Category Archives: Emerging Risks

Business Risk, Catastrophes, Coastal Property, Cyber Risk, Disaster Preparedness, Disaster Resilience, Earthquakes, Emerging Risks, Floods, Highway Safety, Hurricanes, Insurance Fraud, Insurers and the Economy, Legal Environment, Market Conditions, Regulation, Risk Management, Terrorism Risk, Tornadoes, Wildfires, Winter Storms

It’s Not an “Insurance Crisis” — It’s a Risk Crisis

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Ten states – Louisiana, Florida, Idaho, Kentucky, Mississippi, Montana, North Dakota, South Carolina, Texas, and Virginia – as well as additional plaintiffs, are suing the Federal Emergency Management Agency (FEMA) over its new methodology for pricing flood insurance, Risk Rating 2.0. On Sept. 14, a federal hearing lasted six hours as the plaintiffs sought a preliminary injunction to halt the new pricing regime while the lawsuit plays out.

Many residents of these states are understandably upset about seeing their flood insurance premium rates rise under the new approach. There may not be much comfort for them in knowing that the current system is much fairer than the previous one, in which higher-risk homeowners subsidized those with lower risks. Similarly, policyholders who have had their premium rates reduced under Risk Rating 2.0 are unlikely to take to the streets in celebration.

These homeowners aren’t alone in seeing insurance rates rise – or even having to struggle to obtain insurance. And these difficulties aren’t confined to holders of flood insurance policies. Florida and California are two states in which insurers have been forced to rethink their risk appetite – due in part to rising natural catastrophe losses and in part to regulatory and litigation environments that make it increasingly difficult for insurers to profitably write coverage.

Even before the COVID-19 pandemic and Russia’s invasion of Ukraine – and the supply-chain and inflationary pressures they created – the property/casualty insurance market was hardening as insurers adjusted their pricing and their risk appetites to keep pace with conditions that were driving losses up and eroding underwriting profitability – topics Triple-I has written about extensively (see a partial list below).

“Rising insurance rates are not the problem,” says Dale Porfilio, chief insurance officer at Triple-I. “They are a symptom of rising losses related to a range of factors, from climate and population trends to post-pandemic driving behaviors and surging cybercrime to antiquated policies, outdated building codes, fraud, and legal system abuse.”

In short, we are not experiencing an “insurance crisis,” as many media outlets tend to describe the current state of the market; we are experiencing a risk crisis. And even as the states referenced above push back against much-needed flood insurance reform, legislators in several states have been pushing measures that would restrict insurers’ ability to price coverage accurately and fairly – rather than addressing the underlying perils and forces aggravating them.  

Triple-I, its members, and a range of partners are working to educate stakeholders and decisionmakers and promote pre-emptive risk mitigation and investment in resilience. We are using our position as thought leaders and our unique non-lobbying role in the insurance industry to reach across sector boundaries and drive constructive action. You will be hearing more about these efforts over the next few months.

The success of these efforts will require a collective understanding among stakeholders and decisionmakers that for insurance to be available and affordable frequency and severity of risk must be measurably reduced. This will require highly focused, integrated projects and programs – many of them at the community level – in which all stakeholders (co-beneficiaries of these efforts) will share responsibility.

Want to know more about the risk crisis and how insurers are working to address it? Check out Triple-I’s upcoming Town Hall, “Attacking the Risk Crisis,” which will be held Nov. 30 in Washington, D.C.

Learn More:

Shutdown Threat Looms Over U.S. Flood Insurance

FEMA Incentive Program Helps Communities Reduce Flood Insurance Rates for Their Citizens

More Private Insurers Writing Flood Coverage; Consumer Demand Continues to Lag

Shift in Hurricane Season’s Predicted Severity Highlights Need for Prospective Cat Risk Pricing

California Needs to Make Changes to Address Its Climate Risk Crisis

Illinois Bill Highlights Need for Education on Risk-based Pricing of Insurance Coverage

IRC Outlines Florida’s Auto Insurance Affordability Problems

Education Can Overcome Doubts on Credit-Based Insurance Scores, IRC Survey Suggests

Matching Price to Peril Helps Keep Insurance Available & Affordable

Triple-I “State of the Risk” Issues Brief: Flood

Triple-I “State of the Risk” Issues Brief: Hurricanes

Triple-I Issues “Trends and Insights” Brief: Risk-Based Pricing of Insurance

Careers and Employment, Catastrophes, Emerging Risks, Risk Management

Church Mutual President: Getting, Keeping Talent
Is “Number One Challenge”

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Of all the challenges facing property casualty insurers today – from growing catastrophe losses to social inflation – Church Mutual president Alan Ogilvie sees the “war for talent” as one of the most pressing.

“For us, the old adage is very true. Our best assets walk in the door in the morning, at the end of the day they leave, and you just hope and pray they come back,” Ogilvie said in a recent Executive Exchange conversation with Triple-I CEO Sean Kevelighan.

Ogilvie called talent acquisition and retention “our number one challenge.”

“We like to think we bring something a little bit unique to our employees, and that’s a sense of mission,” he said.

He pointed to Church Mutual’s status as 126-year-old mutual company – the largest writer of insurance for religious institutions, which has expanded to include coverage for health, educational, and nonprofit organizations – and said, “It’s pretty easy to get up in the morning when you’re protecting organizations that you know are doing tremendous things in our communities.”  

Ogilvie is committed to busting the myth that insurance is a boring business. Among the features of insurance he emphasizes to people early in their careers is the focus on technology and addressing the challenges of climate risk. Catastrophe management – viewed through the lens of artificial intelligence and predictive analytics – has become a cutting-edge discipline. 

This, combined with the fact that many insurance professionals are expected to be retiring over the next decade, “creates an incredible amount of opportunity,” Ogilvie said.

Cyber Risk, Disaster Resilience, Emerging Risks, Insurers and the Economy, Terrorism Risk

Complex Risks in a Complicated World:
Are Federal Government “Backstops” The Answer?

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Two U.S. agencies have agreed to explore the potential need for a federal mechanism – analogous to the one put into place for terrorism insurance after the 9/11 attacks – to address the growing cybersecurity threat to critical infrastructure. The perceived need to do so speaks to the growing complexity and interrelatedness of this and other risks facing governments, businesses, and communities today.

The Government Accountability Office (GAO), in a recently published report, recommended that Treasury’s Federal Insurance Office (FIO) and Homeland Security’s Cybersecurity and Infrastructure Security Agency (CISA) take this action.  It acknowledges that FIO and CISA have “taken steps to understand the financial implications of growing cybersecurity risks” – but those actions have not included the possible need for a federal insurance mechanism.

“Cyber insurance and the Terrorism Risk Insurance Program (TRIP)—the government backstop for losses from terrorism—are both limited in their ability to cover potentially catastrophic losses from systemic cyberattacks,” the GAO report says. “Cyber insurance can offset costs from some of the most common cyber risks, such as data breaches and ransomware. However, private insurers have been taking steps to limit their potential losses from systemic cyber events.”

Insurers are excluding coverage for losses from cyber warfare and infrastructure outages, the report notes, and cyberattacks may not meet TRIP’s criteria to be certified as terrorism.

As we’ve previously reported, some in the national security world have compared U.S. cybersecurity preparedness today to its readiness for terrorist acts prior to the 9/11. Before Sept. 11, 2001, terrorism coverage was included in most commercial property policies as a “silent” peril – not specifically excluded and, therefore, covered. Afterward, insurers began excluding terrorist acts from policies, and the U.S. government established the Terrorism Risk Insurance Act (TRIA) to stabilize the market.  TRIA created TRIP as a temporary system of shared public and private compensation for certain insured losses resulting from a certified act of terrorism.

Treasury administers the program, which has to be periodically reauthorized. TRIP has been renewed four times – in 2005, 2007, 2015, and 2019 – and the backstop has never yet been triggered.

The GAO recommendation that a similar solution be considered for cyber risk highlights the potential insufficiency of traditional risk-transfer products to address increasingly complex and costly threats. Alongside terrorism and cyber, we’ve experienced – and continue to experience – the myriad perils of pandemic, with its assorted impacts on the global supply chain, driving behavior, business interruption and remote work practices, and the economy. Even if those challenges moderate, we will continue to face what is perhaps the most entangled set of risks on the planet: those associated with climate and extreme weather.

One only has to look as far as Florida, where the insurance market is on the brink of failure as writers of homeowners coverage begin to go into receivership and global reinsurers reassess their appetite for providing capacity in that hurricane-prone, fraud- and litigation-plagued state. Or, one could follow the wildfire activity in recent years; or flood loss trends, increasingly creating problems inland, where flood insurance purchase rates tend to be lower than in coastal areas; or insured losses due to severe convective storms, which have been rising in parallel with losses from hurricanes.

Fortunately, many states are taking steps – often with partners, including the insurance industry – to anticipate and mitigate such risks. Much is being done, but much work remains to change behaviors, best practices, and public policies in ways that will reduce risks and improve availability and affordability of coverage.

Cyber Risk, Emerging Risks, Insurance Fraud, Technology

The Battle Against Deepfake Threats

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By Max Dorfman, Research Writer, Triple-I

Some good news on the deepfake front: Computer scientists at the University of California have been able to detect manipulated facial expressions in deepfake videos with higher accuracy than current state-of-the-art methods.

Deepfakes are intricate forgeries of an image, video, or audio recording. They’ve existed for several years, and versions exist in social media apps, like Snapchat, which has face-changing filters. However, cybercriminals have begun to use them to impersonate celebrities and executives that create the potential for more damage from fraudulent claims and other forms of manipulation.

Deepfakes also have the dangerous potential to be used to in phishing attempts to manipulate employees to allow access to sensitive documents or passwords. As we previously reported, deepfakes present a real challenge for businesses, including insurers.

Are we prepared?

A recent study by Attestiv, which uses artificial intelligence and blockchain technology to detect and prevent fraud, surveyed U.S.-based business professionals concerning the risks to their businesses connected to synthetic or manipulated digital media. More than 80 percent of respondents recognized that deepfakes presented a threat to their organization, with the top three concerns being reputational threats, IT threats, and fraud threats.

Another study, conducted by a CyberCube, a cybersecurity and technology which specializes in insurance, found that the melding of domestic and business IT systems created by the pandemic, combined with the increasing use of online platforms, is making social engineering easier for criminals.

“As the availability of personal information increases online, criminals are investing in technology to exploit this trend,” said Darren Thomson, CyberCube’s head of cyber security strategy. “New and emerging social engineering techniques like deepfake video and audio will fundamentally change the cyber threat landscape and are becoming both technically feasible and economically viable for criminal organizations of all sizes.”

What insurers are doing

Deepfakes could facilitate the filing fraudulent claims, creation of counterfeit inspection reports, and possibly faking assets or the condition of assets that are not real. For example, a deepfake could conjure images of damage from a nearby hurricane or tornado or create a non-existent luxury watch that was insured and then lost. For an industry that already suffers from $80 billion in fraudulent claims, the threat looms large.

Insurers could use automated deepfake protection as a potential solution to protect against this novel mechanism for fraud. Yet, questions remain about how it can be applied into existing procedures for filing claims. Self-service driven insurance is particularly vulnerable to manipulated or fake media. Insurers also need to deliberate the possibility of deep fake technology to create large losses if these technologies were used to destabilize political systems or financial markets.

AI and rules-based models to identify deepfakes in all digital media remains a potential solution, as does digital authentication of photos or videos at the time of capture to “tamper-proof” the media at the point of capture, preventing the insured from uploading their own photos. Using a blockchain or unalterable ledger also might help.

As Michael Lewis, CEO at Claim Technology, states, “Running anti-virus on incoming attachments is non-negotiable. Shouldn’t the same apply to running counter-fraud checks on every image and document?”

The research results at UC Riverside may offer the beginnings of a solution, but as one Amit Roy-Chowdhury, one of the co-authors put it: “What makes the deepfake research area more challenging is the competition between the creation and detection and prevention of deepfakes which will become increasingly fierce in the future. With more advances in generative models, deepfakes will be easier to synthesize and harder to distinguish from real.”

Emerging Risks, Legal Environment, Regulation

A Piecemeal Approach Toward Transparency
In Litigation Finance

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A U.S. District Court judge in Delaware made his courtroom the latest jurisdiction to require lawsuit participants to disclose whether third-party investors have any stake in litigation being brought before him.

While this is a step toward greater transparency with regard to third-party litigation funding, the standing order by Chief Judge Colm F. Connolly only affects cases in his court. The other three district court judges in Delaware have not issued similar decrees. But the order was made in an extremely influential district. More than half of publicly traded U.S. corporations are incorporated in Delaware, and the state’s laws often govern contracts between businesses.

A booming global industry

Funding of lawsuits by international hedge funds and other financial third parties – with no stake in the outcome other than a share of the settlement – has become a $17 billion global industry, according to Swiss Re. Law firm Brown Rudnick sees the industry as even larger, at $39 billion globally, according to Bloomberg.

Third-party litigation funding was once widely prohibited. As bans have been eroded in recent decades, it has grown, spread, and become a contributor to “social inflation”: increased insurance payouts and loss ratios beyond what can be explained by economic inflation alone.

Efforts at transparency

Some progress in toward greater transparency has been made in recent years. Last year, the U.S. District Court for the District of New Jersey amended its rules to require disclosures about third-party litigation funding in cases before the court. The Northern District of California imposed a similar rule in 2017 for class, mass, and collective actions throughout the district. Wisconsin passed a law requiring disclosure of third-party funding agreements in 2018. West Virginia followed suit in 2019.

At the federal level, the Litigation Funding Transparency Act was introduced and referred to the Senate Judiciary Committee in October 2021.

Panelists at Triple-I’s Joint Industry Forum in December 2021 agreed on the importance of requiring disclosure of litigation funding. Insurance groups and the U.S. Chamber of Commerce say litigation funding needs more rules to prevent abuses of the legal system and to protect consumers, who often pay exorbitant interest rates on money they borrow to pay legal expenses.

“By its very nature, third-party litigation financing promotes speculative litigation and increases costs for everyone,” said Stef Zielezienski, executive vice president and chief legal officer for the American Property Casualty Insurance Association in a press release about the Delaware order. “At its worst, outside investment in litigation financing dependent on a successful verdict creates incentives to prolong litigation.”

The Delaware judge’s order requires, in addition to disclosing the name and address of any third-party funder, that parties to any case before his bench must also disclose whether approval by the funder is necessary for settlement decisions and, if so, the terms and conditions relating to that approval.

While strides like this may be small, they add up in the fight to make disclosure of third-party litigation financing a priority in states and in courthouses nationwide.

Learn More:

Social Inflation: What It Is and Why It Matters

Triple-I, CAS Quantify Social Inflation’s Impact on Commercial Auto

What Is Social Inflation and What Can Insurers Do About It?

IRC Study: Social Inflation Is Real, and It Hurts Consumers, Businesses

Business Risk, Careers and Employment, Disaster Resilience, Emerging Risks, Industry Awards & Events, Industry Financials, Insurance Industry, Insurers and the Economy

JIF 2021: Risk & the “New Normal”

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Insurance industry decision makers and thought leaders gathered yesterday for the Triple-I Joint Industry Forum (JIF) in New York City to share insights on managing risk in the post-pandemic world.

The in-person, daylong program was conducted in accordance with New York City’s COVID-19 protocols. Topics ranged from climate and cyber risk and the impact of “runaway litigation” on insurer losses and policyholder premiums to the challenges and opportunities presented by “the Great Resignation” for acquiring and nurturing talent in the industry.

The panels featured speakers from across the insurance world, academia, and media. Watch this space next week for panel wrap-ups.

Business Risk, Emerging Risks, Insurance Fraud, Technology

Deepfake: A Real Hazard

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By Maria Sassian, Triple-I consultant

Videos and voice recordings manipulated with previously unheard-of sophistication – known as “deepfakes“ – have proliferated and pose a growing threat to individuals, businesses, and national security, as Triple-I warned back in 2018.

Deepfake creators use machine-learning technology to manipulate existing images or recordings to make people appear to do and say things they never did. Deepfakes have the potential to disrupt elections and threaten foreign relations. Already, a suspected deepfake may have influenced an attempted coup in Gabon and a failed effort to discredit Malaysia’s economic affairs minister, according to Brookings Institution. 

Most deepfakes today are used to degrade, harass, and intimidate women. A recent study determined that up to 95 percent of the thousands of deepfakes on the internet were pornographic and up to 90 percent of those involved nonconsensual use of women’s images.

Businesses also can be harmed by deepfakes. In 2019, an executive at a U.K. energy company was tricked into transferring $243,000 to a secret account by what sounded like his boss’s voice on the phone but was later suspected to be thieves armed with deepfake software.

“The software was able to imitate the voice, and not only the voice: the tonality, the punctuation, the German accent,” said a spokesperson for Euler Hermes SA, the unnamed energy company’s insurer. Security firm Symantec said it is aware of several similar cases of CEO voice spoofing, which cost the victims millions of dollars.

A plausible – but still hypothetical – scenario involves manipulating video of executives to embarrass them or misrepresent market-moving news.

Insurance coverage still a question

Cyber insurance or crime insurance might provide some coverage for damage due to deepfakes, but it depends on whether and how those policies are triggered, according to Insurance Business.  While cyber insurance policies might include coverage for financial loss from reputational harm due to a breach, most policies require network penetration or a cyberattack before it will pay a claim. Such a breach isn’t typically present in a deepfake.

The theft of funds by using deepfakes to impersonate a company executive (what happened to the U.K. energy company) would likely be covered by a crime insurance policy.

Little legal recourse

Victims of deepfakes currently have little legal recourse. Kevin Carroll, security expert and Partner in Wiggin and Dana, a Washington D.C. law firm, said in an email: “The key to quickly proving that an image or especially an audio or video clip is a deepfake is having access to supercomputer time. So, you could try to legally prohibit deepfakes, but it would be very hard for an ordinary private litigant (as opposed to the U.S. government) to promptly pursue a successful court action against the maker of a deepfake, unless they could afford to rent that kind of computer horsepower and obtain expert witness testimony.”

An exception might be wealthy celebrities, Carroll said, but they could use existing defamation and intellectual property laws to combat, for example, deepfake pornography that uses their images commercially without the subject’s authorization.

A law banning deepfakes outright would run into First Amendment issues, Carroll said, because not all of them are created for nefarious purposes. Political parodies created by using deepfakes, for example, are First Amendment-protected speech.

It will be hard for private companies to protect themselves from the most sophisticated deepfakes, Carroll said, because “the really good ones will likely be generated by adversary state actors, who are difficult (although not impossible) to sue and recover from.”

Existing defamation and intellectual property laws are probably the best remedies, Carroll said.

Potential for insurance fraud

Insurers need to become better prepared to prevent and mitigate fraud that deepfakes are capable of aiding, as the industry relies heavily on customers submitting photos and video in self-service claims. Only 39 percent of insurers said they are either taking or planning steps to mitigate the risk of deepfakes, according to a survey by Attestiv.

Business owners and risk managers are advised to read and understand their policies and meet with their insurer, agent or broker to review the terms of their coverage.

Business Risk, Emerging Risks, Legal Environment, Market Conditions

Litigation Funding
and Social Inflation: What’s the Connection?

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Second post in a series on social inflation and litigation funding

Litigation funding – in which third parties assume all or part of the cost of a lawsuit exchange for an agreed-upon percentage of the settlement – is often cited as contributing to social inflation. But, like so much else associated with social inflation, it’s unclear how widespread the practice is.

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With historical roots in Australia and the United Kingdom, funding of lawsuits by investors has taken hold in the United States in recent years. On the positive side, it can let plaintiffs employ experts to develop effective strategies – options once only available to large corporate defendants.

But it also can contribute to cases making it to court based more on investor expectations than on plaintiffs’ best interests.

Erosion of common-law prohibitions

Litigation finance was once widely prohibited. The relevant legal doctrine – called “champerty” or “maintenance” – originated in France and arrived in the United States by way of British common law. The original purpose of champerty prohibitions – according to an analysis by Steptoe, an international law firm – was to prevent financial speculation in lawsuits, and it was rooted in a general mistrust of litigation and money lending.

There’s an irony here, in that a major societal force driving social inflation today – distrust of corporations and litigation – once motivated the prohibition of a practice now widely associated with the phenomenon.

These bans have been eroded in recent decades, leading to increases in litigation funding.

“If you are trying to understand how we got here, I would say start in the 1990s,” says Victoria Shannon Sahani, a professor of law at the Arizona State University Sandra Day O’Connor College of Law. “The United States isn’t really a big player on the scene yet, but you’ve got Australia and the United Kingdom independently making moves in their legislatures that paved the way for litigation funding to become more prevalent.” 

Between 1992 and 2006, Sahani says, “It was sort of the Wild West of Australian law in the sense that if you engaged in litigation funding, you always ran the risk that your agreement might be challenged.”

In 2006, the High Court of Australia provided clarity, saying litigation funding was permitted in jurisdictions that had abolished maintenance and champerty as crimes and torts. It was even acceptable for a funder to influence key case decisions.

The practice took time to gain traction in the United States because champerty prohibitions are left to states.  Some have abandoned their anti-champerty laws over the past two decades. Some, like New York, have adopted “safe harbors” that exempt transactions above a certain dollar amount from the reach of the champerty laws.

“Given the stakes involve in many cases, it will be interesting to see whether litigation funders refrain from direct involvement.”

– David Corum, vice president, Insurance Research Council

Uncertainty as to market size

There is no consensus as to how much investors spend on U.S. lawsuits each year, according to Bloomberg law, “but it is not $85 billion, a number recently put forward as the ‘addressable market’ for litigation finance by a publicly traded litigation financier.”

That’s because the industry spent only about 2.7% of $85 billion during a 12-month span that started in mid-2018, according to a Westfleet Advisors survey.

“Does that low penetration rate portend explosive growth ahead?” Bloomberg Law asks. “Or is it an indication that litigation finance is a niche product most plaintiffs and lawyers find unnecessary?”

A key determinant of growth may be the willingness of funders to remain uninvolved in managing cases, said  David Corum, vice president with the Insurance Research Council: “Given the stakes involve in many cases, it will be interesting to see whether litigation funders refrain from direct involvement.”

Benefit, bane, or both?

While funders tout the “David versus Goliath” aspect of helping small plaintiffs against corporations, opponents worry about introducing profit into a process that is supposed to aim at a just outcome. A settlement may be rejected because of pressure exerted by profit-seeking funders, and a plaintiff may walk away with nothing if the trial goes against them, opponents say. 

Laura Lazarczyk, executive vice president and chief legal officer for Zurich North America, called litigation funding “abusive” and said harm “will be largely borne by insurers in defense costs and indemnity payments and by policyholders in uncovered losses and higher premiums.”

Critics also decry a lack of transparency. While the U.S. District Court for New Jersey held that third-party funding must be disclosed, attempts to pass federal disclosure legislation have been unsuccessful.

“It’s a multibillion industry with no regulation and no requirements for transparency,” said Page C. Faulk, senior vice president of legal reform initiatives at the U.S. Chamber of Commerce. “It is essentially turning our U.S. courtrooms into casinos, which is why the chamber is calling for disclosure.” 

Such concerns led the American Bar Association last year to approve best practices for firms engaging in litigation funding. The resolution is silent on disclosure, but it urges lawyers to be prepared for scrutiny. It also cautions them against giving funders advice about a case’s merits, warning that this could raise concerns about the waiver of attorney-client privilege and expose lawyers to claims that they have an obligation to update this guidance as the litigation develops. 

Previous in the series

Social inflation: Eating the elephant in the room

More from the Triple-I Blog

What is social inflation? What can insurers do about it? 

Litigation funding rises as common-law bans are eroded by courts 

Lawyers’ group approves best practices to guide litigation funding 

Social inflation and COVID-19 

IRC study: Social inflation is real, and it hurts consumers, businesses

Florida dropped from 2020 “Judicial Hellholes” list

Florida’s AOB crisis: A social-inflation microcosm 

Auto Insurance, Business Insurance, Business Risk, Emerging Risks, Insurers and the Economy, Legal Environment

Social Inflation:
Eating the Elephant
In the Room

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  • It has been said the best way to eat an elephant is “one bite at a time.”
    Social inflation is an elephantine topic, so we’re launching a series of blog posts dedicated to each piece of it in turn, starting with litigation funding.

“Social inflation” refers to rising litigation costs and their impact on insurers’ claim payouts, loss ratios and, ultimately, how much policyholders pay for coverage. It’s an important issue to understand because – while the tactics associated with it typically affect businesses perceived as having “deep pockets” – social inflation has implications for individuals and for businesses of all sizes.

The insurance lines most affected are commercial auto, professional liability, product liability, and directors and officers liability. There also is evidence that private-passenger car insurance is beginning to be affected. As increased litigation costs drive up premiums, those increases tend to be passed along to consumers and can stifle investment in innovation that could create jobs and otherwise benefit the economy.

For more on this, see: Social Inflation: Evidence and Impact on Property-Casualty Insurance by the Insurance Research Council (IRC).]

Much of what is discussed and published on the topic has been more anecdotal than data based. Reliably quantifying social inflation for rating and reserving purposes is hard because it’s just one of many factors pressuring pricing. We’ve found that the most meaningful way to think about social inflation and its components is to compare their impact on claims losses over time with growth in inflation measures like the Consumer Price Index (CPI).

Litigation Funding

It’s been said that the best way to eat an elephant is “one bite at a time.” Because of the diversity and complexity of social inflation’s causes and effects, we’re launching a series of blog posts dedicated to each one in turn. The first set of posts will look closely at litigation funding: the practice of third parties financing lawsuits in exchange for a share of any funds the plaintiffs might receive.

Litigation funding was once widely prohibited, but as bans have been eroded in recent decades, the practice has grown, spread, and become a contributor to social inflation.

[See: Litigation Funding Rises as Common-Law Bans Are Eroded by Courts on the Triple-I Blog]                                                                                                  

Litigation funding seemed a good place to begin this series because it’s a distinct legal strategy with a clear history that doesn’t involve a lot of the sociological subtleties inherent in other aspects of social inflation. We’ll look the emergence of the practice, how it came to the United States from abroad, and track its evolution with that of social inflation. We’ll also discuss the current state of litigation finance, along with ethical concerns that have been raised around it within the legal community.

This series will be led by IRC Vice President David Corum with support from our partners at The Institutes and input from our members, as well as experts beyond the insurance industry. As befits any discussion of a complex topic, we look forward to your reactions and insights.

More from the Triple-I Blog

What is social inflation? What can insurers do about it? (January 25, 2021)

Litigation funding rises as common-law bans are eroded by courts (December 29, 2020)

Lawyers’ group approves best practices to guide litigation funding (August 19, 2020)

Social inflation and COVID-19 (July 6, 2020)

IRC study: Social inflation is real, and it hurts consumers, businesses (June 2, 2020)

Florida dropped from 2020 “Judicial Hellholes” list (January 14, 2020)

Florida’s AOB crisis: A social-inflation microcosm (November 8, 2019)

Business Risk, Catastrophes, Cyber Risk, Disaster Preparedness, Disaster Resilience, Emerging Risks, Risk Management

Man-made and Natural Hazards Both Demand
a Resilience Mindset

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This weekend’s ransomware attack that forced the closure of the largest U.S. fuel pipeline provides another powerful illustration of the need for a resilience mindset that applies to more than just natural catastrophes.

Colonial Pipeline Co. operates a 5,500-mile system that transports fuel from refineries in the Gulf of Mexico to the New York metropolitan area. It said it learned Friday that it was the victim of the attack and “took certain systems offline to contain the threat, which has temporarily halted all pipeline operations.”

Individually, the event demonstrates the threat cybercriminals pose to the aging energy infrastructure that keeps the nation moving. More frighteningly, though, it is yet another example of how vulnerable the complex, interconnected global supply chain is to disruptions of all kinds – a message that isn’t lost on risk managers and insurers.

Last year, a ransomware attack moved from a natural-gas company’s networks into the control systems at a compression facility, halting operations for two days, according to a Department of Homeland Security (DHS) alert. 

The DHS described the attack on an unnamed pipeline operator that halted operations for two days.  Although staff didn’t lose control of operations, the alert said the company didn’t have a plan in place for responding to a cyberattack.

“This incident is just the latest example of the risk ransomware and other cyber threats can pose to industrial control systems, and of the importance of implementing cybersecurity measures to guard against this risk,” a CISA spokesperson said at the time.

Not just energy companies

It isn’t only energy and industrial companies that need to be paying attention. According to cyber security firm VMware, attacks against the global financial sector increased 238 percent from the beginning of February 2020 to the end of April, with some 80 percent of institutions reporting an increase in attacks.

“Cyber is an existential issue for financial institutions, which is why they invest heavily in cyber security,” says Thomas Kang, Head of Cyber, Tech and Media, North America at Allianz Global Corporate & Specialty (AGCS). “However, with such potentially high rewards, cybercriminals will also invest time and money into attacking them.”

He pointed to two malware campaigns – known as Carbanak and Cobalt – that targeted over 100 financial institutions in more than 40 countries over five years, stealing over $1 billion.

An ACGS report shows technical failures and human error are the most frequent generators of cyber claims, but the financial impact of these is limited:

“Losses resulting from the external manipulation of computers, such as distributed denial of service attacks (DDoS) or phishing and malware/ ransomware campaigns, account for the significant majority of the value of claims analyzed across all industry sectors (not just involving financial services companies).”

According to the report, regulators have turned their attention to cyber resilience and business continuity.

“Following a number of major outages at banks and payment processing companies, regulators have begun drafting business continuity requirements in a bid to bolster resilience.”

Not just cyber

The COVID-19 pandemic has taught the world a lot of lessons, not the least of which is how vulnerable the global supply chain – from toilet paper to semiconductors – is to unexpected disruptions. Demand for chlorine increased during 2020 as more people used their pools while stuck at home under social distancing orders and homeowners also began building pools at a faster rate, adding to the additional demand. Such disruptions can ripple through the economy in different directions.

Business interruption claims and litigation have been a significant feature of the pandemic for property and casualty insurers.

When the container ship Ever Given got wedged in the Suez canal – one of the most important arteries in global trade – freight traffic was completely blocked for six days. Even as movement resumed, terminals experienced congestion and the severe drop in vessel arrival and container discharge in major terminals aggravated existing shortages of empty containers available for exports. The ship’s owners and the Egyptian government remain locked in negotiations over compensation for the disruption, and the ship is still impounded.

Spurred in part by this event, the Japanese shipping community is considering alternative freight routes to Europe, both reliant on Russia: the Trans-Siberian Railway and the Northern Sea Route. Neither option is devoid of risks.

In an increasingly interconnected world, there is no bright line distinguishing man-made from natural disasters. After all, the Ever Given grounding was caused, at least in part, by a sandstorm. April’s power and water disruptions that left dozens of Texans dead and could end up being the costliest disaster in state history were initiated by a severe winter storm.

A resilience mindset focused on pre-emptive mitigation and rapid recovery is called for in both cases. There is no “either/or.”