Category Archives: Emerging Risks

Deepfake: A Real Hazard

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.

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

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 

Social Inflation:
Eating the Elephant
In the Room

“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)

Man-made and Natural Hazards Both Demand
a Resilience Mindset

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.”

Climate Risk Is Not a New Priority for Insurers

Treasury Secretary Janet Yellen’s pledge to tackle climate change and warning about the economic consequences of failure to act underscore the fact that climate is no longer “merely” an ecological and humanitarian issue – real money is involved.

As long as climate was perceived as a pet project of academics and celebrity activists, driving behavioral change – particularly on the part of industries with billions invested in carbon-intensive technologies and processes – was going to be an uphill effort. But the Titanic has begun to turn, and no industry is better positioned than insurance to help right its course. Insurers are no strangers to climate-related risk – they’ve had a financial stake in it for decades.

Let’s look at the facts:

Global insured weather-related property losses have outpaced inflation by about 7 percent since 1950. Of the $1.7 trillion of global insured property loss reported since 1990, a third is from tropical cyclones, according to Aon data. Nine of the 10 costliest hurricanes in U.S. history have occurred since 2004, and 2017, 2018, and 2019 represent the largest back-to-back-to-back insured property loss years in U.S. history.

Determining how much such losses are driven by climate versus other factors is complicated, and that’s part of the point.

“I know some have argued that this is a reason for us to move slowly,” Yellen said. “The thinking goes that because we know so little about climate risk, let’s be tentative in our actions—or even do nothing at all.  This is completely wrong in my view.  This is a major problem and it needs to be tackled now.”

Understanding the complexities of weather, climate, demographics, and other factors that contribute to loss trends requires data, analytical tools, and sophisticated modeling capabilities. Insurers invest heavily in these and other resources to be able to assess and price risk accurately. As a result, they’re uniquely well positioned to inform the conversation, drive action, and present solutions. 

And they’re leading by example.

Chubb Chairman and CEO Evan G. Greenberg is among the industry leaders who has been on the forefront of communicating about climate risk. When Chubb announced that it will not make new debt or equity investments in companies that generate more than 30 percent of revenues from coal mining or coal energy production, Greenberg said, “Making the transition to a low-carbon economy involves planning and action by policymakers, investors, businesses and citizens alike. The policy we are implementing today reflects Chubb’s commitment to do our part as a steward of the Earth.”

Swiss Re last month announced a similarly ambitious carbon reduction target of 35 percent by 2025 for its investment portfolio. Zurich Insurance Group last year announced the launch of its Climate Change Resilience Services to help businesses better prepare for current and future risks associated with climate. Aon annually publishes its Weather, Climate and Catastrophe Insight reports.

These are just a few examples of how the insurance industry already is recognizing its stake in addressing climate change and providing resources to help others attack the problem.  

Cannabis Industry Prospects Brighten;
Risks, Challenges Remain

The future looks brighter every day for the cannabis industry.

From recent findings that cannabis components may lead to treatment or even prevention of coronavirus infection in lung cells to yesterday’s vote by the House of Representatives in favor of the Safe Banking Act, barricades to full legalization just keep falling.

This isn’t the first time the act – which would protect banks from federal penalties for doing business with cannabis-related businesses that comply with state laws – has made it through the House. It was first introduced in March 2019, and the House has approved it three times, only to have the Senate Banking Committee block its progress. But with the current Democrat majority, apparent bipartisan support, and growing public and state-government support for cannabis legalization, the fourth time just might be the charm.

Similar federal “safe harbor” legislation for the insurance industry – the Clarifying Law Around Insurance of Marijuana Act (CLAIM Act) – was introduced last month.

“More optimism”

The Drug Enforcement Agency characterizes cannabis as a Schedule I drug, defined as having “no currently accepted medical use and a high potential for abuse.” Without legislative change, banks and insurers can’t do business with business without risking running afoul of federal drug laws.

“There’s more optimism now and an assumption that they’re going to work to pass some of these bills that have been in motion for a while now, but never hit the point of actually moving forward,” said Max Meade, cannabis insurance advisor at Brown & Brown Insurance. “I’m also seeing more conversations around working to bundle some of these bills that they’ve been talking about and do a larger cannabis reform.”

As states continue to decriminalize marijuana to different degrees, one of the biggest issues facing cannabis businesses is the 280E federal tax burden, which means cannabis businesses can’t expense the normal cost of goods or anything a normal business can during the course of operation, from utilities to payroll and rent. This means marijuana businesses often pay federal income tax rates in the 65–75 percent range, compared to 15-30 percent  for other businesses. They are taxed on their gross revenues, unlike all regular businesses, which pay tax only on income after their expenses.

The Small Business Tax Equity Act would provide an exception into the Internal Revenue Code to let cannabis operators – as long as they’re in compliance with state laws – make the same deductions as any other business.

Easier to operate

Passage of these laws would make it easier for cannabis-related businesses to operate. The CLAIM Act would let these businesses obtain insurance to cover the same risks of theft, damage, injury, loss, and liability as all other businesses.  

“There are upwards of 30 surplus lines carriers and several managing general underwriters that currently service the cannabis industry across many lines of coverage,” the National Law Review reports. “There also is a small handful of admitted carriers that operate in California, and most recently in Arizona.”

While market capacity for property, commercial general liability, product liability and workers’ compensation coverage has expanded – these policies remain more expensive than the same coverage purchased by similar companies in other industries. Passage of the CLAIM Act would open the doors for more insurers and should bring the cost of insuring marijuana-related businesses much less expensive.

THC persistence a challenge

But challenges will remain – particularly with respect to the workplace. When marijuana was illegal under both state and federal law, employers would typically prohibit employees or employment candidates from using marijuana off-duty as a condition of employment. But as states have begun to permit medical marijuana, things have gotten a bit hazier.

No state requires companies to accommodate on-duty marijuana use. As with recreational marijuana, no state that permits medical marijuana requires employers to accommodate on-duty marijuana use, possession, or impairment. States will often explicitly state that medical marijuana laws don’t affect an employer’s drug-free workplace policy.

Does workers compensation cover a workplace accident in which the injured employee tested positive for marijuana? Persistence of THC – the main psychoactive compound in marijuana – complicates this question, and state courts have differed on this issue, depending on the individual details of each case.

THC persistence also complicates issues around impaired driving.

“Lightning Round” Highlights Technologies Reopening the Economy

Public discussion about re-opening the economy after COVID-19 has mostly revolved around the safety, efficacy, and availability of various vaccines. But in the longer term, other measures and new technologies will be key to getting back to normal and being prepared for future public health emergencies.

Last week’s Lightning Round V: Reopening America in the Post-Pandemic Scenario – a collaboration between Triple-I’s Resilience Accelerator, ResilientH20 Partners, and The Cannon – featured three technologies that promise to help facilitate the recovery.

Workplace workflow

Tomer Mann, executive vice president of business development for 22 Miles, discussed his company’s “digital experience platform,” which incorporates temperature-scanning technology, touchless kiosks, virtual concierge, and other applications to provide social distance among customers and employees and early warning of possible infection in business settings.   

“In March, when we were seeing a lot of the temperature-scanning solutions coming out of China, we realized we could leverage our software to pivot and create a more secure solution, avoiding some of the sensors that are coming out of China that are blacklisted in the trade market and avoiding some of the data breach implications,” Mann said.

22 Miles’ “workplace workflow” starts at a building’s lobby, using facemask and temperature detection and including badge integration and access control for employees and guests. For companies using shared workspaces, the system tracks what spaces are being used to facilitate sanitization between uses. To minimize physical contact while maximizing interactivity, the system’s components can be activated using voice, gesture, or mobile device.

In addition to facilitating safe, hygienic use of these spaces, the system captures large amounts of data that can provide warnings of possible infections and inform modifications to the workflow.

Scrubbing the air

Santiago Mendoza, senior vice president with Integrated Viral Protection, spoke about his company’s indoor air protection system, which has been shown to capture and destroy coronavirus at a 99-plus percentage rate. The system has shown similar results when tested with anthrax spores and other airborne pathogens.

Heating, ventilation, and air conditioning (HVAC) systems are “super spreaders” of coronavirus and other pathogens, Mendoza said, adding that most filter systems only catch and don’t kill them. 

“Our system heats up to almost 400 degrees Fahrenheit and destroys the pathogens,” he said.

The IVP system is available for commercial and residential uses and has been installed in hospitality venues, health facilities, and schools across the United States, Mendoza said. It comes in multiple sizes, including a personal unit for travelers to use in hotel rooms and other closed spaces.

Early warning in water

Jennings Heussner, business development manager for BioBot Analytics, a wastewater epidemiology company, explained how BioBot went from testing for opioids to tracking coronavirus.

“We analyze wastewater coming into treatment plants for human health markers,” Heussner said. The company originally was focused on the opioid epidemic, helping communities better understand the nature of their local opioid problems to better inform their public health response.

When the pandemic hit, BioBot expanded its focus and became the first company in the United States to identify the presence of the virus in wastewater.

Leveraging existing wastewater sampling processes, BioBot analyzes the sample and reports back within one business day after receiving it, providing a quick, inexpensive, comprehensive early warning system.

Ready and resilient

Such technologies will be essential parts of building a pandemic-ready and resilient society. Anticipating and addressing outbreaks early can help alleviate health-related and business-interruption concerns and head off insurance claims.

Just as the insurance industry played a vital role in improving vehicle safety, infrastructure, building codes, and more, insurers and risk managers – partnering with policymakers, businesses, homeowners, and others – will help determine which of these emerging solutions will endure.

Virtual Triple-I Forum Reviews 2020, Looks Ahead at Risks, Opportunities

Sean Kevelighan, Triple-I CEO

Insurance is a business that promotes and demands resilience, and 2020 was a year-long case study in our industry’s ability to respond rapidly to new challenges from a firm financial foundation. Triple-I’s virtual Joint Industry Forum (JIF) provided many examples from a range of industry and academic leaders, along with insightful discussions about what the industry faces in the near and longer terms.

At the 2020 JIF in New York City, it was clear from our various panels that the industry had a full plate of priorities for the year ahead. Then came COVID-19, and a whole new set of public health and economic concerns was added to the existing exposure mix. The virus brought a strong economy nearly to a halt; while officials assessed and responded to these threats, civil unrest on a scale not seen since the 1990s broke out on the streets of many cities; historic and near-historic weather and wildfire activity descended on communities whose resources were already strained by the pandemic.

And all of the above took place amid the uncertainty created by the most contentious, chaotic election year in modern U.S. history.

Through it all, as this year’s JIF speakers described, the property/casualty insurance industry managed to shine.

“Look at how our companies performed” in the real-time shift to fully remote work, noted Chuck Chamness, President and CEO of the National Association of Mutual Insurance Companies (NAMIC). “Then look at the dynamic changes in our businesses caused in large part by the pandemic, where we gave back $14 billion in premiums to policyholders and contributed a couple of hundred million dollars-plus in charitable contributions. We really did our job this year.”

David Sampson, American Property Casualty Insurance Association (APCIA) President and CEO, added that the “bulk of the industry came together to proactively work with agents and policymakers to create a solution that could work for all stakeholders to provide protection against widespread economic shutdown as a result of a viral outbreak.”

APCIA, NAMIC, and Independent Insurance Agents and Brokers of America proposed to Congress a Business Continuity Protection Plan (BCPP) that would allow businesses to buy revenue-replacement coverage for up to 80 percent of payroll and other expenses in the event of a pandemic through state-regulated insurance entities, with aid coming from the Federal Emergency Management Agency (FEMA), which would run the program.

Our industry also faced a literal existential threat in the form of efforts to require insurers to pay billions in business income (interruption) claims for which not one penny of premium had ever been paid. Thanks to industry leaders stepping up to educate policymakers and the media, much of this threat – though, by no means all of it – seems to have faded. Triple-I’s Future of American Insurance & Reinsurance (FAIR) campaign played a critical role in informing policy discussions on business interruption coverage, the uninsurability of pandemic risk, and the need for federal involvement to mitigate the financial impact of future pandemics.

Throughout this year’s virtual JIF, the emphasis on innovation is a consistent thread. Peter Miller, President and CEO of The Institutes, observed that the pandemic and its attendant operational and economic stresses forced the industry into innovation overdrive. He cited a member of The Institutes’ board saying 2020 “caused them to do 10 years of innovation in one,” adding that board members have told him work-from-home alone has saved their companies “one hundred-plus million dollars a year.”

Whether discussing the industry’s response to climate change and extreme weather or how to communicate the importance of risk-based pricing to policymakers, innovation is at the heart of solving every challenge (and seizing every opportunity) our industry faces. Peter emphasized the importance of using innovation strategically across the entire value chain – not just to solve specific problems as they emerge.

In addition to the panelists I mentioned above, the conversations featured a cross section of industry leaders, Triple-I subject-matter experts and non-resident scholars. If you weren’t able to attend, you can view and watch the panels here.

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

A recent study by the Geneva Association on the topic of “social inflation” addresses the challenges of defining and quantifying the phenomenon. More important, it takes on the question of what insurers and reinsurers can actually do about it.

“Social inflation is a term that is widely cited in insurance debates but it is often ill-defined or at best only loosely explained,” the report begins. Broadly speaking, it “refers to all ways in which insurers’ claims costs rise over and above general economic inflation.”

Actuaries typically label such growth in claims costs “superimposed inflation,” the study says, but their measures “may not adequately account for advances in medical technology, which create new therapies, change the costs of treatment, and increase the lifespan of seriously injured claimants,” as well as other considerations.

More narrowly, the report says, “social inflation refers to legislative and litigation developments which impact insurers’ legal liabilities and claims costs.”

The definitional difficulties are well illustrated in the rendering below, from the study.

Understanding what drives these costs – and whether they are temporary phenomena or a long-term trend – is essential to adequately pricing insurers’ exposures and enabling them to pay claims.

Major drivers, possible solutions

Rollbacks in tort reforms stemming from past insurance availability and affordable crises have been implicated by some for driving social inflation. The report finds that any such correlations are “weak at best.”

More significant, the study found, are shifting judge and jury attitudes in ways favorable to plaintiffs; growing anti-corporate bias; and aggressive tactics used by plaintiff attorneys, including third-party litigation funding.  

What can insurers do to battle social inflation? The report suggests four areas of focus:

  • Engage in the public-policy debate to promote legislative changes that further level the playing field between plaintiffs and defendants;
  • Get better at defending against aggressive and increasingly well-armed plaintiffs’ attorneys;
  • Upgrade underwriting to reduce opportunities for claims surprises. “Insurers need better early-warning systems,” the report says, drawing on information from across their organizations, their own and competitor liability cases, and data from social and digital media;
  • Develop products with an eye toward mitigating social inflation. Given the scale of potential liability exposures, the report says, “co-participation arrangements” to share risks among reinsurers could help maintain and even expand the boundaries of insurability. Parametric insurance also might have a role to play.

More on social inflation, from the Triple-I Blog

LITIGATION FUNDING RISES AS COMMON-LAW BANS ARE ERODED BY COURTS

SOCIAL INFLATION AND COVID-19

LAWYERS’ GROUP APPROVES BEST PRACTICES TO GUIDE LITIGATION FUNDING

IRC STUDY: SOCIAL INFLATION IS REAL, AND IT HURTS CONSUMERS, BUSINESSES

FLORIDA’S AOB CRISIS: A SOCIAL-INFLATION MICROCOSM

House Panel Discusses Approaches to Manage Future Pandemic Risk

That the insurance industry alone can’t be expected to cover future pandemic risk seemed to be a given at yesterday’s hearings by the House Finance Subcommittee on Housing, Community Development, and Insurance.

But, as is so often the case, the devil is in the details.

The session – Insuring Against a Pandemic: Challenges and Solutions for Policyholders and Insurers – was chaired by Rep. William Lacy Clay. In his opening statement, Clay said, “It is not realistic or practical to expect the insurance industry to shoulder the astronomical cost of a global pandemic. The American Property and Casualty Insurance Association has estimated that paying all [COVID-19-related] claims, regardless of exclusions, would amount to $1 trillion per month.”

With respect to business interruption coverage claims currently being adjudicated, Clay referenced both the virus exclusions in most commercial property policies and the lack of “direct physical damage or loss” in COVID-19-related cases.

John Doyle, president and CEO of global insurance broker Marsh, testified on the importance of a public-private partnership to address pandemic risk, as well as to the need to “act now” on a solution for future pandemics.

“Acting now on a public-private pandemic risk solution will accelerate the economic recovery by reducing uncertainty,” Doyle said. “Moving forward, capital markets will seek assurances that companies have protection against prospective pandemic risk. The pace of recovery will depend upon the nature and degree of confidence in the marketplace.”

Doyle said the credit and power of the U.S. government is essential – “at the same time, I believe the insurance industry has a role to play.”

The Pandemic Risk Insurance Act (PRIA), introduced by Rep. Carolyn B. Maloney of New York, provided the jumping-off point for the testimonies and discussions of alternative proposals. PRIA, patterned after the Terrorism Risk Insurance Act (TRIA) put in place after the 9/11 terrorist attacks, was generally recognized as a good start – but several other structures were proposed to address perceived weaknesses.

One is the Business Continuity Protection Program (BCCP), advanced by the National Association of Mutual Insurance Companies (NAMIC), the American Property Casualty Insurance Association (APCIA) and the Independent Insurance Agents & Brokers of America (Big “I”).

Brian Kuhlmann, chief corporate counsel for Shelter Insurance, speaking on behalf of NAMIC and APCIA, described BCCP as a program that “would provide straightforward revenue replacement for businesses and nonprofits of all sizes” using a parametric approach that wouldn’t require claims adjustment. Unlike traditional insurance, which pays for damage if it occurs, parametric insurance automatically pays when specific conditions are met – regardless of damage incurred.

Michelle Melendez McLaughlin, chief underwriting officer for the small commercial and middle market at Chubb, presented a “bifurcated” framework that would treat small businesses differently from mid-size to large corporations.

“Pandemics affect small and large businesses differently,” she said. The Chubb framework would cover small companies for up to three months of payroll and other expenses. Policyholders would be paid a pre-determined amount when the policy is triggered. “This provides policyholders with certainty that they will receive timely financial assistance after an event.”

For businesses with more than 500 employees, the Chubb proposal would create Pan Re – a federal reinsurance facility. “Private insurance companies that choose to sell coverage would write pandemic policies at market terms and retain some portion of the risk. The rest of the risk would be reinsured through Pan Re.”

R.J. Lehmann, senior fellow at the International Center for Law and Economics, agreed with other witnesses that the insurance industry isn’t equipped to handle pandemic risk alone. He went further to question whether insurance is the best structure for addressing this problem.

“Insurance is a system of risk transfer, not a system of economic relief,” Lehmann testified. “Even if private insurers could provide this coverage—on their own or with government support—it is not clear their incentives would align with public health goals or with the aims members of Congress likely have in mind.”

The best argument for a public-private partnership, he said, is that insurers can help policyholders mitigate risks. “But it’s important to ask, ‘Mitigate the risk of what’? The risk you’re trying to reduce is the risk that a business will shut down. But, in a pandemic, you want businesses to shut down. We want them to have a safety net so they can shut down and survive.”

Hartmann counseled legislators to take their time and get the solution right, drawing from all the options that exist.

“Let’s be humble about how little we know, even about the current pandemic,” he said. “Get help to the businesses, workers, and communities who need it now. Don’t legislate for the next pandemic while we’re in the midst of the current one.”