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Evolving risks in financial lines

At a glance

  • We recently hosted an event to update a number of our strategic customers on some of the key evolving risks across financial lines
  • A clear theme of the day was the connectivity that exists between seemingly diverse risks such as cyber breaches and the increased threat of regulatory action
  • How the insurance market is responding to these challenges was another important area of discussion

Understanding and responding to evolving risks is a fundamental challenge for any business.

At a recent Zurich Customer Advisory Board event, Stephen Moss, Head of Specialties, discussed how the world of risk is changing across financial lines.

Merger objection lawsuits drive rise in class actions

The volume of class actions filed across the globe has reached record levels. In the US, for example, the number of federal class actions filed in 2017 was more than double the yearly average for the preceding 20-year period.

“Class actions have long been a significant risk for US companies, but we are seeing increasing exposure for non-US firms too,” says Stephen. “In fact, there has been a significant increase in the frequency and severity of claims against non-US companies.”

The rise in non-US class actions is largely a consequence of the financial crisis, with shareholders becoming increasingly willing to hold directors accountable for their performance against the backdrop of legislative reforms and a rise of third party litigation funding.

“A lot of countries – Australia and the Netherlands for example – have taken steps to make it easier for action to be taken collectively against a board of directors,” says Stephen.

An increase in the volume of mergers and acquisitions (M&A) globally has also seen an exponential rise in merger objection lawsuits.

“There has been a lot of consolidation in recent years, and M&A deals have also become a lot more complicated,” says Stephen. “It’s no longer just a company in one territory acquiring another company in the same territory; these deals have become highly complex and often span multiple jurisdictions.”

The unprecedented scale of cyber risk

While cyber can no longer accurately be described as an emerging risk, the scale of the threat has undoubtedly increased beyond all recognition in recent years.

Take ransomware, for example. In 2015, the global cost of ransomware attacks was $325m; last year, that figure hit $5bn. By 2020, it is predicted the average cost of a data breach is estimated to reach $150m.

Cyber risk is no longer just an IT issue, but a fundamental feature of corporate governance, and as such it has become a crucial issue for directors and officers (D&O).

“Cyber and D&O almost go hand-in-hand,” says Stephen. “Boards of directors are ultimately going to be held accountable for the level of data stored, the security used to protect it and the effectiveness of their response in the event of a cyber or data breach incident.”

Regulators beginning to bare their teeth

These challenges are compounded by changes in the regulatory landscape.

“Across the world, regulators now have a lot more teeth to hold companies and individuals to account,” says Stephen.

This is particularly evident in relation to data breaches. In Europe, the GDPR will introduce a far tougher regulatory framework for the management of personal data, not to mention significantly higher penalties for non-compliance.

Stephen says: “The US has been ahead of the rest of the world in terms of data protection for a number of years now, particularly in relation to breach notification requirements.

“GDPR is Europe’s attempt to catch up, and we are seeing regulators in Australia and other territories trying to do the same thing.”

How is the insurance market responding to evolving risks?

“Our customers fully understand that the risk landscape is changing,” says Stephen. “What they want to see is how the insurance market is responding to ensure adequate protection is available through innovative and effective risk transfer solutions.”

While these risks are evolving rapidly, Zurich remains committed to working in partnership with our customers and brokers to better understand their exposures

Stephen says: “To take cyber, for example, in the absence of reliable actuarial data and of tried and tested exposure models, the challenge for the market is to understand the exposures, quantify individual risks and ultimately quantify the inherent systemic risk on a portfolio basis. We want to build an ongoing partnership to proactively help clients identify, control and manage these risks.”

For more information, please speak with your local Zurich contact.

Image © Getty

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