Insurers Should Monitor the Pulse of These 4 Emerging Regulatory Trends

The regulatory landscape is changing. Insurance companies need to be on top of these key trends if they want to continue to build successful risk strategies.

The legal/regulatory landscape is ever changing, and with a new year already underway, insurance companies need to be on top of key regulations if they want to continue to build successful risk and compliance strategies.

To do just that, Deloitte released a report on key areas within the regulatory landscape where they expect change and other possible growing trends. The report, “Leading in Times of Change: Insurance Regulatory Outlook 2019,” highlights several places in which regulators are giving their attention this year. And at the forefront is cyber security.

1) Cyber Security and Data Privacy

Now that hacking and data breaches have fallen into the category of the inevitable, cyber security and data privacy dominate the regulatory agenda.

In just 2018, the EU General Data Protection Regulation (GDPR), the California Consumer Privacy Act (CCPA) and the New York Department of Financial Services Cybersecurity Regulation all came into effect.

Each had an impact on how businesses collect and use consumer data, reinventing the way the risk is looked at as a whole. GDPR regulates personal data pertaining to any person or company within the European Union; the CCPA expanded the rights for consumers to know how a company uses their information; and the N.Y. regulation requires financial services companies to establish and maintain a cyber security program.

Moving forward, the report said several more countries are looking to implement or enhance already-existing regulatory requirements, from Brazil and the UK, to the U.S. and Australia.

“For insurers to remain competitive,” said the report, “they need the ability to acquire and manage vast quantities of data to provide more relevant coverage for consumers.” This is particularly true in cases where businesses outsource data-collection activities and it becomes third-party risk.

2) Analytics and Modeling

“The year 2018 appears to have been the turning point for insurers embracing the use of analytics and modeling to help manage their operational risk and regulatory compliance exposures,” noted the report.

There has been a trend of firms adding data scientists to their risk teams, enabling many to start the conversation on improving data analytics and what that will do to and for the industry. But while innovation has its upsides, data analytics is also proving an emerging risk. Some regulators have begun questioning why firms have not proactively identified certain risks given the amount of information they already have at their finger tips.

Additionally, other high-priority areas are being identified, including emerging risks related to the regulatory market conduct exams, policy rate accuracy and related laws and regulations, and sales practice misconduct.

So how can insurance keep on top of analytics in 2019? “Firms should strive for meaningful progress in the year ahead, using periodic checkpoints to refine their goals; demonstrate progress, value, and ROI; manage internal expectations; and adjust course as needed.”

3) Fraud as an Epidemic

According to Deloitte, insurance fraud is a major issue for the industry, estimated as an $80 billion-a-year problem. Both hard fraud — perpetuated by criminal organizations intent on committing fraud — and soft fraud — committed by individuals through benign acts like exaggeration, embellishment or misrepresentation — have each taken a toll.

An estimated 3 to 5 percent of every claim dollar is lost to hard fraud, while 5 to 25 percent of every claim dollar is lost to soft fraud.

U.S. states are cracking down the best way that they can — through regulatory action. In 2018, Michigan became the 42nd state to form a fraud bureau. Additionally, 43 states have mandatory fraud reporting statutes, 22 require companies to have anti-fraud plans, and 15 require companies to utilize special investigative units. For 2018, 30 anti-fraud bills were enacted, with 26 bills still pending.

An estimated 3 to 5 percent of every claim dollar is lost to hard fraud, while 5 to 25 percent of every claim dollar is lost to soft fraud.

State legislatures across the country are continuing along this path, and insurance companies would fair best to review what’s in motion per state and how each might impact their business.

A Coalition Against Insurance Fraud study has found companies to be embracing new and innovative technologies to combat fraud as well. Others have implemented the following analytics techniques to the mix:

Data exploration: Identifying trends, outliers and circumstantial anomalies through exploratory data analysis.
Geospatial analysis: Using geographic coordinates to identify spatial patterns and anomalies.
Social networking: Visualizing and analyzing relationships to identify key players and uncover hidden patterns.
Machine learning: Leveraging advanced modeling techniques such as neural networks, random forests and regression to uncover subtle fraud patterns.

4) Insurtech

Some of the latest innovations in technology include artificial intelligence, algorithms and robo-advice, smart contracts, the Internet of Things, wearables, blockchain and more.

“All of these technology innovations have significant potential benefits for consumers; however, they also pose challenges that may trigger regulatory scrutiny,” said the report.

Regulators have found that while Insurtech has primarily supported the insurance industry, it has been challenging to monitor and assess its effect.

Robo-advice, according to the report, is a good example. While this technology can enable consumers to receive advice at a lower price point, its uncertain whether the tool is providing accurate advice compliant with the parameters set up for human advisers.

To stay ahead of a changing tech environment, the report suggests that insurers inform and involve regulators early in the Insurtech adoption process, both emphasizing the need to work together and bringing relevant, innovative products to market more quickly, “which is something all stakeholders should find appealing.” &

Autumn Demberger is a freelance writer and can be reached at [email protected].

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.