Steamin’ Hot Markets: Cyber, Sharing Economy, Active Shooter, Construction, Mergers and More

Insurance Journal examined industries experiencing changes, challenges, expansions and growth in the past year.

For 2017, experts predict the U.S. economy will continue to expand. “Job growth means higher payroll, sales, more autos insured by businesses, construction, property expansion, etc., which will increase gross premiums underwritten,” according to the 2017 Wells Fargo Insurance Market Outlook. “The majority of insureds will continue to see rate reductions, just not as high as in prior years.”

Here are the top five market sectors that could offer opportunities for agents and brokers in the property/casualty insurance industry in 2017.

All Eyes on Infrastructure

Quality infrastructure is a critical component to U.S. economic success, but lack of funding in recent years has left many of the nation’s roadways, railways, airports, dams, bridges, water and energy plants in disrepair. Renewed federal efforts to rebuild America’s infrastructure by President Donald Trump could further boost the construction insurance sector.

In February, Trump promised in a speech to Congress that a $1 trillion infrastructure rebuilding plan would create “millions of new jobs.” While few of those jobs are expected to materialize this year, the promise offers new hope for construction specialists.

Trump’s team has compiled a list of about 50 infrastructure projects nationwide, totaling at least $137.5 billion, as the new White House tries to determine its investment priorities, according to documents obtained by McClatchy’s Kansas City Star and The News Tribune.

Senate Democrats also proposed a $1 trillion infrastructure bill to fund the nation’s infrastructure projects over a 10-year period and state their proposal would create more than 15 million jobs.

There’s no question about the need for public infrastructure in the United States, said Scott Rasor, head of construction for Zurich North America.

“The question is how to finance that need,” he said.

“We still have a major need to build infrastructure in the country, not only from airports, but roadways, etc.,” said Jim Untiedt, president of PentaRisk Insurance Services LLC. “We’ll see an increase in public works, which I think is good.”

Brian McDonnell, managing principal, Construction Practice at EPIC Insurance Brokers & Consultants, also expects to see greater growth in infrastructure spending now that President Trump is in the White House. But “whether those dollars actually get spent in 2017 is another question altogether,” he said.

It terms of overall spending in the construction market, McDonnell said the industry is back to where it was in 2005-2008 in terms of real dollars spen,t although in his view some markets are close to tapping out in the San Francisco Bay area.

“Many things are now in play politically so it’s hard to say what’s going to happen (during the rest of 2017) but some sectors are close to being tapped out from a demand perspective (office and multi-family residential being two examples in some cities),” he said.

“If the economy remains healthy, and the consumer continues to lead expansion, the (construction) market could grow at 5 percent a year for the next two years,” Rasor said in late November. But the economy is just as likely to go the other way, he added. If that happens, construction will certainly contract. However, Rasor said, overall, he expects 5 percent growth in terms of put-in-place construction over the next year. “That’s probably reasonable.”

For the umpteenth year in a row, cyber insurance is the belle of the market ball. Carriers are pumping out new cyber insurance products and enhanced policies with breach prevention and response services at a rapid pace, with new products or enhancements coming out almost daily.

But the question remains for this market: is anyone buying them? The answer seems to be yes; the take-up rate for cyber

policies has grown every year, but there are indicators that the pace might be slowing. A 2016 survey from Zurich and Advisen of 345 U.S.-based risk managers, insurance buyers and other risk professionals covering both large and small companies, shows that over the last six years the proportion of companies buying cyber insurance increased by 85 percent.

However, the proportion of companies buying coverage in 2016 was up only 7 percent from 2015, compared to an 18 percent increase in 2015 over 2014.

Still, there is increasing awareness for the need for cyber coverage – 87 percent

of the survey respondents believe technology interruption would have a moderate-to-significant impact on their business – which the insurance industry hopes will turn into increased demand.

An article from Marsh & McLennan Cos. Global Risk Center said total annual cyber premiums have reached an estimated $2 billion and may reach $20 billion by 2025.

The biggest growth area may be in the realm of the Internet of Things (IoT), which could open the door for a personal lines cyber market. From smart phones, to smart watches, to smart TVs, and even internet-connected thermostats, people are constantly connected and so is their personal data.

According to a survey from the Hartford Steam Boiler and Inspection Co. (HSB), eight out of 10 U.S. consumers have a home data network and more than a third of them connect entertainment systems, gaming consoles and other smart devices to the internet. With all of this connectedness comes increased risk of home cyberattacks.

The HSB survey said that while cyberattacks on non-computing home systems and smart appliances have been relatively uncommon so far, the increase connectedness is luring hackers and cyber thieves that are looking for new targets.

“Home devices like smart TVs and appliances are often designed for easy use and not security,” said Timothy Zeilman, vice president and counsel for HSB. “Compounding the problem, many consumers don’t take even basic measures such as changing default passwords and updating security software.”

HSB said that damage to home devices in a cyberattack could result in a substantial financial loss – typically between $1,000 and $5,000.

A report by Aon company Stroz Friedberg called “2017 Cybersecurity Predictions” listed the IoT as one of the top cybersecurity threats for 2017.

The report said that insurers are beginning to respond with cyber insurance coverages for individuals that reimburse for expenses related to cyberattacks on home computers, home systems, and appliances and other connected devices, cyber extortion, data breach and online fraud. The business community’s risk is even greater, as employees increasingly turn to less secure devices outside of their office to conduct business.

There will be a “necessity to accept that cybersecurity risk management is a critical part of doing business,” according to the Stroz Friedberg report.

Sadly, nearly every kind of business or educational institution faces the potential of an active shooter incident and the frequency of these incidents is increasing.

An FBI study of 160 active shooter incidents, defined as one or more individuals actively engaged in killing or attempting to kill people in a populated area, found that between 2000 and 2013 there was an average of 11.4 annually, or one every three weeks. In 2014 and 2015, there were 20 mass shootings per year, according to an analysis of 2014 and 2015 active shooter incidents released by the FBI last year.

That has led to a growing insurance market with policies that provide coverage for both pre- and post-active shooter incident services, including security and risk management, post-event counseling, and coverage for lost income due to reputational damage to the business or institution.

The agencies spearheading the emergence of this market say the education process on why a typical property or general liability policy doesn’t cover an active shooter event has been arduous, but they believe that down the road this market could become the next cyber or employment practices liability insurance.

And, unfortunately, says Hugh Nelson, senior vice president of Southern Insurance Underwriters (SIU) in Atlanta, demand and sales tend to increase after active shooter events.

“When people see that it is a real risk that could affect them… they start looking,” Nelson said.

SIU launched its coverage with Lloyd’s last year for educational institutions and has since expanded it to encompass virtually any entity because of the response it received. SIU’s policy also now has an expanded definition of a weapon to include knives, explosive devices, chemicals, etc., because these events do not always center around shootings, Nelson said.

“What [the coverage] provides is a primary layer of liability coverage that duplicates the GL coverage. If one of these events happens, that liability limit is likely not enough to cover any degree of negligence,” Nelson said. “It is pretty easy to allege negligence – someone can always argue more should have been done to prevent an incident.”

Nelson says while premium growth has been slow, the product is just at the beginning of its cycle. The company also sees steady inquiries and hopes that as entities realize the need they will incorporate the insurance into their budgets.

“The services that are built into this policy really do make it a viable product for them,” he said.

Paul Marshall is program manager for McGowan Program Administrators’ dedicated Active Shooter Division, which launched last year. He says the company has seen a “very big uptick in the submission count and agent broker inquiries.”

The company is doing a massive education campaign, including releasing a video series, and so far its policy count and premium book has “exceeded its expectations.” The program is now backed by its own McGowan Lloyd’s Line Slip and offers lower limit quotes with minimum premiums starting at $500 and limits up to $25 million.

Lloyd’s has led the pack on all active shooter programs, but just this month Ironshore Specialty Casualty’s Public Entity division introduced a policy extension offering institutions of higher education an automatic endorsement for expenses related to natural or man-made incidents, including active shooter and weapon wielding incidents, impacting campus operations.

Nelson said he hopes a new carrier will help spur growth in the market.

“The more it looks like a mainstream product the more it will cause people to think about it and buy it,” he said.

The merger and acquisition insurance sector has seen increased demand for coverage while competition in the market has also grown.

Transactional risk insurance includes a class of policies that cover risks related to M&A, including representations and warranties insurance or warranty and indemnity insurance, tax indemnity insurance, and contingent liability insurance.

Demand for transactional risk insurance increased globally in 2015, according to Marsh, which saw a jump in policies written by 32 percent year-on-year. Marsh reported that uptake rates increased in all regions, continuing the trend from recent years.

“A rise in the number of policies placed in Asia over the past year was particularly noteworthy,” wrote Karen Beldy Torborg, global practice leader of Marsh’s Private Equity and M&A Services, in a Marsh report. She added that the number of policies purchased also increased in other regions: up 21 percent in the U.S. and Canada and 15 percent in Europe, the Middle East, and Africa, year-over-year. The US and Canada also experienced a record value of limits placed, rising 56 percent in 2015 compared to 2014.

The growth in transactional risk products is an area that came as a surprise to Patrick Ryan, chairman & CEO of Ryan Specialty Group.

“Transactional insurance is reps and warranties from M&A transactions, litigation, insuring litigation risks, tax. Those three product lines, risks, are just growing exponentially,” he told Insurance Journal in September 2016.

The number of markets offering M&A insurance has grown, too. More than 25 insurers now offer products under the banner of “transactional risk solutions.” The increase has been driven by demand as well as by insurers seeking new sources of written premium, according to Marsh’s Annual Transactional Risk Report published in April 2016.

It’s a good market for AIG and an area the property/casualty insurer says it will continue to invest in, Michael Turnbull, America’s M&A manager at AIG, told Insurance Journal.

AIG submissions for M&A business rose 23 percent from 2015-2016. As a result, Turnbull said the AIG M&A team has grown in response to the increased demand. “We have put underwriters onto the west coast in San Francisco and also in Chicago, Boston and Toronto,” he said.

Turnbull said while competition in the sector has increased, AIG continues to see significant opportunities in the M&A space in areas where buyers had not traditionally purchased coverage. “This product plays well in the mid-market … from $25 million deals to a couple of billion,” he said. Turnbull said for AIG, most of the growth has been in deals ranging from $50 million to $1 billion and primarily in the U.S. but he also noted growth in various cross border deals. “We see good quality transactions happening where insurance hasn’t been contemplated yet so our view is that there is definitely a good deal of room to play still left in this market,” Turnbull added.

Other M&A activity reported in 2016:

• ANV Global Services Ltd, the international managing general underwriter (MGU) of global specialty insurance group ANV, increased its Lloyd’s underwriting capacity for mergers and acquisitions insurance to a limit of €40 million, $40 million and £30 million per risk, marking an increase of 10 million in each currency compared with previous limits. Five supporting carriers provide “A” rated Lloyd’s capacity to ANV Global Services M&A Insurance, with ANV Syndicate 1861 continuing to provide the majority share of capacity. ANV’s Barcelona and London-based M&A team focuses primarily on bespoke warranties and indemnities insurance for commercial and financial clients across the European and UK markets. The company’s Lloyd’s syndicate, ANV 1861, continues to provide the majority share of the capacity under the MGU’s Lloyd’s binding authority.
• Preparing to capitalize on merger and acquisition (M&A) activity in 2017, XL Catlin further built out its global M&A insurance team with the appointments of Joseph W. Laws and Michael J. McGowan as directors of M&A Insurance in North America. McGowan joins XL Catlin from Chubb where he helped build out Chubb’s Transactional Risk practice. Laws spent five years at Kirkland & Ellis, where he advised private equity funds, as well as public and private companies related to mergers, acquisitions, leveraged finance, equity investment, joint venture and other commercial transactions.
• Ironshore International expanded its global Mergers & Acquisitions unit by opening an office for transactions in the North and Latin American regions. The Americas team is led by Navine K. Aggarwal, senior vice president, head of Mergers & Acquisitions of the Americas, who will be based in New York. Aggarwal previously served as vice president of Mergers & Acquisitions with Allied World Assurance Co. Ironshore also added several regional underwriting specialists to its team. All new appointments came from Allied World, where each served in various positions within the mergers and acquisitions sector of the insurance industry. Patrick Ryan, vice president, and Aartie Manansingh, assistant vice president were named to Ironshore’s New York office while Elizabeth Cunnane, vice president, and Andrew Stewart, vice president, operate the Atlanta and Toronto offices.
• Breckenridge Insurance Group jumped into the space in 2016 with the formation of Vista Insurance Advisors, a new company focused on the Transactional and Mergers and Acquisitions market. Vista Insurance Advisors is led by Chief Executive Officer Thomas Dowd based in New York who previously worked for AIG, Lloyd’s, Crum & Forster, Employers Insurance of Wausau and Seneca Insurance.

The idea of sharing resources as a small business opportunity continues to gather interest from a growing number of Americans. People continue to play in the gig economy by sharing their homes, vacation properties, collector cars, recreational boats, ridesharing digital platforms like Uber or Lyft, and even household tools.

In the context of gig employment, nearly one-in-10 Americans (8 percent) have earned money in the last year using digital platforms to take on a job or task, according to the Pew Research Center survey conducted in August 2016.

“Nearly one-in-five Americans (18 percent) have earned money in the last year by selling something online, while 1 percent have rented out their properties on a home-sharing site. Adding up everyone who has performed at least one of these three activities, some 24 percent of American adults have earned money in the “platform economy” over the last year.”

As the sharing economy continues to evolve and grow so does the insurance market. But emerging risks associated with the sharing economy and new technology that enables this budding industry poses challenges for insurers.

Because insurers don’t have a good handle on future exposures of shared economy risks, education is key, said Scott Kellers, head of Syndicate and Reinsurance Claims for London-based Liberty Specialty Markets.

Pete Fennell, managing director of Aon Benfield and immediate past president of the International Association of Claim Professionals, said that future exposure will be hard to assess. He offered the example of Uber, which doesn’t consider itself to be a transportation company but rather a software company. “Are they? How does that get insured? Who’s paying the claim if there is a claim? Airbnb just got sued recently for discrimination. Is it Airbnb’s liability? Is it the homeowner’s liability? This is a really gray area right now,” Fennel said.

The lines between underwriting personal and commercial property risks are blurring as the sharing economy evolves, Christopher Pesce, president of Maritime Program Group, told Insurance Journal last fall. “Look at some of these rental operations, at Airbnb, and how the market responded to the fact that there is now a mixed commercial use of what’s otherwise considered personal property.”

Pesce believes the insurance industry has and will continue to find ways to insure sharing economy risks. “I think we have an advantage from the standpoint of really knowing and understanding the risk.”

There are some insurance markets developing solutionroductss today. One just released this month is pay-per-use insurance option by Slice Labs Inc.

Slice is a tech startup featuring an on-demand insurance platform for people who share or rent their homes. The pay-per-use insurance coverage is available on a limited basis in six states: Colorado, Iowa, Maryland, Massachusetts, Texas and Washington.

The Slice product is a customized commercial policy. It is for users of homeshare sites like Airbnb, HomeAway, OneFineStay and FlipKey. Users can purchase the coverage through an app or online and turn it off-and-on as needed by the week, day or hour. The coverage can be for a room in a house or condo, or an entire residence. The customized commercial insurance policy includes commercial liability coverage limits of $2 million, full replacement cost value of the home, and low or no deductible coverages. The offer is not open to the overall public yet but homeshare hosts in those states can get access to the Slice offerings on an individual basis.

Slice, headquartered in New York City, is backed by Horizons Ventures, XL Innovate and Munich Re. It is currently licensed to sell insurance in 49 states. The company says it has plans to eventually offer a ridesharing insurance product as well.

Homeshare platforms like Airbnb tend to offer limited property damage and liability protection for hosts who rent their space using their sites.

Other platforms such as GetMyBoat.com advise purchasing additional coverage if a boat owner’s personal boat owner’s policy doesn’t cover charters/rentals.

Traditional insurers are also moving into the sharing economy space. Last spring, Allstate began offering homesharing protection in six states — Arizona, Colorado, Illinois, Michigan, Tennessee and Utah — and said it plans to expand it to others this year.

In November, ISO, the policy and rate development organization used by many P/C insurers, introduced homesharing insurance options for insurers to adopt for their home insurance customers who might rent or share their properties.