Changing risk and regulatory landscape
COVID-19 has brought into sharp focus the need to continually assess and reassess changes in the risk landscape. Since 2002 there has been an increased frequency of epidemics such as SARS, Swine Flu, MERS, Ebola and the most recent and ongoing COVID-19 global pandemic. Small businesses in particular will likely wish to ensure they have insurance cover against future occurrences of epidemics and/or pandemics and their effects but at a price that is not prohibitive. Insurers will need to consider their appetite to write such risks.
In light of the Supreme Court's judgment in The Financial Conduct Authority v Arch Insurance (UK) Ltd and others , particularly in the context of 'but for' causation (where a series of events cumulatively cause a result notwithstanding that none of those events individually was either necessary or sufficient to cause the result) and the decision that Orient-Express Hotels Ltd v Assicurazioni Generali SpA was wrongly decided and should be overruled, both the legal sector and insurance industry are considering and will continue to consider, the implications of that judgment, not only in the context of insurance claims but also for contractual and/or tort claims more generally.
The cooperative way in which the insurance industry and its regulator, the FCA, have worked to ensure certainty for policyholders in the context of COVID-19 business interruption claims, is testament to the UK's ever-increasing customer focussed insurance regime, practice, and regulatory environment. The way customers behave and engage with insurance is changing, driven by digitalisation and customer demands and needs. With an evolving regulatory landscape, fast-paced technological change, data gathering and the use of AI, insurers must continue to adapt to meet customers’ demands, ensure the use of new technologies dovetails with existing and future regulation, and ensure that customers are still treated fairly.
While COVID-19 has been the focus of global attention this year, an even more pressing issue for the next decade is that of climate change. Increased frequency and severity of major weather events and natural catastrophes will continue to impact domestic and commercial property risks and the rating of them by the market, with challenges ahead for property owners, builders and insurers. In particular, the impact of climate change is likely to produce a significant increase in the number of properties at risk of damage by perils such as flooding and subsidence.
With the UK hosting the 2021 United Nations Climate Change Conference (COP26) in Glasgow in November, the Government's Independent Review of Flood Insurance (recommending that both insurers and intermediaries do more to help people get the right insurance), the increasing usage of more sustainable construction techniques, building regulation reform reaching its final stages and the ongoing recovery from COVID-19, insurers will need to ensure that they continue to work with each other, the Government and alongside customers to fully understand potential risks and exposures arising out of climate change and on strategies for risk reduction and mitigation of losses.
Technology and Innovation
Many businesses around the world, including insurers, have responded to COVID-19 by stepping up investment in digital development and innovation. AI continues to be a hot topic with advances in technology and a greater willingness to adopt innovative practices. It can assist insurers in learning more about their customers, pricing risk more accurately, improving efficiency, and cutting costs. AI can also help streamline the process of claims settlement, increasing customer satisfaction and also has potential in assisting in the identification of fraudulent behaviours.
The next few years are likely to see AI being used even more in damage assessment. The need for onsite surveys and inspections will continue but for less complex claims insurers may be able to cut the cost of claims - drone inspections, for example, may become increasingly common practice in property claims, with AI being used to extract key data. Further increase in the use of Internet of Things devices will have an inevitable impact in the property insurance arena, particularly in escape of water claims. A rise in the use of water leak detection and automatic water shut off devices (along with smart burglar alarms, fire alarms etc.) in building construction and management, may make many properties much better risks.
Better sharing of pools of data between insurers and better use and analysis of historic and weather data is also likely – this could enable insurers to more accurately plan potential risk in postcode areas or even more precise locations. We could see automatic notifications being sent to organisations and local authorities so that they can better prepare, e.g. with the deployment of sandbags or moving of property to higher floors, all helping to mitigate losses.
The next few years will see the effect of imbalances in both European and wider global goods and services standards and regulatory regimes, including the fallout from Brexit. Economic and geopolitical instability, the ongoing shift of manufacturing to China and South East Asia, coupled with the changing global political landscape and, in particular, emerging and increasing trade wars (and their attendant tariffs) may likely significantly affect both the reinstatement costs and business interruption periods involved following losses in various sectors. UK businesses (including those in the agricultural sector) will likely continue to look at ways to continue to bolster the "buy British" message, to increase productivity and to drive sustainability including by use of renewable energy. This will present various opportunities but also brings additional challenges and risks including, for example, from a public/product liability perspective.
Data protection and cyber risk
Many businesses are likely to continue some remote working practices implemented during the pandemic and this continues to present challenges and risk in terms of data protection and security and will inevitably be relevant to policyholders and insurers in the context of cyber risk and liability claims.
The year ahead is likely to see an increase in the frequency and severity of cyber incidents. Cyber-attacks are becoming increasingly sophisticated, creating a growing risk of physical damage to properties, for example, cyber induced fires and power grid outages, as well as widespread non-physical damage business interruption losses, all capable of giving rise to first party indemnity claims and the potential for increased volumes of claims against directors and officers, who in turn may seek indemnity from their insurers.