Trends to watch: New and emerging risks

Sarah Kim, partner at Centana Growth Partners

Artificial intelligence will be transformative for the insurance industry. With it will come expanding complexities that must be identified and managed. While AI can accelerate underwriting, increase efficiencies by leveraging workflow copilots and improve risk analysis, it can also introduce bias and security risk into processes. Strong safeguards must be incorporated to protect data and prevent biases. Insurtechs can help design new tools to bring transparency to models, evaluate on-going validity, and provide a sound basis for communicating with stakeholders and regulators who will be keeping a watchful eye.

As the already hard market copes with increasing pressures from climate change and global politics, insurtechs can continue to innovate by integrating advanced short-duration parametric products with conventional indemnity solutions. This strategy can draw alternative capital sources from asset managers like hedge funds, family offices and pensions to the market. Investors can be attracted to these liquid investments with no/low correlations to equity beta returns. Additional capital sources can help fortify the insurance industry's financial resilience in an increasingly challenging environment.

Ed Shahnasarian, managing director at THL

The E&S market sees its fourth straight year of double-digit rate growth, a trend that hasn't occurred in 20+ years.

Many E&S lines are still facing challenging markets, driven by limited capacity coupled with an uncertain macro, geopolitical, and environmental backdrop. The massive property market is in a particular crunch as the definition of CAT exposure expands and capacity flees the market. More and more insureds are turning to the parametric insurance market, which is growing dramatically, for incremental coverage on top of traditional property policies. A consistent theme across almost all lines is a lack of capacity, which will drive rate growth and lower limits particularly in casualty, construction, wildfire, and hospitality.

The most noticeable outlier is cyber, which led the entire E&C market's rate growth through 2022. The cyber market grew softer last year as both severity and frequency dropped. Expect rates to moderate as ransomware events increase and social engineering losses continue.

Experts have been predicting we will return to a soft market for a while, but I don't believe it is in the cards for 2024.

Cynthia Aoki, partner; Meghan Dalton, partner; Janice Holmes, senior counsel, Clyde & Co

Cynthia Aoki, Partner, Calgary, Clyde & Co

The explosion of AI, particularly generative AI, has intensified the need for regulation globally. Calls for action from federal and local governments as well as human rights organizations will continue as countries around the world are in the nascent stage of regulation, grappling first and foremost with how to clearly define AI itself and the risks it presents. 

Meghan Dalton, Partner, Chicago, Clyde & Co

Chief among the risks are discrimination bias and privacy concerns. With the increased reliance on generative AI, we expect to see discrimination, bias, and privacy concerns, amplified as key risks and probable litigation targets. Companies relying on the use of generative AI open themselves up to liability over bias and privacy issues, as do the developers of the AI systems which will result in an intensifying push for safeguards as the lines become increasingly blurred in determining whether humans or machines are at fault. It seems only a matter of time before an AI system is sued, along with the companies relying on it. Regardless, we expect the number of AI-related cases, particularly class action suits, to increase.    

As companies race to develop or adopt AI technology, insurance will be a critical component of moving projects forward as well as protecting against risks. The big question is will insurers want to address the risks and if so, how. As insurers also increasingly adopt AI tools as an organization to streamline and improve their operations, they will need to carefully consider what they are willing to cover when it comes to AI. Will we see policies written to protect AI systems? Likewise, as AI related litigation increases, and insurance becomes harder to obtain, we expect companies to more carefully consider contracts entered into with third parties over AI and adopt strict policies around the use of OpenAI platforms. One thing seems certain: Following a sharp uptick in AI-related litigation, insurance will be a catalyst for regulation and industry reforms.

Ed Majkowski, Americas insurance sector and consulting leader, EY

Insurers and risk management teams are going to continue to be challenged to manage the evolving use of Artificial Intelligence, new and more complicated cybersecurity threats, geopolitical tensions, emerging environmental risk factors, and added pressure from regulators.

In addition, insurers are aiming to effectively navigate the transformations required in their business models to stay competitive, attract customers and focus on growth.

Mark Berven, president & COO of property & casualty at Nationwide

Nationwide fully expects to see severe weather events increase in frequency and scale, resulting in another year of high recovery costs. Climate risk will remain a prominent issue for the property & casualty industry for the foreseeable future. That's why Nationwide has and will continue efforts to raise awareness and advocate for strong, enforceable building codes at all levels of government.

We continue to call on our elected officials and policymakers to require buildings to be built to IBHS fortified building standards. We know, based on more than 20 years of scientific research, these enhanced requirements deliver superior performance protecting people and their property during severe weather events.

Gwen Cujdik, claims manager, cyber incident response, AXA XL

Cyber extortion events are not going away. In fact, if the final quarter of 2023 is any indicator of 2024, we should all be buckling up for a ride. In 2023, we saw more frequency of cyber extortion events impacting mid to small markets earlier in the year. We started seeing an increase in significant events impacting large enterprise starting in October and holding steady through November. There was noted increase in demands by threat actors and in severity. It remains to be seen whether a soft insurance market, where controls that were in place in the hard market, were set aside and therefore, contributed to the increase in severity. Some threat actors including Scatter Spider engaged in highly sophisticated and targeted attacks (a.k.a. big game hunting). I believe that the controls of the hard market helped to minimize the severity of attacks.

We continue to see wire fraud events. This suggests that bad guys will continue to pivot to whatever means necessary to get the payout – either by ransom or by duping people into wire fraud.

I think we will also see an increase in the use of social engineering as a means to gain unauthorized access into systems – not just email fraud. This includes sophisticated attacks aimed at bypassing MFA and other tried-and-true security features: SIM swapping for example or social engineering to dupe IT staff into granting access to accounts under the belief the caller is an employee (experts are recommending video verification now), and the use of publicly available information to attempt to legitimize communications or websites where individuals are duped in clicking on links or opening attachments with malware.

Lastly, I think we will continue to see attacks stemming from zero-day vulnerabilities. While the window of time can be short to leverage these vulnerabilities, those that are not consistently patching their network will continue to be the most vulnerable to these attacks. For these threat actors, all it takes is one big score per-vulnerability and it's worth the effort.

Ariel Weintraub, head of enterprise cyber security, MassMutual

I predict we'll see a dramatic increase in the number of cybersecurity attacks conducted via social engineering. Cybersecurity technology has significantly evolved over the past decade, with the development of AI and other tools that can improve controls like protection against phishing emails. However, it only takes one successful phishing email or call center protocol error to successfully bypass security controls and experience a social engineering attack. With controls that depend on humans, there is always room for error – which is why it's important we remain diligent and agile with our security advancements.

Elizabeth Francy Demaret, president of carrier services, Sedgwick

I believe the key issues to watch in the P&C markets for 2024 can be summed up with one word: Unpredictability. Specifically, I believe there are two areas in the P&C markets that are seeing unpredictability because the factors are difficult to model and measure accurately and therefore predict their impact.

Secondary losses
In 2023, Secondary Losses accounted for 60% of the $100BN in CAT losses (Swiss Re) and will continue to increase claims costs, change pricing as well as coverage appetites globally but especially in the U.S. and Europe. According to AON's Global Catastrophe report for Q3 – losses are 17% higher than the 21st century average and were driven more by severe convective storms and wildfires than the CAT losses we normally track – hurricanes and EQ. Secondary losses will force additional capacity restrictions in an already hard market. Most reinsurer's models are driven by CAT storms such as the hurricanes. I believe the continually increasing impact of the secondary losses will force insurers to restrict coverage or significantly raise rates in "at risk" areas. It is also driving an industry need to address the impacts of climate change and urbanization in a way that has not been done before.

Litigation
Increased and nuclear litigation will continue to drive unexpected losses and expenses in the general liability area. We continue to watch closely four factors that are negatively impacting costs:

Early attorney assignment on claims
Social inflation
Third-party funded litigation
Nuclear verdicts and class action lawsuits

All of these factors have increased significantly in the past 3-5 years and have driven both increases in claims costs but also pricing and underwriting appetite.

Jason Kaminsky, CEO, kWh Analytics

P&C; climate insurance (emerging risk); data; nat cat exposure: Climate insurance is an emerging area where technology innovation will play a big role. Access to more readily available data and increasingly sophisticated analysis tools will give insurers a clearer view of risk, putting greater emphasis on risk mitigation and site resiliency measures for assets in

natural catastrophe prone regions.

Emerging risk (renewable energy tax credit transfers); renewable energy: Insurance will play a critical role in enabling investments in tax credit transfers for renewable energy projects. Expect pricing to fluctuate significantly as insurers determine the likelihood of recapture events and how hard it is for developers to satisfy government requirements for getting tax credits.

P&C, emerging risk, renewable energy (battery storage): Insurers will cautiously approach insurance for battery storage assets, with a focus on the risk of thermal runaway events. Technology improvements and operating best practices will continue to drive physical risk out of the infrastructure, with more rigorous underwriting being applied to the segment.

Bill Pieroni, president & CEO, ACORD

Emerging risks - environmental, geopolitical, cyber - are getting increasingly more pervasive and severe. Risks that were traditionally excluded, as well as things that didn't exist before, are now in significant demand - think about supply chain disruption or liabilities from the use of Al. This may well drive continued growth in specialty lines, but all carriers will have to make a decision about embracing these risks, developing new products and solutions as well as the tools to address rating, underwriting, and claims.

If the industry doesn't rise to the challenge, customers may turn to new entrants or alternative means of risk transfer.