March 4, 2015 by Regan Reid
All through our history, our magazine has checked in with what the Brits have been up to in the industry. After all, they practically invented our business. And say “insurance” to most people in Europe, they think one word: Lloyd’s. Grand and venerated, more than than 325 years old, it’s not every insurer that has its own gallery of artifacts from Horatio Nelson. When David Beckham wants to insure his legs or when an ocean-side Florida resort needs property coverage, Lloyd’s syndicates will pool their resources and each take on a share of that risk.
“Because they’re flying under the Lloyd’s banner, collectively, all their capital together gives them A-rated paper,” says Jad McGregor, president of Affiliated Brokers Exchange (ABEX), a Lloyd’s coverholder based in Waterloo, Ont. “So it gives them the capability to do great things and huge things.” He believes “they have the capability to see things differently, just because of how they’re set up.”
McGregor says that London is where the “world’s talent collects” and from here that insurance solutions for the most complex risks are devised. And Lloyd’s has thrived on creating new products and coverages for risks that were previously thought uninsurable. After 33 miners were trapped in a Chilean gold mine in 2010, for example, a broker and underwriter team developed a policy that would cover the search and rescue of trapped miners, as well as the public relations costs. At a recent event in Toronto, Lloyd’s CEO Inga Beale said the industry needs to develop more ideas like this.
The stand-alone terrorism insurance market is generally considered robust, with some arguing that the private market has enough capacity to handle the vast majority of terrorism risks. But as we point out in this issue’s “UpFront,” Canada has no government terrorism insurance program and insurers aren’t required to provide the coverage. Some do offer property insurance programs with coverage included, but it can be limited. So for those in need of terrorism insurance, the London market is often the place to look.
The big problem in Canada is that few are actually looking, and the demand for terrorism insurance here may increase, says McGregor. “People don’t buy insurance unless they need it, or unless they think they need it. Or unless they’re told to have it.”
He expects to see an uptake in terrorism coverage in Canada, which is excluded on almost every policy. “We haven’t had a major 9/11-type event. We’ve had a couple of close calls and a couple of scares, but we haven’t had anything that’s been catastrophic. In the event that that does happen, it’ll be a no-brainer. Just look at what happened in Ottawa: even though it wasn’t a terrorist attack per se, the city did shut down for a day. And under the threat of a terrorist attack there was business interruption that occurred. You know, people could very well put in claims on policies, but if it’s considered an act of terrorism then they wouldn’t be covered [unless they specifically had the right coverage].”
He says brokers should be speaking to their commercial clients about terrorism insurance if they haven’t already. Terrorist attacks are a very real and potentially very costly threat and, in all likelihood, they’ll continue to be.
The U.S. cyber insurance market was expected to grow to $2 billion in direct written premiums in 2014, up from $1 billion in 2013, according to a report by Marsh & McLennan. And the European market is expected to experience similar growth. Marsh & McLennan estimates the market to be at less than $150 million, growing by 50 to 100 percent annually.
Lloyd’s CEO Inga Beale told Bloomberg TV recently that she expects to see more growth in the cyber insurance market. “Lloyd’s is at the heart of cyber attacks, providing coverage right now. It’s going to grow dramatically with all the high-profile hacking incidents.”
While Canada’s cyber insurance market is growing, it certainly lags behind the U.S and European markets.
“Every day a new syndicate pops up offering some form of cyber coverage,” says Jad McGregor. “That’s probably the hottest trend that’s going on [in the London market] right now. And the Canadian marketplace is a little bit behind the eight ball. People who are asking for it generally are asking… because they’re doing business in the U.S., and their U.S. counterparts are requiring that they have coverage.
“People just don’t know that it’s insurable, for one, but they also don’t think that it’s going to happen to them. Because for the most part it doesn’t, but when it does, it’s usually bad.”
McGregor gives the example of a Toronto marketing consulting firm that does work for large oil companies. The firm’s website was hacked and redirected visitors to a site advertising knock-off Michael Kors purses. “Talk about a reputational problem. Any one of [their] contracts could be a million dollars. And if they send the wrong message because their website gets hacked, they could lose a million dollar contract.” McGregor stresses that the firm simply didn’t know cyber insurance was available.
And this is a major problem that Canadian brokers need to address, says Eileen Greene, vice president and partner at Hub International. “From a broker standpoint, we are exposed from an E&O standpoint like no other.”
Brokers have an obligation to inform their clients of the risks and the coverages, explains Greene. So if that marketing consulting firm asked its broker if it had cyber coverage, and the answer was no, the firm could rightly ask, “Well, is coverage available?” And, since the answer is a resounding “yes,” the broker could be in trouble.
At a recent event in Toronto, Sean Murphy, president of Lloyd’s in Canada, also pointed out that brokers need to understand the effects a cyber attack can have on a client’s distribution chain so that they can suggest appropriate coverage.
A recent Crawford & Company report stated that, “The insurance industry is at the relative infancy stage of responding to risk managers’ concerns with bespoke cyber insurance products.” The report also states that, though the markets in the U.S. and Europe are more mature than others, “very few carriers are able to offer indemnity in excess of $50 million, with the majority writing maximum limit of $10 million or under. In Europe, the market is catching up but the capacity on offer remains limited.”
In fact, Lloyd’s Vision 2025 states that the “future success of Lloyd’s” depends on the development of “new and better products” in the areas of cyber risk (as well as climate-related catastrophes and supply chain disruption, among others).
One risk that the London market is working to develop products for is cyber terrorism. The problem is that terrorism coverage excludes acts that are electronic in nature, while cyber insurance doesn’t provide coverage for cyber attacks that cause physical damage. In a 2014 Lloyd’s article on cyber terrorism, Laila Khudairi, an underwriter for Enterprise Risk at Lloyd’s underwriter RJ Kiln & Co. wrote, “Now terrorists don’t need to board planes and put bombs in location, but can use the Internet to get into critical infrastructure or nuclear facilities and cause explosions. This is a new type of risk.”
But, to invoke an old wartime slogan, London can take it.
“London is the most innovative insurance market in the world. If they have not already come up with [a product], they will if there is a demand,” says Mark Frederick, a partner at Miller Thomson in Toronto. And it stands to reason that the new product will make its way across the pond… eventually.
Lloyd’s Canada president Sean Murphy says Canada remains an integral part of the company’s global growth strategy. Lloyd’s is also focused on strengthening relationships with its brokers, coverholders and underwriters here—something made clear at its first Meet the Market event in Toronto last October. At the event, London brokers and underwriters met with their Canadian counterparts, with the goal being “to strengthen and develop business relationships and explore future opportunities.”
“Lloyd’s wants to write more business here,” says McGregor. “I think you’re going to see Lloyd’s throwing their capacity into Canada, because it’s a very profitable territory. And Lloyd’s recognizes that.”
They shall drive on the streets. They shall drive to the beaches. They shall not flag or fail, but every so often they shall try to get away with a fast one—those young tossers. According to a survey done for Kwik Fit Insurance in the UK, younger Britons are “far more likely to commit insurance fraud.” One in five adults aged 18 to 34 admitted to giving false information on their car or home insurance to try to get a cheaper price or premium. That’s nineteen times more than those older than 55 who would consider doing the same.
But the Brits haven’t completely given up on their young. The British Insurance Brokers’ Association has launched a Young Broker Steering Group with the idea of molding fresh faces into “the leaders of tomorrow.” There are such spiffing good ideas as a Young Broker Day at the group’s 2015 conference, where they can network with the big industry types, and the development of a regional ambassador to figure out other ways to get involved.
Copyright 2015 Rogers Publishing Ltd. This article first appeared in the February 2015 edition of Canadian Insurance Top Broker magazine
This story was originally published by Canadian Insurance Top Broker.