Marsh predicts cyber insurance rates will increase for retailers, U.S. commercial property rates softened in 2014

Some commercial insurers covering cyber risk are looking for additional information from retail clients on compliance with the payment card industry (PCI) data security standard standards, conflict in the Middle East is raising “red flags” among political risk insurers while rates for environmental coverage “remained generally flat” in 2014, despite risk associated with cleanup obligations on legacy sites, commercial brokerage Marsh Inc. suggested in a report released Monday.

In its U.S. Insurance Market Report 2015, New York City-based Marsh the U.S. commercial property market softened in 2014 “and is expected to continue doing so into 2015.”

In cyber insurance, there was an increase in both frequency and severity of losses in 2014, Marsh added.

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“Retailers in 2015 should expect cyber insurance rates to increase and overall capacity to shrink, particularly for organizations with more than $1 billion in revenue,” Marsh said in the report. “Alternative risk transfer structures – including co-insurance, large retentions of $50 million to more than $100 million, and use of captives – are being considered by some retailers. The use of captives, however, may not necessarily be a cost effective option due to the relatively immature marketplace for cyber.”

Marsh also suggested that carriers “generally now require additional underwriting information and other steps as a pre-condition to providing the coverage.”

Additional information sought by underwriters “may include credit card transaction statistics, documentation of standards and controls for payment processing systems, particularly point-of-sale (POS) systems, and detailed information on payment card industry data security standard (PCI DSS) compliance.”

Cyber is also a concern in the energy sector.

“Although most attacks to date have been data-driven, the possibility of a targeted attack causing catastrophic physical damage or a disruption of the energy sector is real,” Marsh warned. “Energy companies have been quick to embrace new internet- connected industrial control systems (ICS) to realize cost reductions and operational efficiencies, but this may also mean that they are more susceptible to cyber-attacks.”

Standard policies, including property and general liability, “contain exclusions for bodily injury, property damage, and business interruption resulting from a cyber attack,” Marsh warned. “But evolving cyber insurance can fill many of these gaps, providing direct loss and liability protection for technology risks. Emerging cyber insurance solutions designed for the energy industry are also written to specifically address this risk.”

The expiration last December of the U.S. Terrorism Risk and Insurance Act (TRIA) “raised significant pricing and capacity concerns for organizations that purchase terrorism insurance, particularly for those located in central business districts in major cities,” Marsh noted.

TRIA, originally passed in 2002, essentially requires commercial property insurers in the U.S. to include terrorism coverage, while providing for a backstop from the federal government. TRIA expired Dec. 31, 2014 but a bill extending – and making some changes to – the program was passed into law Jan. 12.

Risk and Insurance Management Society (RIMS) Inc. earlier noted that any company with “facilities, employees or components of their supply chain” in the U.S. would be affected if TRIA does not continue.

The 12-day lapse of TRIA “raised issues such as the potential for gaps in coverage, violations of loan covenants requiring the coverage, and confusion over the terms and conditions within policies that excluded coverage,” Marsh said in its report, adding organizations “may need to determine” whether terrorism coverage is automatically in effect, whether endorsements are necessary, whether additional premiums must be paid and whether stopgap arrangements that were put in place should be adapted further or canceled.

Marsh also commented on political risk in the Middle East and North Africa.

“Much of the region – including Libya and Syria – remains at war, while the influence of the Islamic State terrorist group has contributed to instability in Turkey, Iraq, and elsewhere,” Marsh noted. “This regional instability has raised red flags among underwriters about countries that have historically been considered stable, such as Saudi Arabia. Beyond the Middle East and North Africa, underwriters also remain concerned about potential violence in Ukraine, Thailand, Hong Kong, and Taiwan.”

Marsh also alluded to several aviation tragedies in 2014, including Malaysia Airlines Flight 370 (which disappeared March 8 after departing Kuala Lumpur), Malaysian Airlines Flight 17 (which was shot down in July over Ukraine), Transasia GE222 (which crashed last July in Taiwan) and Algerie/SwiftAir, DAH5017, which crashed last July in Mali.

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Those losses “had little impact” on general aviation insurance, Marsh reported, but the two Malaysian Airlines incidents “had a major impact on renewals worldwide” in airline hull and liability insurance.

“Airline insurance buyers experienced a volatile 2014, with the first half of the year seeing average renewal decreases typically in the 15% to 25% range,” Marsh stated of airline hull and liability.

Rates for environmental coverage “remained generally flat, with some programs seeing a marginal decrease at renewal,” Marsh stated if 2014. “Managing legacy risks was common in 2014 as organizations sought to control costs associated with unknown pre-existing conditions, cost overruns related to cleanup obligations, and joint and several liability associated with formerly divested properties and non-owned disposal sites. For complex legacy transactions, particularly those with terms in excess of five years, average rates typically flattened or increased.”

Marsh added the number of environmental claims rose last year.

“The combination of increased use of environmental risk transfer, the significant number of long-term legacy policies in force, and the widening in coverage provided over the past five years will likely drive significant claims activity for years to come,” Marsh reported. “This is a major factor in the rebalancing of insurers’ books with a preference for shorter-term policies
, and lower limit programs.”