Insurance developments to know from Gotham Insurance Symposium 2019

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The world of insurance is evolving at an exciting and unprecedented pace. We are seeing new risks and demand for new products, followed by new regulations to address the changes. As such, companies are innovating not only with respect to their product offerings, but also their operations. They are tracking and optimizing the solvency and competitiveness of their overall portfolios, as well as engaging in mergers, consolidations and other transactions to adapt to the new environment and execute their business strategies.

Every year we meet in Manhattan with insurance leaders from across the country for the Gotham Insurance Symposium to discuss trending topics and issues faced by established carriers, start-up companies and regulators. Below are some of the takeaways from our most recent gathering in 2019.

New insurance business transfer mechanisms in Oklahoma and nationally

We heard it first on our panel on insurance business transfers (IBTs). The Oklahoma Insurance Commissioner publicly announced that Enstar Group Ltd., which specializes in the acquisition and management of diversified insurance businesses, is in the final stages of implementing an Oklahoma IBT, with another two IBTs in the Sooner State’s pipeline.

Key discussion points included the policyholder protections built into the Oklahoma IBT process, and how the IBT mechanism has provided another tool to help unlock runoff opportunities in the US.

Also noted was the UK’s deeper knowledge, and greater array of, runoff tools compared to the US, despite the fact that the size of the US market is significantly larger than the UK market. Newly enacted laws, such as in Oklahoma, have the potential to invigorate and transform the US insurance and reinsurance runoff market.

Finally, there was a brief discussion on a recent high-profile decision by an English court not to approve a Part VII transfer (which the Oklahoma IBT is, in large part, based on). Our panel noted that the decision showed that the UK court was not a mere rubber stamp and that, like the Oklahoma process, it properly took into account all relevant factors to assess potential impact on policyholders, and that this was a good thing.

Arbitration law developments

Year 2019 saw several significant rulings impacting the arbitration of disputes in the US. First, the Fifth Circuit Court of Appeals clarified that whereas certain state insurance laws prohibiting the arbitration of insurance disputes may reverse pre-empt the Federal Arbitration Act pursuant to the McCarron Ferguson Act, such state insurance laws may not reverse pre-empt arbitration agreements governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), a US Treaty. See McDonnel Group, LLC v. Great Lakes Insurance SE. Thus, courts will enforce arbitration agreements arising out of insurance contracts subject to the New York Convention regardless of any state law prohibiting the arbitration of insurance disputes.

Second, in Henry Schein Inc. v. Archer & White Sales, Inc., the US Supreme Court eliminated the “wholly groundless” exception to the rule recognizing where the parties have clearly and unmistakably delegated the issue of arbitrability to the arbitrators, the arbitrators alone should decide arbitrability questions. Accordingly, parties who do not wish to delegate the issue of arbitrability to arbitrators should clearly specify such intention in the language of their arbitration agreement.

Third, in Lamps Plus v. Varela, the nation’s highest court declined to permit class arbitration to proceed where the parties’ arbitration agreement was ambiguous as to whether class proceedings were agreed. Finding that class arbitration was fundamentally at odds with the basic intent and purpose of arbitration (i.e., to provide a forum for the efficient, speedy and cost-effective resolution of disputes), the Court concluded the parties must actually agree to class arbitration in order for the Court to authorize class arbitration proceedings. Notwithstanding this rule, parties who wish to eliminate any risk of class arbitration proceedings should include a clearly identifiable class arbitration waiver in their arbitration agreements.

The future of cyber insurance

Many insurance companies do not actively pursue the market for cyber liability coverage due to their perception of the complexity of the risks and the industry’s limited experience underwriting cyber losses. That said, the cyber insurance market is forecast to grow by approximately 34 percent annually over the next five years, expanding from US$2.9 billion in total premiums written in 2019 to US$16.7 billion in 2024. Given the huge potential of this new revenue stream, insurers will likely find a way to get comfortable with underwriting cyber risks. As there are currently few insurers with specialist cyber teams, insurers will need to build skills in assessing cyber risks and whether the potential insured has an adequate risk mitigation strategy and cyber incident response plan in place.

Where a potential policy-holder is not prepared, insurers have an opportunity to offer broader cyber consulting services to help the company stay secure.

High-profile disputes in the cyber insurance market currently focus on denials of “silent cyber” claims, referring to potential cyber exposures contained within traditional property and liability insurance policies that may not implicitly include or exclude cyber risks. Over time, cyber risks likely will be clearly excluded where policies are not intended to extend to this coverage. Similarly, insurers will need to be transparent about the risks that are excluded from a cyber policy. If clients understand this at the outset, the risk of disputes will be limited, confidence will grow and the cyber insurance market can fulfill its significant potential. See full article here.

Long-term care insurance developments

The long-term care (LTC) insurance industry finds itself in a challenging position, having sustained significant losses due to the substantial difference between actual experience and the actuarial assumptions used to price its product. As a result, insurance companies have requested approval from their state insurance regulators to increase premium rates. Regulators, however, have tried to balance the actuarial justification for rate increases with the impact on elderly policyholders and have been reluctant to approve the full amount requested. Both regulators and policyholders have challenged the rate increases in administrative hearings or courtroom litigation.

Historically, policyholder class actions alleging fraud, breach of contract or defective pricing have largely been unsuccessful. But recently, the Seventh Circuit Court of Appeals grappled with the way forward in a pair of cases that could auger a new wave of policyholder litigation based on the definition of policy “class.” However, a federal district court in Illinois rejected policyholders’ attempts to expand theories of liability based on the Seventh Circuit’s rulings, which suggests that—for now, at least—insurers’ defenses to policyholder litigation remain strong.

Given these challenges, some insurers have come up with creative new strategies to mitigate the impact of rate increases on elderly policyholders and to minimize the risk of policyholder litigation, ranging from offering more reduced-benefit options, to a co-deductible model in which insurers and policyholders share in claims costs, to lump sum buyouts of LTC policies. LTC insurers also are evaluating ways to keep policyholders happier and healthier in their own homes for longer periods of time in order to reduce claims costs.

Autonomous vehicles: Liability and insurance

Unlocking the full potential of autonomous transportation will require smart, forward-looking decisions about how to manage the spectrum on which driverless vehicles will rely. Regulators in the US and around the world must design, implement and continuously refine policies to allocate, use and protect autonomous vehicle spectrum from harmful interference. In the insurance context, autonomous technology will significantly alter the traditional auto insurance market as cars become increasingly safer, which will significantly reduce accident frequency and, potentially, accident severity. The rise of autonomous vehicles will also produce a change in the insurance products marketed to the auto industry, with far greater emphasis placed on liability coverage.

The role of companies that manufacture, or design software for, autonomous vehicles will likely disrupt the insurance marketplace in three key ways. First, we can expect a shift to manufacturers of driving risk and associated liability, as more driving decisions are made by a vehicle’s proprietary algorithmic “brain.” Second, in an environment where driving decisions are shared between the driver and the vehicle, we may see a consolidation of legal exposure. Third, the next generation of cars will capture more, and more data via an array of sensors and cameras, their control of the data, relationship with the vehicle’s owner and assumption of legal exposure will give manufacturers an outsize role in redefining the driving insurance marketplace.

Insurance coverage for environmental pollution risks: How it works and what it covers

Obtaining specialized insurance coverage for environmental pollution risks is an increasingly common and important risk-management strategy for a wide variety of businesses. Particularly given the expansion of environmental laws and regulations over the past few decades, pollution-related claims and liabilities are not limited to major industrial manufacturers. Over the same time period, however, traditional commercial general liability policies have been revised to expressly exclude environmental pollution risks. To address the resulting demand for environmental coverage, a number of carriers have developed specialized insurance products that expressly cover certain pollution-related risks, typically on a claims-made basis. Insurers market these policies to property owners, contractors, engineers, lenders and others. These relatively new, but proliferating, lines of coverage differ in significant ways from traditional occurrence-based CGL policies and raise unique issues in terms of disclosures, underwriting and claims-handling. Our panel discussed these issues as they affect both policyholders and insurers, as well as the insurance marketplace more broadly.

We are excited to see what 2020 will bring for the Insurance market, and look forward to our next gathering for Gotham Insurance Symposium in the Fall of 2020. Happy Holidays!

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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