Consolidation, increased regulation and cybercrime are the main themes that have dominated the global insurance and reinsurance market over the past 12 months, with lawyers pinpointing them as significant areas of focus in their practice. As the market undergoes an unusually long “soft” period, industry players and practitioners alike are having to adapt and find ever more innovative and strategic solutions.
“The year of mega-mergers” was how 2015 was described to us, with high-volume cases and large-scale consolidation transforming the landscape of the insurance market. According to a study by EY, 2015 saw a 73 per cent increase in the total value and a 174 per cent increase in the average value of deals globally compared with the previous year. The trend towards consolidation within the insurance industry continued into 2016, most notably with the close of ACE Limited’s US$29.5 billion acquisition of fellow insurance powerhouse Chubb. The transaction not only established the world’s largest publicly traded property, but made the new brand, which has adopted the Chubb name, the world’s largest casualty insurance company.
However, not all moves towards consolidation have seen success – the US health insurance market being a prime example. In February 2017, a proposed merger between insurance giants Anthem and Cigna was blocked by a US federal judge, who cited anticompetitive activity and the risk of increased and unaffordable premiums as some of the main reasons behind the judgment. This was the fate also suffered by Humana and Aetna, whose merger plans were similarly thwarted earlier this year.
Lawyers did note that the past year has been a quieter period, despite continued transactional activity. However, sources were certain that there is more to come in the way of litigation as well as non-contentious work, primarily in the form of strategic and opportunistic M&A, as a means of overcoming cost pressures by enhancing margins and bolstering core business.
As has traditionally been the case, trends in mass torts tend to originate from the US, a jurisdiction home to an incredibly active and attentive plaintiff bar. Although some lawyers mentioned this year that they continue to see asbestos claims (decades after the initial flurry), as this stream of work dwindles they are now looking forwards to ascertain exactly what will be “the next big thing”. Interviewees told us that “cybercrime” is the word on everybody’s lips at the moment; however, they noted that it is yet to reach the same peak that the asbestos claims did in the 1970s and 1980s.
Despite this, multiple cyberattacks over the past few years indicate that it may indeed be headed in that direction. In 2013, retail giant Target was hit by an extensive cyberattack in which the data of 74 million customers had been breached. Since then corporate entities including Tesco Bank and, more recently, Lloyds Bank have also faced such attacks.
Indeed, this surge in cybercrime has inevitably led to an increased focus on related coverage on the part of both insureds and insurers. KPMG’s 2016 US CEO Outlook Survey notes that 38 per cent of CEOs surveyed pinpointed cybersecurity as the risk they are most concerned about, while only 26 per cent felt their company was fully prepared for a cybersecurity “event”. However, the main challenge for insurers currently lies in attempting to price cyberproducts, ascertaining exactly what risks are posed and assessing the scope of exposure.
The biggest development faced by the European market over the past year has been dealing with the EU legislative programme Solvency II, which came into force on 1 January 2016 and introduced a new EU-wide insurance regulatory regime. The new changes have brought on a vast amount of compliance-related work for lawyers, particularly surrounding requirements and reporting duties entailed in the new rules. As one source notes: “Solvency II will be the most important trend over the coming year in corporate insurance in Europe.”
In the UK, the market has witnessed additional change of late, with the introduction of the new Insurance Act which came into force in August 2016. Lawyers note that the bulk of its effects will not be felt for a while, but are keen to find out where any subsequent disputes will arise from. One lawyer commented: “Hopefully the new regulations will clarify, rather than confuse and confound.” Indeed, those practitioners we spoke to told us that they expect the bulk of the work to be non-contentious and relate more to policy drafting and compliance matters for the present.
The general diminution in contentious work is not a new trend, and stems from a changing market that in recent times has been increasingly reluctant to litigate. “The days of substantial litigation are long gone,” sources said, as clients are now a lot more cost-conscious and their incentives and priorities have evolved. Thanks to the “soft market” now being experienced, “there is simply not enough premium being paid at the moment”, commented one interviewee. Underwriters in London have been forced to withdraw from certain lines because they cannot get enough money to make it a worthwhile endeavour – and the same situation is being faced by brokers. However, lawyers were keen to stress the cyclical nature of the market – although it is currently soft, at some point premiums will begin to rise again.
As in other regions, the Asian insurance market has also seen its fair share of changing regulation, consolidation and new players. However, the most notable recent shift in the continent’s insurance space has been the opening-up of the Indian market. In 2015, Indian prime minister Narendra Modi raised foreign investment limits within the country’s insurance market, allowing foreign investors to hold stakes of up to 49 per cent in local joint ventures. This is a major increase from the previous limit of 26 per cent.
Since then, major global insurance players including Standard Life, Aviva, Aegon and AXA have made moves to increase their stakes in established joint ventures in the jurisdiction. As more and more entities look to take advantage of the change, lawyers anticipate an uptick in regulatory, transactional, financial and compliance work, in relation to both domestic and foreign clients.
The insurance legal market around the globe remains extremely competitive and fierce, with sources attesting that insurance companies are among the most sophisticated users of legal services in the world. With work ranging from slips and falls to multibillion-dollar claims, they note that the main aim for firms is to find where their products fit in the market. However, they do comment that it is no longer that simple – insurers and other clients, as they have become increasingly cost-conscious, are now conducting a lot of legal work internally, building up their in-house capabilities – a trend that is translating into increasing fee pressures for practitioners.
Despite this, sources stated that the legal landscape remains more or less the same, with large corporate deals tending to go to large full-service outfits and magic circle firms, and regulatory matters going to smaller, specialised boutiques.
As clients become more sophisticated and regulations more stringent, insurance and reinsurance practitioners forecast the next 12 months will be extremely busy. However, lawyers are also waiting to see where the next wave of mass litigation will stem from, and whether or not its source will be cybercrime. New regulatory regimes, and new rules in Europe and worldwide, seem certain to ensure that insurance and reinsurance will remain an interesting and dynamic area of practice in the coming year.