This year, Who’s Who Legal interviewed over 40 leading insurance and reinsurance lawyers and expert witnesses to find out more about market trends. Sources we spoke to identified a number of hot topics, including ongoing consolidation in the market, cybercrime, and an increased emphasis on compliance and governance, all of which are discussed here.
Lawyers we interviewed all around the world continue to be busy helping clients adapt to regulatory changes. Meanwhile, insurance companies are keen to exploit the advantages of technology, which is giving rise to the growth of insurtech startups – entities that deliver innovative technological solutions to boost efficiency. This is an area of priority for companies that, since the financial crisis and in the face of a prolonged “soft” market, are extremely cost-sensitive. There has been a huge uptick in companies taking out insurance policies to cover cybercrime, and this remains an area of significant activity and concern.
The year 2015 was the “high water mark” for consolidation and M&A activity in the insurance industry, which “cooled a little in 2016, and further still in 2017”. During the M&A boom of 2015, interviewees reported high levels of activity among Japanese and Chinese clients making and signing agreements to invest in the US insurance market. Since then, the Chinese government has promulgated certain capital controls on outbound foreign investment, which has caused issues for Chinese acquirers in the insurance sector. Nevertheless, “the Chinese insurance industry is bigger and busier than ever,” as one source described, and international law firms with a strong presence in the country are looking to capitalise on this. Elsewhere, in Ecuador, “the ongoing need to consolidate the industry continues”, as new regulations requiring a significantly higher level of capitalisation have created the need for smaller companies to merge. Meanwhile, the Singaporean government is actively trying to attract insurers and has introduced a number of reforms, with the aim to be one of the world’s leading insurance markets by 2020.
Practitioners reported an uptick in claims with international reach, leading to a wider jurisdictional coverage for many practitioners. “This is clearly a major change over the last two-to-three years,” said one lawyer. For example, an increasing number of American corporate policyholders are purchasing foreign coverage programmes in Bermuda, and foreign companies are looking to markets such as Ecuador for acquisition opportunities.
Since the early 2000s, much emphasis has been placed on regulation, compliance and discipline within the insurance industry. The 2008 financial crisis resulted in “some big failures which can be attributed, at least in part, to bad governance”. As a result, “governance is one of the hottest issues,” reported one UK-based interviewee, who observed that “companies put a lot of emphasis on having the right governance and board in place, and making sure there are clear values and risk-appetite which is passed down through the organisation.” Practitioners in Ireland also reported an uptick in regulatory work and commented, “it will be interesting to see whether this trend will solidify into disputes.”
Directors and Officers (D&O) claims were an area of significant activity in jurisdictions including the US, India and South Africa. In the US, “there is an increasing focus on D&O claims coming out of government investigations.” D&O policies are also becoming more common in India, in “a marked shift towards a more insured market overall”. Regulators in South Africa have also “become very involved” in a drive to combat corruption, and consequently, “There is far more pressure on directors and offices to make sure they are scrupulous and careful in how they conduct themselves.”
The volume of regulation at the EU and domestic levels continues to increase. In the face of regulatory changes, “clients need to adapt, which leads to a lot of advisory for work lawyers,” say market sources. As insurance remains one of the most heavily related industries, and a large volume of regulation comes from the EU level, “Brexit will have a significant impact on the UK insurance industry” and is “top of the agenda” in terms of issues impacting the market, according to one practitioner we spoke to. Brexit is driving clients to assess their business models and structures to determine how best to continue their operations after the UK leaves the European Union in March 2019. Interviewees told us that many London-based companies have restructured to establish a subsidy in Europe, or incorporated European branches into a European carrier. Such work “involves a heavy element of regulatory advice”, and will undoubtedly continue to occupy practitioners in the coming year.
“Technology has changed the risks that are being insured,” as one source put it, and, as such, cyber liability is currently “the hot topic” in the market. In the words of one commentator, “The industry is starting to realise that they need more controls in place to safeguard and protect the organisation and personal data from breach." As well as including data breach coverage in traditional insurance policies, there is a trend towards companies purchasing standalone cyber coverage.
The number of cyber policy providers is growing, and companies can therefore select from a broad array of options to tailor to their entity’s risk. Sources spoke of the insurance market’s “struggle to grapple with the scope of the risk, and to provide and price products which deal with this constantly changing area of law”. This constant evolution keeps lawyers busy, as “cyber liability issues have so many facets, they defy pigeonholing.” Because of “the sheer volume of breaches” and the upswing in companies purchasing insurance coverage, “it will be interesting to see how this will impact disputes,” said one practitioner. Lawyers are also active in conducting cyber reviews to ensure companies have ‘best practice’ policies in place. The GDPR has focused attention on compliance and “there is a lot of additional work in terms of data analysis and identification of the measures needed to be compliant with the new rules.”
Sources also reported that insurance and reinsurance companies are keen to utilise technology and digitalisation, and there is “an increased focus” on insurtech in jurisdictions including the UK, Austria and Belgium. This involves the development of new products to increase efficiencies in the industry, and numerous insurtech startups are emerging to bring “large and exotic products” to the market. Major insurers are expected to invest hundreds of millions of dollars in these technological innovations over the next few years. Blockchain contracts are receiving a lot of attention, and lawyers told us, “It will be interesting to see how these mechanisms work in insurance and reinsurance settings as we move forward.”
The reinsurance disputes market is much quieter than 10–15 years ago. In the words of one interviewee, “It has become abundantly clear that the days of the early 2000s when disputes were dropping out the sky are long gone.” The insurance industry has been in a prolonged “soft” period, during which time “reinsurance providers have been loath to pick fights because a soft market is a buyer’s market.” There is therefore “a great deal of pressure for people to pay fines and find commercial solutions” in this environment. Sources reported “talk of premium rates hardening, but we will have to wait to see whether, and to what extent, they do, and whether this will be sufficient to swing the balance in favour of reinsurance providers”. In the US, however, practitioners have observed an uptick in reinsurance disputes over the last 12–18 months “as certain issues which have been brewing for a while come to a head”, for example, the cap on reinsurance limits, which has been an issue that has “percolated over the last four to five years”. Because of the huge sums at stake, a number of cases have been brought to trial over the past two years.
Claims have been “relatively quiet” in the US “because the stock market has been so good”, according to one source. By contrast, Bermuda has experienced “what is said to be the worst claims year for a very long time” as a result of hurricanes that have devastated parts of the US and the Caribbean. These hurricanes will create significant disputes, with claims totalling an estimated US$50–100 billion.
Insurance and reinsurance companies have felt the impacts of the prolonged soft market “very acutely”, state interviewees. In general, since the financial crisis, “companies have been very wary of legal spend, and are keen to settle disputes more rapidly and at a lower cost than they might have in years past”. These factors have driven clients to find commercial solutions, and place more of an emphasis on negotiation and settlement. One practitioner reported that “we are usually able to settle claims without the need for a judgment,” demonstrating the desire to settle matters outside of formal proceedings. In this environment, “It is only matters of principle which make it through to formal litigation or arbitration proceedings.” The trend favouring mediation and arbitration over litigation has been seen in jurisdictions including the US, Israel and Bermuda, with practitioners having observed an uptick in the number of cases handled this way over the past two years.
European and US markets are saturated, leaving “little room for new entrants” and resulting in fierce competition among existing firms. In Singapore, “the landscape is changing” as foreign firms enter and “try to penetrate the local market”. The legal market around the world has undergone a period of consolidation, in general. In the US, for example “firms are getting bigger, while boutiques are disappearing.” However, by contrast, jurisdictions such as Austria are home to many small boutiques specialising in the area. With a limited volume of work on offer, according to practitioners in countries including Belgium and the UK, firms who are struggling are looking to diversify their insurance practice into other areas of law.
There is a high level of competition between practitioners, who “all seek work from the same limited market”. Clients are “extremely rate-sensitive” and put lawyers under “tremendous cost pressures”, a trend which began with the economic downturn, and which hasn’t abated. The effect is that “companies are evaluating the results their outside lawyers are getting for them more closely” and are “seeking lawyers with established track records of good results and cost-effective representation.”
The legal market for insurance and reinsurance work is extremely competitive in the face of higher client expectations and cost pressures, and a limited volume of work available. Consolidation in the insurance industry has driven a similar consolidation of firms in the area over recent years. With “fewer industry players left to pick fights”, disputes work has decreased. However, practitioners are of the view that the market has diversified to encompass more varied disputes than simply asbestos and pollution claims, which were the focus for many years. Meanwhile, interviewees were quick to highlight an increased emphasis on compliance in the face of regulatory changes such as GDPR, and cybersecurity challenges. The industry is also keen to make use of technological and digital advances, and insurtech is an area of growth that will be the subject of a great deal of attention going forward. The market remains soft and, despite some indications, it remains uncertain as to whether, and to what extent, it will harden.