The word on all lawyers’ lips this year was “cybercrime”, pegged to be the “next big thing” in the insurance market. The British government recently estimated the potential cost of a single cyber-attack at up to £20 billion, highlighting the potentially devastating impact that major attacks could have. As some lawyers prepare clients for this new liability, others have been working to ensure clients are compliant with Europe’s Solvency II regulations which came into force at the start of the year.
Following a busy 2014, the past year saw a continued spike in mergers across the insurance market, with a number of high-profile consolidations taking place and more in the pipeline for 2016. Lawyers have also been commenting on the disparate levels of litigation work in the sector, which appear to be largely dependent on which side of the Atlantic they are based.
The major talking point across the market this year has been the continued focus on cybercrime. Dubbed the “hot topic” of 2016, lawyers around the world noted their clients’ concern and expect this to create the biggest increase in work in the coming 12 months. Indeed, Stephen Catlin, one of the leading names in the Lloyd’s insurance market, has warned that cybercrime is potentially the biggest business risk in over 40 years. At present, lawyers are making sure clients are covered and also looking at insurer liabilities in the light of a security breach, although once attacks start to take place this work could evolve rapidly. As the “home of litigation” practitioners expect that any trend for cybercrime will originate in the states. Practitioners we spoke to in the UK and elsewhere in Europe stated that they have yet to see any disputes arising from cyber-security matters, and are paying close attention to the US to see what cases might develop. It is expected that the market will act as a benchmark for what matters the rest of the world can expect to see resulting from these types of liabilities in years to come.
There has, however, been scepticism among some we spoke to as to whether cybercrime will become the major trend others are anticipating, with several likening it to the hype surrounding the millennium bug and mobile phone radiation. Most other lawyers said they were waiting to see what happened in the US market and whether the trend will “come to nothing” like others before it, although the overwhelming majority believe that this will not be the case. Following high-profile cases such as the attack on Sony in late 2014 and on British telecoms company TalkTalk in mid-2015, this is an area is said to be “not just a flash in the pan”. Indeed, many of the practice areas we have researched over the past 12 months, practitioners have noted their clients’ concerns over cyber-security and coverage. In a world what increasingly relies on technology and online storage and data transmittal, “it hardly seems plausible that this won’t become a major issue”.
The past year has seen continued high levels of activity in the M&A market, with the trend for consolidations and mergers extending throughout 2015. Following the merger of XL and Catlin at the start of the year, practitioners have reported a “flurry of activity” in the market, with more consolidations expected in the coming year. There were questions raised as to whether this consolidated market could lead to a shrinking of the corresponding legal sector, with fewer clients to go around. Although some lawyers we spoke to felt that this was a concern, on the whole most believed that the market consolidations they had seen were unlikely to continue to the extent that work levels would be seriously affected. The main issue some foresaw was the consolidated market leading firms to experience more conflicts between firms’ clients and the clients of insurance companies, and more consolidated firms will have even larger client bases.
Practitioners also questioned how these mergers will affect the Lloyd’s market in London. The structure of the market means that risk is shared across members, and so a spate of mergers without any new entrants into the market could mean that each member is liable for much higher claims. Although some practitioners voiced this concern about the market, on the whole it was felt that the current trend of consolidations would not get to the point where the Lloyd’s market was seriously challenged or compromised. Instead, many saw it as a way to “enliven the market” by opening it up to new members and providing a greater spread of risks and liabilities once again.
Following years of preparation and discussion, Solvency II finally came into force in Europe on 1 January 2016. In the final run-up to its implementation, regulatory practitioners were focused on making sure that clients were compliant and that any possible liabilities were taken care of. Now that the regulations are in place, practitioners are waiting to see how these new rules are interpreted by each jurisdiction, and how suspected breaches might be handled. In the UK the new Insurance Act is also due to come into force in August 2016, meaning that practitioners have been, and will remain, busy making sure that the frameworks are met by clients before the implementation date. Practitioners expect in the wake of these two new acts that the regulatory sphere will remain active for the coming year, as clients come to terms with what the new regulations mean for them in practice.
The amount of litigation practitioners have seen over the last 12 months has varied according to location. US lawyers have continued to see an active disputes market, with many we spoke to claiming 2015 had been “one of the busiest” they had seen and that the market is “definitely in an upcycle”. The main sources of these disputes continues to be coverage matters, broker liability and catastrophe and ILS bonds, with new technologies such as driverless cars flagged as areas to watch in the coming years. In Europe and elsewhere this has not been the case, as very few disputes have reached litigation. This has in part been attributed to the lack of major disasters in the last couple of years, and disputes specialists outside of the US have stated that they must wait for new cases to “trickle down” from the US courts.
The insurance market continues to be depressed, with the explosions in the Chinese city of Tianjin the only major incident seen in the last year there are still some cases working their way through the reinsurance sector. Lawyers specialising in this field have commented that “there’s always more asbestos work” although others noted that this could finally be drying up. Disputes arising from Hurricane Sandy are expected to begin to filter into reinsurance soon, although it is yet to be seen how big an impact this will have on reinsurers. With a lack of new insurance disputes to feed into reinsurance cases later down the line, the dearth of matters currently plaguing some insurance specialists is likely to hit reinsurance lawyers in the years to come, with practitioners on both sides of the Atlantic predicting the same fate. As one lawyer simply put it, “no bad news is bad news” for the sector which “banks on things going wrong”. Despite this, those we spoke to were not fearful for the future, and are simply “waiting for the next big thing to come along”. While many predict that could indeed by cybercrime, until a large case emerges lawyers must sit back and wait.
Our leading firms in the research remain unchanged for 2016, with Clyde & Co and Hogan Lovells continuing to lead the way in the market. The firms on the whole show a trend of building on inclusions from the previous year, with Holman Fenwick Willan gaining an additional five names in this year’s guide. On the whole these new inclusions at firms are additions to the guide, rather than moves by previously listed lawyers from other firms, suggesting that the market is indeed growing, rather than just reshaping.
Reflecting the trend of larger amounts of litigation taking place in the US market, there has been a 24 per cent increase in the number of practitioners listed across the jurisdiction, suggesting that this trend is having an impact across the market. Bermuda and Germany have both seen healthy increases in the number of listings they have received, with both increasing on last year by 40 per cent, with Canada not far behind with a 35 per cent increase in the number of practitioners recognised. The increase in these jurisdictions suggests that there is starting to be a shift away from the traditional insurance centres of London and the US, with the UK seeing an increase of 16 per cent, below the average for the edition as a whole. This shift could in part be clients trying to save costs by taking local counsel rather than the traditional London or US-based lawyers, and indeed highlights the opening up of the insurance market on a more global scale.
In Singapore and particularly Hong Kong, large increases in listings highlight the growth of the insurance markets in the region, with them receiving an increase of one-third and two-thirds respectively. The increase in these two jurisdictions could in part be due to the continuing emergence of Singapore as a top dispute resolution centre, and the resulting need to have quality local counsel in the region. When previously matters may have been litigated or arbitrated in the UK with London based counsel, the ability to resolve matters closer to home has drawn clients back to the region. As China continues to become a world superpower, international investors and insurers are looking for quality legal counsel with a local knowledge but a Western attitude, which the Hong Kong market offers.
With the market waiting for the next major disaster to hit, many practitioners are seeing themselves kept busy with cybercrime safeguarding work and the continuing consolidations and mergers in the market. As the market continues to grow in size, many are hopeful that 2016 will be a fruitful year, and that a new major source of work, be it from cybercrime or a more traditional source, is just around the corner.