By Tricia Hobson of Norton Rose Fulbright
Neither insurers nor lawyers have traditionally been considered innovators. Indeed, it has been said that the only thing insurance and innovation have in common is their place in the dictionary.
But this is no longer true. The insurance industry is rapidly evolving in order to adapt to advances in technology. Phrases such as “data breaches”, “the sharing economy” and “autonomous vehicles” have now entered the general lexicon, and insurers are grappling with how to assess and quantify risks never previously encountered
This volume and complexity of change poses novel challenges for insurance lawyers. How do we partner with our insurance clients and devise solutions for their legal problems? And how can we create new business models which allow us to reduce legal fees without simply slashing hourly rates?
There has been a market trend towards consolidation among insurers and insurance brokers, and it is almost certain that even more consolidation lies ahead. As the recent ACE/Chubb merger demonstrates, no insurance deal is too big and no merger impossible.
The new, bigger insurance and broking organisations create increased competition between fewer players in both the insurer and broker markets. For lawyers, the decrease in market players and the emergence of large, global, consolidated insurers means more pressure to obtain appointment to fewer legal panels.
For some firms, consolidation simply brings two existing clients together, allowing streamlining of client engagement and relationship management. For others, consolidation has the potential to obliterate long-standing client relationships as panel requirements change, and as clients move to legal service providers who are able to meet both their local and global needs.
Cyber-risk is no longer an emerging risk but the new reality.
While discernible trends and patterns are emerging from well-known cyber breaches across various industries, it is still difficult for insurers to properly assess cyber-risk. With little relevant historical claims data, it is not easy to predict the likelihood of a claim being made, or to calculate the maximum probable loss. This uncertainty is heightened by the fact that cyber risk cuts across all industries, organisations, and disciplines, leaving all insureds vulnerable, regardless of size. From a claims perspective, the long tail nature of the consequences of a data breach also makes accurate reserving difficult.
While the areas of data protection and data breaches continue to evolve and insurance lawyers attempt to respond, it is apparent that clients have an insatiable hunger for knowledge in this dynamic area.
For example, one key question often asked of us by insurers is: how much will a data breach cost? The answer is that it is impossible to predict. No two cyber incidents are the same. Whether an affected organisation is small or large is irrelevant; each may hold significant amounts of data. Our experience has also been that smaller organisations often have a limited understanding of their IT environment, making breach assessment difficult; they also have limited internal capability to assist with the response which requires a greater level of assistance from our ‘breach coaches’.
While the element of the unknown will likely remain for some time, the knowledge gap is narrowing. For example, to assist insurers to collect data and meaningfully track exposures, Lloyds has recently released a set of core data reporting requirements designed to standardise the way in which cyber incidents are reported. Over time, this data will hopefully help take the sting out of the unpredictable nature of cyber-risk, and at the front-end allow a more measured assessment of the risk.
In the meantime, in an effort to reduce or mitigate exposure, there has been an increase in insurers requiring insureds to undertake IT/legal cyber-risk assessments prior to binding. This trend exists despite the current soft market, with multiple insurers competing for the same business.
In terms of the impact on the profession, cyber is a new risk which raises completely new issues for even the most experienced insurance lawyers. Only those with deep expertise and knowledge of what is happening in overseas markets, particularly the United States, will survive to establish sustainable legal practices in this area.
Emerging Risks and Disruption
The list of emerging risks seems to be never-ending; the better-known of these risks include driverless cars and the sharing economy.
While consumers, brokers and many insurers themselves are grappling to understand the cover required and how to access it, leading insurance providers are starting to offer commercial products tailored to the sharing economy.
Sharing has created a demand for new and innovative insurance products. For example, in 2015 Airbnb extended its Host Protection Insurance offering to Australia. IAG has recently created a new insurance product (provided by NRMA) called ShareCover which provides cover for sharing houses on short stays and attaches to existing home insurance. NRMA also provides fully comprehensive insurance cover for Uber X drivers (but only for individuals who drive their own cars for Uber occasionally, not full-time).
Many risks are emerging faster than the insurance products being developed to cater for them. While certain insurers are meeting the challenges head-on – such as IAG in Australia, which recently established a division called “Customer Labs” to drive product innovation through data and insights – many other insurers are taking a conservative approach in order to fully understand the risks they are underwriting before seeking to capitalise on these new opportunities.
In addition to developing new products, market entrants are also disrupting traditional modes of selling insurance products.
For example, Friendsurance, a German-based insurtech business, allows groups of people to pool insurance premiums together and offers an annual no-claims reward. The peer-to-peer insurance solution uses social networks such as Facebook to bring customers together.
Members contribute to a premium which is mostly used to cover the policy excess. Part of the group’s premium is set aside to settle small claims. The costs of large claims are covered by normal insurance arrangements – Friendsurance has partnerships with 60 traditional insurers. However, if the group’s set aside premiums exceed the amounts of small claims made, members receive a return of this part of the premium.
Tellingly, Friendsurance has just announced plans to launch in Australia in 2016. The expansion is predicted to be a milestone event for the Australian insurance industry.
Recently released Australian data shows that revenue is declining across the local insurance sector, primarily due to a downturn in global financial markets. Commentators suggest that insurers need to increase revenue and decrease expenses to ensure sustainable profitability, by focusing on underwriting profits, not investment returns. The same trend is visible in global markets.
One way in which insurers are decreasing expenses is by seeking to reduce their overall legal spend. In turn, insurance lawyers are coming under pressure to revise their own business models in order to reduce fees while remaining profitable. The key question for lawyers is: how do we deliver our legal services cost-effectively to assist our clients, without sacrificing quality?
The obvious but self-defeating answer is by reducing hourly rates. The truth is, lawyers’ charge-out rates are not a true indication of a client’s likely legal spend on legal fees. To cut hourly rates, except as part of a broader strategy, is to undermine law firm viability.
To stay viable over the long term, and to retain top talent, law firms will need to focus on innovation; disrupting current approaches to matter management and dispute resolution, and harnessing technology in order to reduce insurance clients’ legal fees. Indeed, in his 2013 book, Tomorrow’s Lawyers, Richard Susskind predicted that the legal world will change more radically over the next two decades than over the last two centuries.
That change is already occurring. Susskind and his son Daniel’s 2015 work The Future of the Professions: How Technology Will Transform the Work of Human Experts (Oxford University Press) states:
Larger firms are responding to cost pressure by establishing a new division of labour. Lawyers are breaking down legal work into more basic tasks, and finding alternative ways of sourcing the more routine and repetitive work, such as document review in litigation, due diligence work, routine contract drafting, and rudimentary legal research. Legal tasks in this way are now being outsourced, offshored, passed along to paralegals, subcontracted, and sold to clients on a fixed-price basis.
In what is an extremely competitive market, it is a given that insurance lawyers will be on top of the intricacies of insurance law and all relevant case law and legislation. Like our insurer clients, we now need to leverage off developments in technology in order to deliver our legal services quicker and more cost-effectively.
At the same time, it is important to remember that technology is not the solution. Rather, it is only an enabler to find solutions to existing problems. Technology must be used to enhance the value proposition that lawyers provide to clients.
To illustrate this concept, it is useful to look at the role of insurance brokers. The traditional broker role is rapidly changing due to the ease of purchasing insurance policies online, even in areas such as professional indemnity and management liability insurance. The insurance brokers who will survive and continue to thrive in this environment are those who can identify a niche market which requires the services of a traditional insurance broker, rather than just an electronic interface. At the same time, broker services which can be automated, that is, informational and transactional services, are most likely to be disrupted.
Similarly, as lawyers, we are already automating some of the services we have traditionally provided our insurance clients, such as e-discovery. However, we need to find niche markets for our services which continue to demand personal service and human interaction, because technology can only take us so far.
Indeed, the issues facing the new self-driving cars, which author Martin Lindstrom has credited to “the mismatch between technology and humanity”, clearly show the limits of technology. Citing the example of a self-driving car that was not able to advance through a four-way stop, as its sensors were calibrated to wait for the other drivers to make a complete stop as opposed to inching continuously forward (which most did), the New York Times noted, “Researchers in the fledgling field of autonomous vehicles say that one of the biggest challenges facing automated cars is blending them into a world in which humans don’t behave by the book.”
This is an important lesson for lawyers: we undoubtedly need to harness technology to adapt to the changing insurance and legal marketplaces. But legal services cannot be completely mechanised and outsourced. As much as lawyers need to innovate, and as much as our existing clients require us to develop new ways of delivering our legal services, there will continue to be complex, multiparty insurance transactions and insurance claims which require legal advice and representation.
As practitioners, our ultimate challenge is to recognise the added value we offer our clients and identify those areas within which specialised skills are centred on independent legal thought and analysis. This is where we truly add value. Beyond this, legal practitioners need to work innovatively with clients to identify their ever-changing needs, and help look at how we can best help with those needs in a dynamic and evolving insurance market.