Faced with significant losses from financial crime policies, insurers are now taking further measures to address rising claims trends in addition to adapting premiums and retentions.
The Crime insurance market is in transition. Approximately five years ago the number of crime risks placed in the London market started to increase significantly, as a number of Lloyd’s Syndicates approved ‘All Risks’ forms with most of the major brokers. The key selling point was the provision of full limits cover for social engineering losses (with no verification requirement) at similar premium and self-insured retention levels as clients were used to seeing with traditional named peril forms. In most instances the cover was significantly broader and often no more expensive than their current cover.
This coverage has proved attractive to buyers, many of whom have moved their crime insurance to the London market to take advantage of the broader cover. Submissions were received from across the Lockton Network, especially from Australia, Canada, Europe and the U.S and the rate of binding was unprecedented. The handful of carriers that led this saw their books grow considerably and at first their loss ratios were looking good. The majority of insurers took the subscription/coinsurance route and in most cases two or three markets would come together to insure each of our clients.
During the same period there has been a dramatic increase in the incidence of financial crime and the frequency and severity of losses is leading insurers to re-examine their crime portfolio. The Crime insurance market does not generate a large premium base and can easily be negatively affected by one or two large losses. Underwriting results have deteriorated across the market. Insurers have cited numerous large loss circumstances including the following in the last twelve months alone:
Underwriting results have deteriorated across the market.
7 employee fraud losses ranging from £1.2m to £20m including embezzlement, over-billing and collusion with suppliers
5 third party fraud losses ranging from £750k to £7.5m including invoice fraud, stock theft, impersonation fraud
In response insurers are adjusting line sizes down, and seeking a greater degree of co-insurance from other carriers. Towards the end of last year insurers focussed on a strategy of right-sizing premiums and retentions. Unfortunately, with the frequency and severity we have seen so far in 2019 it seems that premium and retention adjustments will not be sufficient to address the way claims are trending.
As an example, starting last week the Crime underwriters at a specific market began to roll out an endorsement which will amend the Crime cover they will offer going forward. It is likely that insurers will start to seek to limit coverage or impose coinsurance conditions for social engineering claims, along with other underwriting changes including:
Increased premiums
“Managed” (i.e. reduced) capacity
Higher deductibles
Increased scrutiny over internal controls (dual control, verification procedures, fraud awareness)
Imposition of sub-limits and/or exclusionary language, in some cases.
Declinature or non-renewal for some industry sectors
Companies that have had crime losses are particularly feeling the effects of these changes. It’s important to note that these measures are being taken in order for insurers to maintain broad levels of Crime cover for our clients.
With the above in mind, we strongly advise starting the renewal process early and ensuring full application forms are completed. Over the next year or so our clients will likely need to weigh up whether they purchase a traditional named perils product vs. an ‘All Risks’ product with higher premiums and self-insured retentions.
For further information please contact:
Abel Budd, Assistant Vice President / Broker, Global Professional & Financial Risks
Tel: +44 (0)20 7933 2743 | E-mail: abel.budd@uk.lockton.com (opens a new window)
Michael Lea, Head of Management Liability
Tel: + 44 (0) 20 7933 2669 | E-mail: Michael.Lea@uk.lockton.com (opens a new window)
