We are pleased to share the Lockton H1 2024 London Market Insurance Update, intended to keep you abreast with underwriting and risk trends from a London Market perspective. This issue contains insights from 20 business segments across Lockton, along with a spotlight feature on our MENA operations and trends pertinent to that market. Our largest update to date, it is a testament to our continued growth as a business.  As ever, the direction of the economy has significant implications for insurers’ strategies and, in turn, the wider market and impact for insurance buyers. Inflationary pressure has remained broadly stable in 2024, following decreases in the latter part of 2023, reflective of a slowly improving global outlook. This translates to positive news for insurers, many of whom will have been affected by inflation-driven increases in claims costs. At the same time, high interest rates ensure that insurers’ investments continue to deliver a profitable return.   Many insurers have continued to report strong results as we close out the first quarter of 2024, with Lloyd’s of London having had its best year in a decade. These improved results have supported a transition towards more benign market conditions, characterised by increased competition, capacity, and a more positive outlook for buyers.   Nevertheless, these notes of optimism come against a background of uncertainty. Anecdotal evidence exists of longer reporting tails on certain casualty lines than anticipated at the time of underwriting. This is impacting profitability for some insurers and has led to a more restrictive and disciplined approach to terms, conditions, and deployment of capital for those insurers operating within this environment.  Social inflation remains a challenge for many insurers with significant US casualty exposures. Many insurers are reporting adverse development in their historic accident years.   Global macro-economic uncertainty will still provide a cautious approach to the current rating cycle, with lack of new capital entrants, elevated levels of debt, worse than anticipated adverse loss development on casualty portfolios and economic and political uncertainty.  While geopolitical tensions in Europe and the Middle East threaten to renew disruption to global trade, any further deterioration in international relations is almost certain to introduce negative ripple effects for the wider economy, with consequences for a diverse set of sectors, from Fine Art to Marine Cargo. 2024 is also a year of elections, most notably in the US. Here too, it is hard to understate the implications.  Elsewhere, natural catastrophe risks continue to figure among insurers’ key concerns and remain a major topic at renewals for property risks. Many of our specialists in insurance lines such as Directors’ and Officers’ Insurance, Professional Indemnity Insurance, and Cyber have also noted an increasingly tight regulatory environment, with areas under scrutiny including environmental, social, governance (ESG) disclosures and the use of artificial intelligence (AI). As awareness grows around these topics among both consumers and governments, there is an increasing likelihood of claims for businesses including financial institutions, solicitors, and other professional services.  Lockton is here to support the mitigation of businesses’ risks to create a risk profile with strong underwriter appeal. Our Risk Control Services team can help identify weaknesses and create a tailored strategy that meets your risk management needs.   Starting the preparations for renewal early and gathering detailed information around the risks of most concern to insurers, remain key to achieving the best possible outcome at renewal.  Please access the document here or download it on the right hand side.  

We are pleased to share the Lockton H1 2024 London Insurance Market Update, intended to keep you abreast with underwriting and risk trends from a London Market perspective. This issue contains insights from 20 business segments across Lockton, along with a spotlight feature on our MENA operations and trends pertinent to that market. Our largest update to date, it is a testament to our continued growth as a business. 

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London Market Insurance Update H1 2024

The risk evolution of automated storage systems The world of storage and distribution is changing. To improve operational efficiency, operators are seeking ways to optimise space utilisation, increasing both the height and/or density of storage with warehouse and distribution centres. One approach which is becoming more common is to install an automated storage and retrieval system (ASRS), enabling faster order fulfilment.  However, operating an ASRS introduces new property challenges. Claims resulting from system failures and insufficient risk mitigation measures are on the rise. Businesses adopting ASRS technology need to identify, assess, and mitigate potential hazards, particularly those related to fire, to ensure the operation is both resilient and can secure appropriate insurance coverage.  ASRS systems Not all ASRS are equal. There are different types of ASRS, and it is important to understand the type of ASRS when assessing the risk and selecting risk mitigation measures. Common examples include:  Mini-Load ASRS: These typically consist of multiple levels of trays supported on angle irons within a rack structure. The trays can be constructed from a range of materials but are typically plastic and of an open-top design. The trays are removed from the racks by an automated system within narrow aisles. The racks can range in height and can often be very tall.  Top-loading ASRS: These consists of an open metal three-dimensional grid structure, supported by metal columns for each stack of containers. The containers are typically a plastic open-top design and are stacked onto of each other across the storage grid. Remotely operated robots use the top of the grid to access storage locations to remove or return containers, removing the need for aisles and effectively ‘burrowing’ into the grid to access or store the product.  Property protection challenges: An ASRS introduces several property protection challenges which should be carefully considered early in the design stage. These include: Storage configuration: the ASRS design can introduce challenges to conventional sprinkler systems, for example, the angle irons within a mini-load ASRS can adversely influence water distribution. The selected ASRS may be outside the scope of some commonly used sprinkler codes or standards.  Ignition sources: automated systems within ASRS can introduce potential ignition sources from electrical or mechanical equipment in close proximity to combustible materials.  Final extinguishment: sprinkler systems are designed to control or suppress a fire, but final extinguishment is still required by the responding fire brigade. The increase in density of stored materials (and height in the case of mini-load systems) can present the risk of deep seated or hard to access fires, increasing the challenge of final extinguishment, requiring clear planning, response, and longer duration fire water supplies. Longer restoration times: the increased complexity of storage systems increases the likely restoration time following a fire loss. ASRS insurance challenges for real estate investors/owners High premium costs: property damage insurance premiums are likely to be significantly higher in properties with an ASRS compared to assets using traditional storage methods. Reasons include the potential property fire risk and longer rebuild times. Insurer capacity: it can be challenging to find insurers willing to offer terms on warehouses with ASRS systems. ASRS’s could be considered an ‘emerging risk’ resulting in caution from insurers when providing terms. Risk mitigation requirements: insurers may require certain mitigation measures within and around an ASRS. Deductibles: insurers may apply an increased deductible. As a result, the property owner must cover a significant portion of the damage costs before insurance is involved. Long rebuild times: the complex technology used in an ASRS can significantly increase the time required for debris removal, reconstruction, and commissioning. This can result in longer business interruption for the owner, operator and their customers, larger claims, and a negative impact on a property’s claims experience. Mitigating increased risks arising from ASRSs There are measures which can be implemented to reduce the risk of a fire and any resultant claim in facilities using ASRSs. These include: Consider property protection and business resilience at an early stage of the design. Engage with your broker for advice. Ensure suitable sprinkler protection is designed and installed for the ASRS. This is an emerging technology and not all sprinkler codes have guidelines for ASRS systems. One approach, used by many global insurers would be to apply the latest version of FM Data Sheet 8-34 Protection for Automatic Storage and Retrieval Systems.  Minimise the risk of ignition sources from electrical and mechanical equipment escalating to combustible materials. This can include the design of lighting, robot charging and human element controls as well as ensuring effective planned preventative maintenance and inspections. Ensure an effective emergency response including early fire detection (such as using aspirating smoke detection), sprinkler protection to control the fire and detailed emergency plans to enable fire extinguishment. Clear plans should be developed in collaboration with the fire service including familiarisation visits, to determine how a fire could be accessed across all areas of storage. Additional measures such as mezzanines, remotely controlled fire monitors and long duration fire water supplies may be needed. Some manufacturers of ASRS systems provide specialist equipment to help gain access to a deep-seated fire.  Ensure the ASRS system is designed, operated, and maintained in accordance with good property protection guidelines (such as FM DS 8-34) and manufacturers guidance. For example, ensure stored commodities do not include products such as flammable liquids, aerosols or lithium-ion batteries. Where possible, consider use of non-combustible storage containers, rather than combustible plastic containers.  In some cases, it may be possible to explore an Oxygen Reduction System (ORS) as an alternative (or in addition to) sprinkler systems. An ORS works by continuously reducing the oxygen level in the protected enclosure to a concentration where ignition of ordinary combustibles is not possible or cannot be sustained. This is done by introducing nitrogen to the enclosure, effectively becoming a fire prevention (rather than protection) system. A key consideration is the selection and maintenance of a suitable oxygen concentration, which, depending on the code and jurisdiction, may or may not be suitable for human access. Insurers may take different positions on ORS systems. If an ORS system is being considered, this should be discussed with your broker.  It is inevitable we will see an increase in warehouse developments opting to install an ASRS. To avoid the above-mentioned challenges, adopting the recommended mitigation measures can be an effective way of overcoming insurance obstacles and reducing the risk exposure to your assets. For further information, please visit our Real Estate and Construction page, or contact: Oliver Stafford, Insurance Administrator E. oliver.stafford@lockton.com

Automated storage and retrieval systems (ASRS’s) are being used in warehouses more frequently to improve efficiency. The technology has the potential to reduce human error, optimise space utilisation, and enable faster order fulfilment. However, claims resulting from system failures and insufficient risk mitigation measures are on the rise. Businesses need to identify, monitor, and protect against potential hazards, particularly those related to fire, not least to be able to secure appropriate insurance cover.

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The risk evolution of automated storage systems

Wind turbines are an increasingly popular form of energy generation. Although dependent on size, their ability to potentially power a home for two days with a single rotation has contributed to a 9% YoY growth of total installed wind capacity to 906 GW in 2022, according to the Global Wind Energy Council. However, a recent incident in the UK where a wind turbine shed blades highlights the changing weather conditions that designers have to  address when looking at the extremes of weather. In December 2023, the blades of a 34-metre (110 foot) wind turbine in Galston, Ayrshire, broke off and flew through the air during storm Gerrit. While there were no injuries or other damage, such accidents may happen more often in future as both the frequency and severity of storms increase due to climate change. Potential loss drivers Manufacturers engineer the hub of wind turbines to withstand the potential loading forces for the average and an excessive wind speed over a defined period. However, as the centrifugal force on the blades increases, the structure’s sensitivity to overspeed also rises. Wind turbines are a complex engineering feat, and there are many reasons why a blade failure may happen:   Tensile stress throughout the blade due to excessive centrifugal forces.  Poor quality control, lack of maintenance and component failure.  Failure to monitor the turbulence level (caused within a cluster of turbines) that is the main cause of fatigue loads of many major components, including blades. The height and positioning of the wind turbine are an important factor for turbulence levels.  Climate change makes wind levels less predictable and potentially more forceful.  Hail (amongst other examples of impact damage) can strike the leading edge of the blade as it rotates.   In colder climates, the blade can get loaded with ice, causing an imbalance that could lead to a blade failure.  Weather causing wear to the leading edge of the blade, hail, rain, sand, etc.  Repairs carried out to blade damage, without balancing causing a stability issue at speed.  The blade control and emergency stop systems that are not tested routinely  Lightning strike to blades causing delamination, not affecting blade balance at standard operating conditions (These may not be detected until a post loss investigation).  Defects during manufacture, causing  delamination, root (connection to hub flange) failure, etc.  Claims impact The costs to remediate the detachment of blades from an onshore wind turbine can vary due to several factors:   Larger turbines require specialist cranes to access the hub and the blade replacements, creating delay in the return to operation because of the high lift crane’s availability and location.  Lifting of the blades is also dependant on the wind conditions around the turbine at the time. A limitation is usually placed on safe lifting due to wind speeds.   High rope access to the blades left in place to ascertain if they have been impacted by the material thrown from the detached blade.  The investigation of the possible damage to the Nacelle due to the vibration on the hub with a single blade detachment at high velocity and cost of repair to the Nacelle and tower.  The costs depend on the location – offshore and onshore, remote and local. Onshore turbines offer easier access for lifting equipment or climbing gangs, but can still be in difficult to access locations.  Risk mitigation The risk of a failure can be inherent within the manufacturing process and a full manufacturing quality document should be supplied and inspected by or on behalf of the client, especially as the blade length increases.  Increasing the focus on servicing and adjusting the maintenance regime should contribute to  reducing the risk of an incident. Appropriate, regular servicing and checks (particularly on the overspeed system) can play a major role in detecting any potentials issues early. The overspeed protection system is maintained by a monitoring system that will look at vibration, speed, and axial displacement of the turbine rotor, with an increase in blade speed limit to ward against overspeed. If necessary, the electronic monitoring system will take an executive action to slow the speed of the blades down, by altering the angle of the blades related to the wind and applying a shaft brake. Wind turbines generally require preventative maintenance checkups two to three times per year, particularly on the nacelle (containing the gearbox, generator, brake, and the low or high-speed shafts). The blades should undergo a visual inspection at least every two years for potential damage, but monitoring of weather condition in the location of the turbines should determine if a more regular inspection should be implemented. The life cycle of the turbines installed should also be considered in the same way as other items of equipment to avoid ‘running to failure’.    As more wind turbines are installed there will be an increase in the number of turbine failures. Good quality control on the design and build and good maintenance and inspection of the installed turbines can ensure that the frequency of failures, as a percentage of the overall numbers in service, can be maintained at a low level.    For more information, please visit the Lockton Energy and Power page, or contact:    Philip Hewer, Risk Engineer  E. philip.hewer@lockton.com   Paul Clarke, Risk Engineer  E. paul.clarke@lockton.com

Wind turbines are an increasingly popular form of energy generation. Although dependent on size, their ability to potentially power a home for two days with a single rotation has contributed to a 9% YoY growth of total installed wind capacity to 906 GW in 2022, according to the Global Wind Energy Council. However, a recent incident in the the UK where a wind turbine shed blades highlights the changing weather conditions that designers have to  address, when looking at the extremes of weather that may be seen in operation.  

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Addressing the growing risk of blades detaching from wind turbines

The London cargo market continues to prove its stability to assureds in 2024 due to increased capacity, new entrants trading more actively since early 2023, a relatively static January reinsurance treaty renewal season, and more balanced profitability booked over the past few years. However, insurers’ reaction to geopolitical conflicts may require creative solutions and persistent negotiations to ensure appropriate protection. Favourable conditions for buyers An overall upbeat market environment has resulted in Lloyd’s syndicates looking to grow their market share. Renewals are generally treated as ‘flat’ on prior year’s rating, assuming no major losses or other factors have influenced the client’s risk profile. In addition, we’re increasingly seeing more competition for new business, with many carriers showing less restraint on offered capacity in relation to premium while creating new and innovative products to set them apart from their competitors. It is also worth noting that a great proportion of the growth in the cargo market has been caused by the restructuring of traditional property placements which saw inventory risks moving into a Stock Throughput product underwritten in the marine cargo market – a concept which has been around for many decades but became increasingly popular during the last hard market cycle in the property market (mainly US). New syndicates/start-ups:  Sirius has re-entered the cargo market  Axon Underwriting has opened a London office  New consortiums set up in London:  Build Consortium - Brit/RSA for project cargo and Delay in Start-up (DSU)  Chubb Battery Consortium  As is usually the case when capacity and competition increase, underwriters have been moving jobs more frequently, including:    Joanne Reynolds has joined Axis.  Ben Farley has joined Axis.  Ryan Godfrey has joined Sompo.  Rachel Waker has joined Liberty.  William Warden has joined Talbot.  Richard Grant has joined Aviva.   Leigh Meekings has joined Everest.  Brendan McCarthy has joined Everest. Underwriters currently serving their notice:  Gavin Wall (Ex-Ascot)  Chris McGill (Ex-Ascot)  War risks The continuous events in Russia and Ukraine, alongside recent events in the Red Sea, have created new supply chain disruptions. This is driving insured values higher for Stock Throughput risks, requiring more capacity. Meanwhile, some markets have issued Notices of Cancellation in respect of war coverages because of the events in the Red Sea and Israel-Gaza. However, this seems to be through an improved and more calculated method rather than just blanket notices issued to clients with no exposure in these regions. We are closely monitoring geopolitical developments, but since the conflicts show no signs of quick resolution, we are anticipating cargo insurers to issue more war, strikes, riots or civil commotion (SRCC) cancellation notices to cargo policyholders. There is usually a seven-day notice period to cancel and opt for reinstatement of the affected regions. If your insurer doesn’t offer a war reinstatement or the offer is not competitive, we have a Cargo War Facility that may cover all war related risks. This facility can, for example, include:  USD250 million limit for cargo and USD400 million for hull  No combined single limit between hull and cargo interests  Ability to cover Russia/Ukraine/Belarus risks with USD100 million limit each section  We recommend looking for alternative options only if the reinstatement offered by your insurer is not competitive. For further information, please contact: Peter Hall, Head of Cargo & Logistics  E. peter.hall@lockton.com Jack Barker, Senior Broker E. jack.barker@lockton.com 

The London cargo market continues to prove its stability to assureds in 2024 due to increased capacity, new entrants trading more actively since early 2023, a relatively static January reinsurance treaty renewal season, and more balanced profitability booked over the past few years. However, insurers’ reaction to geopolitical conflicts may require creative solutions and persistent negotiations to ensure appropriate protection.

Industrial Container yard for Logistic Import Export business and Forklift truck handling cargo shipping container box in logistic shipping yard with cargo container stack, Crane lifting up container in yard

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Cargo market remains stable amid global conflicts

Board members are having to steer businesses through a challenging environment after a series of social, political, and economic shocks over the last few years. We’ve  here the main risks for boards in 2024 — as outlined in a December 2023 Lockton webinar — and the consequences these may have from an insurance perspective.  Insolvency risk Corporate revenues are declining amid lower pricing power and weaker global demand. At the same time, elevated costs are squeezing profitability. High energy costs are impacting some sectors more than others, with transportation, hospitality, food and beverage companies, and chemical companies among those facing the greatest pressure.  The number of registered company insolvencies in England and Wales in November 2023 was 21% higher than in the same month in the previous year, according to the UK’s Insolvency Service. Similarly, US bankruptcy filings grew 21% year-on-year in November 2023, according to the American Bankruptcy Institute. Commercial chapter 11 filings increased 141% during this period. Furthermore, global business insolvencies are set to increase by +6% in 2023 and +10% in 2024, according to trade credit insurer Allianz Trade. Corporate liquidity positions are worsening and unlikely to improve before 2025, and fresh capital is less available following a series of interest rate hikes in major economies around the world. As a result, businesses need to preserve cash. Continuing supply chain challenges are being further complicated through economic sanctions and import controls (tech, semiconductors).  Risk monitoring In this challenging economic environment, investors are closely watching what directors and officers are doing to protect assets and their valuations and may consider bringing suit against management if they suspect wrongdoing. To help mitigate potential litigation, managers could consider placing particular attention on creating a resilient supply chain with buffers and alternative suppliers for core materials. Furthermore, businesses need to maintain state-of-the-art sanctions controls that reflect the rapidly changing geopolitical environment. Violations of sanctions regimes can result in administrative penalties, criminal proceedings, and securities claims. Businesses that have expanded rapidly in recent years should confirm they have governance processes in place appropriate for their size.  From an insurance perspective, Side B of the D&O policy covers the liability of directors when they are indemnified by the  and Side C covers the corporation’s own liabilities related to securities’ grievances. When the corporation becomes insolvent, however, Side A — which protects directors and officers against financial liabilities where indemnification is not available — claims can quickly arise. Accordingly, it is imperative to ensure that you have appropriate Side A, B and C limits in place to fit your risk exposures. Regulatory disclosures Regulators and investors have been increasing scrutiny over companies’ environmental, social, and governance (ESG) disclosures, demanding additional transparency. Currently, disclosure laws differ according to jurisdictions, but the IFRS Sustainability Disclosure Standards (IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures) are increasingly becoming the standard for sustainability reporting. The Corporate Sustainability Reporting Directive (CSRD) entered into force in Europe in January 2023, strengthening the rules concerning the social and environmental information that companies have to disclose. Further, a broader set of large companies, as well as listed small- and medium-sized enterprises (SMEs), will now be required to report on sustainability. The new rules will be applied for the first time in the 2024 financial year, for reports published in 2025. A two-year delay has been agreed for certain features, primarily the adoption of the European Sustainability Reporting Standards (ESRS). The ESRS are the rules and requirements which obligate companies to report on sustainability-related impacts, opportunities, and risks under the CSRD. EU companies will now have substantially more time before being subject to requirements to provide sector-specific sustainability disclosures, and certain non-EU entities will be brought within the scope of the CSRD two years later than originally proposed. In the US, the Securities and Exchange Commission (SEC) is expected to release its rules for requiring companies to disclose climate-related risks like scope 1, scope 2 and scope 3 emissions and their risk management practices in April 2024. The SEC climate disclosure rule proposal includes several extensive,  and prescriptive requirements and is intended to provide investors with consistent, comparable, decision-useful information that is reliable. California, meanwhile, has enacted a first-of-its-kind mandatory climate emissions disclosure rule in October 2023. The rules, which are coming into force in 2026, demand that companies have clear accountability roles for climate reporting and create cross-functional teams within their finance, legal, and other units. Unlike the SEC’s proposal for public companies, California’s rules apply to both public and private companies that do business in the state and meet certain annual revenue thresholds. Risk monitoring Disclosure rules will place more scrutiny on information released by directors, officers and the companies they serve. Stakeholders and regulators may decide to challenge certain disclosures, potentially leading to regulatory investigations and proceedings, criminal proceedings, and civil actions, including security claims and derivative actions.  Disclosures regarding the “S” in ESG can be quite challenging. Even businesses that are trying to do the right thing from a diversity, equity, and inclusion (DEI) perspective, may face litigation. Recent cases include a pharma company that was sued in the US by an advocacy group opposing diversity initiatives in medicine. The NGO claimed that the pharma company’s fellowship  to improve diversity discriminates against white and Asian-American applicants. Similarly, a conservative activist investor filed a lawsuit against the board of a coffeehouse chain over its hiring goals for black and other people of , awarding contracts to "diverse" suppliers and advertisers, and tying executive pay to diversity. The investor claimed that those policies require the company to make race-based decisions that violate federal and state civil rights laws. Doing too little or too much on the diversity front can both result in legal challenges, making it very difficult for directors and officers to make decisions. There has also been a recent rise in the number of US derivative claims relating to social issues. Such claims often result in large settlements, some in the hundreds of millions of dollars. Derivatives suits are being seen as an alternative to a securities class action in the absence of share price movement.  In addition, regulators have generally become more active after a slowdown during the pandemic. A flurry of changes proposed under the umbrella “ARGA” Accounting Reform and Governance Authority is forcing directors and officers to place more focus on the “G” in ESG. Some industries are attracting particular attention. These include construction material manufacturers, food and beverage companies, gas and water companies, and utilities companies in general, industrial metals and mining companies, as well as the retail sector. The scrutiny comes in the wake of high-profile failures, particularly in the UK and Europe. Company boards will need to prepare for the regulatory changes and ensure protection is in place to avoid potential breaches. An increase in regulation does mean that there are more regulations to potentially break. There are also new and forthcoming regulations requiring companies to self-report cybersecurity incidents to regulators and shareholders. An example is thenew SEC regulation in the US requiring public companies to disclose “material” cybersecurity incidents they experience within four business days after determining that it is material. For directors and officers this will mean that speed and accuracy of what they report to the public will be crucial. There is a significant risk that companies may fail to meet the deadline or that the information they release is incomplete or incorrect, potentially putting them at risk for both regulatory action and shareholder securities class actions.  One potential  for companies alleged to have violated the new SEC cybersecurity rules will be the interpretation of the word “material”, but it might be that the term is likely to encompass more than just an impact on share price, but also impact on the balance sheet, and on a company’s reputation. The new reporting rules will require a rethink of how companies assess and report cyber breaches and incidents. Cyber subcommittees may need to meet more often to assess the risk, review crisis plans, and ensure quick access to the relevant information required for disclosure.  Given the ESG and heightened cybersecurity exposures associated with directors, officers and the companies they serve, it is imperative that companies review their current D&O , not only to ensure the appropriate limits but to ensure that certain potentially problematic exclusions are either eliminated or narrowed where possible. Emerging risks The deployment of AI technology is likely to introduce new risk from a D&O liability perspective as it will add vulnerabilities that may need to be disclosed. The integration of AI tools into existing systems may add new entry points for cyber criminals. AI tools may also create wrong output if the data it was trained on is biased. Criminals may use AI to create not only synthetic text, but also audio, and video to scale targeted phishing campaigns. In addition, there is the risk that directors and officers may overstate or understate the risks, threats, challenges and opportunities in what is referred to as “AI washing”. If you want to find out more, please watch the replay of the webinar here, or visit the Lockton Management Liability page. Alternatively, please contact:  Sarah D. Katz Downey, Managing Director, U.S. Financial Services E. sdowney@lockton.com Michael Lea, Partner, Head of Management Liability E. michael.lea@lockton.com 

Board members are having to steer businesses through a challenging environment after a series of social, political, and economic shocks over the last few years. We’ve summarised here the main risks for boards in 2024 — as outlined in a December 2023 Lockton webinar — and the consequences these may have from an insurance perspective. 

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D&O risks to watch in 2024

Structured risk solutions can represent an attractive alternative to traditional insurance , allowing businesses to be less reliant on traditional market cycles and reducing both pricing and self-insured loss volatility. They usually complement traditional insurance  and can reduce overall insurance cost. However, structured risk solutions are not suitable for all risk scenarios.   How structured solutions work A structured risk solution  usually lasts between 3-5 years and is tailored to the company’s needs with risk-sharing arrangements between the company and the insurer. This includes access to a range of pre and post-loss funding mechanisms such as loss-sensitive features, aggregate retentions, loss ratio triggers, and reinstatement provisions. A structured solution also takes advantage of a company’s risk diversification across multiple risks and time and can enable a company to profit from good risk management and loss history. Simpler forms of structured solutions can include aggregate stop loss protection which are typically annual  with the aim of providing a company protection in the event of a series of large loss events in one year. Unlike traditional insurance policies, structured risk solutions keep insureds free from annual renewal requirements due to the long-term nature of the deal. Despite this difference, both usually run concurrently. Benefits of structured risk solutions  By exploring structured risk solutions, clients are  trying to improve their total cost of risk. While structured risk solutions may initially be more expensive to set up than traditional methods, they can offer overarching savings that can be lucrative for clients. Benefits may include:  Consolidated buying strategy across multiple lines  Improved total cost of risk  Reduced cash flow/P&L volatility  Capacity certainty  Loss volatility smoothing  Profit potential  Significant downside risk protection  Less reliance on traditional market cycles  Ability to retain more risk  Greater investment in risk management strategy  More bespoke coverage  Reduced capital requirements  No need to play the annual game in the most volatile risk areas   Prerequisites The underwriting process is analytically driven, focusing on good quality, long-term claims data over the course of 10 years or more. Potential insurers will need to understand how the business has changed over the years. They seek to know factors such as why the company in question is different, or why the claimant is getting lower loss ratios than the market is giving credit for. More specifically, multi-year structured solutions will suit clients with a 25-30% insurance rate. This is because insurers manage the volatility of the portfolio over the 3–5-year arrangement and can use a toolbox of pre and post-loss financing mechanisms. However, annual aggregate structures are also suitable for clients with much lower insurance rates but with material self-insured retentions across their insurance placement. To ensure that a structured risk solution is appropriate, the total cost of a structured deal needs to be evaluated to see if it improves economics for the insured. Understanding the business’ claims history is crucial, including understanding a firm’s uninsured losses. Analytics is also key to the success of a structured solution. Before asserting whether a structured risk solution is the correct next stage, all the business’ claims across multiple lines need to be evaluated to find out which costs should be allocated to a specific risk. Considerations Setting up a multi-year agreement requires input and information from a variety of sources, making the process more complicated than traditional risk solution methods.   Long structuring process can add complexity  Requires internal education/buy-in from key stakeholders  If loss activity is higher than expected, structured solutions might be more expensive  Still requires traditional insurance to sit on top of structured solutions  Structured solutions are often optimal when used in conjunction with a wider captive strategy.  However, a captive is not needed to design an effective structured solution.    Industry trends Currently, the reinsurance market in many areas is proving difficult to navigate, which is why the multi-year set up of a structured solution is generating interest across a variety of sectors, industries, and risk areas. Examples include property and liability classes among various manufacturers, contractors, and distributors as well as recycling and waste management companies. More specifically, there is also interest in structured risk solutions in more challenging markets such as product liability and recall risks. Generally, large industrial companies with high-risk profiles but a relatively low loss ratio tend to benefit from a structured solution. Also, businesses with a consolidated buying strategy coupled with a strong risk management culture can benefit from long-term cost savings. Over the years, we have seen these types of solutions deployed for companies with a large trucking fleet exposure to help with their auto liability risks. However, more recently we have seen a shift toward these solutions in any organization that has a large fleet exposure. The auto liability marketplace has seen a dramatic rate change combined with a severe compression of capacity over the past quarters. Commercial insurance carriers are further pushing up their attachment points on their umbrella risk thus providing a need for creative alternative risk solutions. For industries where reinsurance capacity is scarce and markets are in distress, such as transportation, US property and casualty, or international markets for professional indemnity insurance, structured risk solutions can offer an attractive alternative. Suitability check Structured risk solutions can be used both strategically and tactically within an insurance placement.  Recent trends have demonstrated an increase in demand for risk areas the traditional insurance market is neglecting because underwriting risk appetite is either low or restricted. Below are a few more specific indicators for when exploring structured risk solutions may be worthwhile.   Premium levels are at least $5M across the various towers  Company has a high perceived risk profile but relatively low loss history  Client wants to develop a multi-year and multi-line buying strategy  Interest in obtaining aggregate & cash flow volatility protection in the event of a series of large self -insured loss events    Interest in   profit from effective risk management strategies  Seeking to build up profit and capital within a captive arrangement  To find out more about structured risk solutions, watch Lockton’s recent Webcast Replay | Structured Risk Solutions 101, or contact:  Peter Rapciewicz, EVP - Alternative Risk Practice Leader E. prapciewicz@lockton.com James M. Donald, Head of Risk Finance E. jamesm.donald@lockton.com   

Structured risk solutions can represent an attractive alternative to traditional insurance programmes, allowing businesses to be less reliant on traditional market cycles and reducing both pricing and self-insured loss volatility. They usually complement traditional insurance programmes and can reduce overall insurance cost. However, structured risk solutions are not suitable for all risk scenarios.

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Structured risk solutions: reducing insurance costs and volatility

We are pleased to share the Lockton H2 2023 Insurance Market Update. This issue provides insights across 17 business segments. It also includes a spotlight feature on our US operations and the local trends in that insurance market. The intention of this update is to keep you up to speed with underwriting and risk trends from a London Market perspective. The economic environment has a significant effect on insurers’ strategies as it affects their investment and underwriting performance, and the global outlook is slowly improving. Inflation is coming down from the record highs seen in the lastyear, suggesting that the interest rate hike series seen recently in many economies is coming to an end. While high interest rates may benefit insurers’ investment income, recent increases should provide a respite for investors and consumers, supporting economic activity. Nevertheless, recent price increases for raw materials, labour and energy continue to impact the financial performance of businesses in many sectors. Inflation is increasing claims costs for insurers, which is why it remains a major topic at renewals for property risks. Likewise, an increase in claims costs from natural catastrophes is adding to the pressure insurers are exerting on pricing for property risks. While this is mostly affecting the US market, predicated on a record year for catastrophic events with the number of billion-dollar events increasing to an average of over 8 per annum, the effects are spilling over to other jurisdictions via reinsurance agreements. Casualty insurers and reinsurers continue to raise concerns over the impact of inflation, the rate of adverse loss development and the continued challenges of litigation funding. Once seen as a phenomenon for US domestic risks, the increase in lawyers being remunerated by financial outcomes is showing signs of impacting insurers with large international books that have significant US exposures.  In other insurance areas such as Directors’ and Officers’ Liability or Cyber, our specialists are noticing shifts in underwriters’ approaches that may benefit insurance buyers. This is mainly driven by an increase in capacity following years of rate hardening. The insurance market has seen greater competitive opportunities for buyers in a wide range of risk areas. As always, businesses with well-managed risks and a compelling narrative around environmental, social and governance (ESG), strong risk management, and good claims profiles, are set to benefit most. Click here to read the Lockton LLP Insurance Market Update for H2 2023.

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Insurance Market Update H2 2023

Ransomware attacks cause severe direct financial consequences. We know this, but we must also understand the potential for wider collateral damage to businesses arising from sustained, ongoing disruption. The indirect effects of an extortion event can cause long-standing, indirect (and often unforeseen) damage which has the potential to be at least as harmful as the initial event itself. Due to the complexity of these breaches and the various consequences that may ensue, specialist ‘breach response’ advice may be required to help businesses consider all options and take the most appropriate actions.  The Law Society/NCSC statement Recently, The Law Society of England and Wales published an article mirroring the government’s National Cyber Security Centre (NCSC) and the Information Commissioner's Office’s (ICO’s) warning about the role of solicitors paying or advising clients to pay ransoms to cyber criminals, with the message ‘[w]e do not advise members to pay ransoms, nor suggest that is what they should advise their clients.' However, adopting a singular mindset in this new and evolving digital world (which is anything but one-dimensional) may not be suitable. Ransom payments are controversial, but the payment of a ransom is not of itself illegal in much of Europe. That said, all individuals and legal entities incorporated, located or conducting business within the EU and UK must comply with the local financial, trade and other sanctions in force.  Any payments could also be illegal if there is reasonable cause to suspect that the ransom will (or may) be used for causes connected to terrorism and is being handed over in response to a demand (s 17A Terrorism Act 2000). Complicating matters further is the fact that malicious actors in any extortion situation are usually anonymous, and their underlying aim, together with the ultimate destination of any ransom payments, is usually entirely unknown. The ICO and NCSC have made their position clear whereby they ‘will not encourage or condone paying ransom demands to criminal organisations’, regardless of the payment being deemed unlawful or not. The reasoning behind this stance is that by paying a ransom, a business may be incentivising criminals while, adding insult to injury, not even receiving a guarantee that any stolen data will be securely returned. Firms also run the risk of infringing their sanctions regimes (Russia being a hot topic of discussion), which could result in further economic consequences for the business, the organisations warned. These are valid points and must be taken into consideration when evaluating and resolving a breach.  The statement, while a stark proclamation to law society members, may also come across as an inflexible ‘one size fits all’ approach.  The reality  Extortion attacks (and the effects of them) are as varied and nuanced as the businesses which are targeted. Law firms must contemplate every risk and solution that may arise from a cyber-attack. As well as the extortion demand itself, other costs to consider include loss of revenue due to the associated downtime. Ransomware attacks cost the US $159.4bn in downtime alone in 2021 based on publicly-confirmed ransomware attacks and data compiled by pro-consumer website Comparitech. For small and medium-sized enterprises especially, access to response teams may be limited and time-consuming, meaning they may be more heavily affected from losses relating to downtime. These costs could potentially outweigh that of a ransom, with cybersecurity and data backup company Datto suggesting that it can be up to 50 times more. If the company does not have secure or separate back-ups in place, without an encryption key lost data may become complicated to recover or, in a worst-case scenario, impossible.  Consequences can be catastrophic in other fundamental ways. Consider the hospital suffering a ransomware attack, battling with network outages which are impacting on the operation of life-saving medical devices…or the effect of an outage on critical infrastructure such as power or water suppliers.  While these risks are not something a law firm need typically consider, the point also has validity in the context of legal business; if court and/or commercial deadlines are not met, the indirect implications to the firm, its clients and/or third parties, could indeed be significant.  Prevention is part of the cure One thing that is evident is the necessity to resolve these breaches as quickly and effectively as possible to limit or reduce the ramifications. It is vitally important for law firms to keep tight security measures in place, which should include:  utilising multi-factor authentication,  maintaining segregated backup systems for any critical data, and deploying regular employee phishing training. Various other cyber hygiene protocols can help to minimise the risk and consequences of a breach.  Despite increased security measures reducing these risks, in this dynamic tech world new ways of hacking are evolving each day, meaning the risk of a breach will always be present. For many law firms, standalone cyber insurance cover may no longer be considered a discretionary spend.  A market-leading cyber policy contemplates cover for the costs of a cyber-security incident response team as well as ransomware specialists, who can negotiate with bad actors and run forensics respectively. This may help to reduce the period of downtime, and the costs responding to the event (including the amount of the demand itself), and minimise reputational harm.  Keeping the options open Clearly firms should not be encouraged to provide any motivation (not to mention their hard-earned money) to cybercriminals. However, ruling ransom payments out as an option, in specific circumstances, could have dramatic effects on a firm, its clients, and the wider community. Providing law firms (and their insurers) with the casting vote as to whether or not payment of a ransom demand should be made, seems eminently sensible. Law firms cannot anticipate how severe cyber-attacks may be - paying a ransom might be the only way to save a business. For further information, please contact:  Carlo Ramadoro, Head of Cyber UK Retail E: carlo.ramadoro@lockton.com 

Ransomware attacks cause severe direct financial consequences. We know this. 
What we must also understand is the potential for wider collateral damage to businesses arising from sustained, ongoing disruption. The indirect effects of an extortion event can cause long-standing, indirect (and often unforeseen) damage which has the potential to be at least as harmful as the initial event itself.


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Ransomware response requires specialist advice 

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