Insurance & Reinsurance 2023

A Year Dominated by COVID-19, Climate Change and Geopolitical Conflict

Although the human cost of the COVID-19 pandemic gradually receded in most parts of the world during 2022, the insurance and legal implications of the pandemic continue to be tested. Inevitably, this has led to extensive litigation in several jurisdictions, with the UK and the USA being just two examples. Consequently, courts around the world are revisiting previously accepted approaches to concepts such as causation and aggregation as well as the proper construction of key policy terms. Clearly, the courts’ conclusions on these issues will vary from jurisdiction to jurisdiction, and this guide provides an invaluable overview to the approach adopted in key jurisdictions around the world.

A second major theme of 2022, and one which will continue into 2023, was climate change. The COP27 summit took place in Egypt in November 2022 and its importance for the insurance industry was highlighted by the fact that 2022 was one of the costliest years since 1970 in terms of natural catastrophe losses. Insured losses during the year are estimated at USD115 billion. These losses stem from a series of catastrophes ranging from hurricanes to winter storms, flooding and hailstorms (Swiss Re Sigma Preliminary Results December 2022).This estimate, which was provided before the December 2022 “cyclone bomb” in North America, reflects a continuing 5–6% annual average increase in natural catastrophe losses over the last decade and has only increased the already widespread concern that climate change will see a long-term increase in the number and severity of natural disasters.

In addition, climate change is likely to challenge previous assumptions about the nature of the risk posed by natural disasters; for example, flooding may become more frequent and more widespread. From a legal perspective, these developments will raise issues of policy construction; for instance, in relation to aggregation clauses and the obligation on reinsurers to follow claims decisions of the underlying insurer. From a regulatory perspective, one may also see steps by governments around the world to compel insurers to provide cover for catastrophic risk. An example of this might be Flood Re in the UK.

The major geopolitical issue of 2022 has, of course, been the war in Ukraine.  As well the horrendous human suffering caused by the war, the conflict has raised difficult issues for the insurance industry. One of the features of the Western response to Russia’s aggression has been the imposition of sanctions on Russia and its allies as well as on individuals and organisations associated with Putin’s regime. These sanctions, and the retaliatory sanctions imposed by Russia, create a difficult legal and regulatory environment for insurers which can only be enhanced by the different approach to sanction enforcement in different jurisdictions.

In addition to sanctions, the war has emphasised the role of war risk insurance and the scope of the cover which it provides. Indeed, such has been the pressure on this class of business that the main marine insurers are withdrawing war risk cover in the disputed areas. The hybrid nature of modern warfare, including as it does aspects such as cyber conflict and physical conflict, brings into question many definitions of “war” in insurance covers. Most cyber policies exclude coverage for war and related risk, but defining and proving “war” in the context of a cyber-attack often challenges existing legal definitions and it is important for insurers to know how different jurisdictions approach this and related issues.

Modernising the Global Insurance Industry

In 2022 the drive to modernise the world’s insurance markets continued apace, and that trend will continue in 2023. The changes being introduced are in many cases fundamental and bring with them a range of legal and regulatory challenges for insurers, brokers and regulators alike.

One aspect of the drive for modernisation is the continuing search by established insurers for new markets and territories in which to expand. The desire for expansion is being assisted by regulatory adjustments in some jurisdictions that are increasingly open to external investment, but it is also challenged by the growing assertiveness of insurers domiciled in emerging markets. It is imperative, therefore, that insurers, related professions and their advisers all understand the different legal and regulatory requirements for operating in different jurisdictions. This guide, written by experts from around the world, seeks to provide a practical overview of these requirements in the key international jurisdictions.

Insurtech

The growth of insurtech and the wider use of artificial intelligence presents both opportunities and challenges to insurers and brokers. Insurers are using insurtech to create more personalised and better-targeted insurance products through the development of sophisticated algorithms to analyse detailed source data and broader market data, to produce a highly specific risk profile and price. Similar initiatives are being developed to speed up the handling of claims while increasing insurers’ ability to detect fraud and analyse the cost and benefit of claims disputes. At present, these advances are limited principally to personal lines insurance and SME business, but it is expected that they will be applied to larger commercial risks in the coming years.

The increasing use of insurtech, and AI more generally, brings with it significant legal and regulatory challenges, and the responses are likely to vary from jurisdiction to jurisdiction. For example, insurtech involves managing huge quantities of personal data, which is often of a sensitive nature. The coming into effect of the European Union’s General Data Protection Regulation (GDPR) has created a new legal regime within which insurers have to manage this data, with the risk of incurring very significant financial penalties for non-compliance. Importantly, although this is an EU regulation, it applies to insurers anywhere in the world that hold information about EU citizens, so has potential ramifications for insurers and their advisers wherever they may be. Jurisdictions outside Europe, of course, have different approaches to data protection, which this guide seeks to highlight.

One of the key objectives of insurtech is to strengthen the connectivity between insurers and their clients. This is achieved through more personalised underwriting and the adoption of different distribution methods, including social media and internet apps. Many innovative, new products rely on source data gathered through wearable technology and the internet of things (IoT). These communications, and information from things like wearable technology, will be subject to a new EU regulation, the ePrivacy Regulation (ePR). As with the GDPR, the ePR will have a worldwide reach and bring with it the same significant penalties for breach as the GDPR.

All of these technological advances are challenging existing legal assumptions, which are often based on laws developed for an entirely different commercial world. How the laws of different jurisdictions adjust to these challenges is one of the issues this guide seeks to address.

Artificial intelligence

As well as the regulatory issues associated with the growth of insurtech, the adoption of AI technology by insurance buyers raises new legal challenges for insurers, including the question of where liability will lie if a piece of AI technology, dependent on machine learning, causes injury or breaks the law. Similar issues will arise in relation to the programming of autonomous ships and vehicles and the choices they may have to make when faced with the likelihood of collision. The answer to these questions is likely to differ between jurisdictions, so it will be important for insurers to understand local laws before accepting business that exposes them to risks of this nature.

Political Tensions

There is no sign of a resolution to the war in Ukraine and 2023 is likely to see continuing political instability and tensions between some of the world’s leading economies. The insurance industry is not immune to the commercial and regulatory consequences of such conflict. These political tensions have also been expressed in actual or alleged cyber-attacks by one country or its proxy against another. Such attacks can lead to very significant insured losses, both in targeted countries and in other countries that experience “collateral damage”.

The Brexit transition period was terminated on 1 January 2021 and no replacement for the previous passporting arrangements has yet been agreed between the United Kingdom and the remaining EU members. This is one of the many regulatory and legal uncertainties that will continue to hinder UK and European insurers through 2023. Until the post-Brexit regulatory framework has been agreed, bilateral arrangements between the UK and individual EU member states are likely to be of an ad hoc nature, and there will inevitably be uncertainty over the ability of UK insurers to write European business (and vice versa) and how that business may be written – for example, with respect to the regulation of underwriting agents.

Emergence of New Risks

At the same time, new risks are emerging, and concern continues about the potential for a “new asbestos” – be that legalised cannabis and medical marijuana, opioids or microplastics and nanotechnology. The legal context for the handling of insurance claims and coverage disputes in different jurisdictions will play a large part in determining the impact of any of these risks, if they do emerge.

Despite the uncertainty and risk development the industry faces over the coming years, there is no shortage of investment, with private equity houses continuing to show an interest. The industry saw continuing consolidation among insurers and brokers in 2022. In addition, money from outside the industry continues to be invested in new insurance vehicles such as insurance-linked securities (ILS), which are said to have “come of age” during the COVID-19 pandemic. Regulators in a number of jurisdictions are opening their markets to the underwriting of these products, but it remains to be seen whether they can be sufficiently flexible to wrest a meaningful share of the market from Bermuda.

Overall, 2023 is expected to see the continuation and speeding up of the modernisation process across the insurance industry together with a slower, but nonetheless significant, shift towards new markets and new ways of doing business.