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Symposium 2016

Underwriting Emerging Risks – A Practical Guide

by ~ Jaime Bachrach (Email) (Web Site)

In keeping with the theme of “emerging risks” central to this year’s Symposium, the second panel discussion, titled “Beyond the Headlines: Underwriting Emerging Risks,” transitioned seamlessly from the first panel’s discussion of types of emerging risks to a discussion about how these risks are incorporated into reinsurance underwriting in practice. Moderator John Harding (Morrison Mahoney LLP, Boston) opened the discussion by inquiring of panelists Thomas C. Bredahl (Odyssey Re, New York), Marnie Hunt (Aon Benfield Inc., Minneapolis) and John Phillips (General Reinsurance Corporation, Stamford) whether “new risks” such as terrorism, climate change and cyber attacks bear any resemblance to traditional risks encountered in the market. The panelists agreed that these emerging risks have clear historical counterparts, such as pollution, asbestos and tobacco-related risks. One panelist suggested that, in the process of working through these historical risks, the reinsurance industry has come to realize that it is better to focus energy on figuring out how to allocate these types of losses over the long term instead of expending significant time and money trying to stamp out new problems as they arise.

The discussion then turned to the issue of how reinsurance companies assess emerging risks and incorporate those risks when drafting new policy language. The panelists revealed that this is typically a multi-step process. First, a reinsurer might engage in a “discovery-like period” during which the company completes a damage assessment that includes researching historical records of exposure to the risk and performing a frequency/severity analysis. Second, the reinsurer might determine the demand for new coverage, mainly through discussions with brokers, sub-agents and client companies. Third, the reinsurer may move into a “workshop mode” to evaluate what level of policy coverage to offer, who is most likely to purchase such coverage and how to price the coverage. Once these phases of research are complete, a reinsurer drafts a policy to cover the new risk, and the new policy is thereafter continually re-evaluated.

Among reinsurance brokers, emerging issues may be analyzed by an inter-disciplinary committee with the goal of trying to maximize coverage for clients and determine what types of policies will be accepted by the reinsurance market. Some clients take a “wait and see” approach when it comes to coverage for emerging risks and only purchase policies for emerging risks once those policies gain common acceptance. Although convincing clients to purchase coverage for emerging risks can be easier in the facultative market, where customized reinsurance plans are common-place, even in that market many clients are not yet knowledgeable about new risks. For example, coverage for risks involving nanotechnology and cyber attacks is still relatively new, and convincing insureds to purchase coverage for this type of risk involves an “education campaign” by brokers. It was quipped that the best way to get an insured’s attention about an emerging risk is to exclude an exposure that the insured never knew it had.

Turning to the impact of particular emerging risks on underwriting, the panelists were asked to address whether, in light of recent events like the Boston Marathon bombing in April 2013, terrorism is back on the coverage radar. It was emphasized that one crucial issue is whether the Terrorism Risk Insurance Act (“TRIA”), enacted in 2002, would be extended past its current expiration date of December 31, 2014. One panelist noted that TRIA “drops dead” on the date of its expiration, thereby affecting any related policy that carries through to January 2015 or later. Companies are beginning to issue policies that will be in effect past the date of expiration, and they are being forced to guess whether TRIA will be reenacted. Further, some reinsurance contracts rely on TRIA’s definition of what constitutes a terrorist event. In light of the current uncertainty about TRIA, companies will likely add conditional endorsements regarding coverage for acts of terrorism and may have to provide supplemental definitions. The need for brokers to raise this issue with clients was also addressed.

Climate change is another area which has recently had a significant impact on reinsurance underwriting. October 2012’s Superstorm Sandy revealed the extent to which low-lying coastal areas, including New York City, are ill-prepared for the effects of rising water levels. The panelists highlighted some pre- and post-storm factors impacting both the extent of losses and coverage issues arising from the storm, including whether insureds took the steps that they could have prior to the storm to prevent major property damage. The discussion also noted some unexpected fallout arising from rapid repair programs established in several states, which in some cases resulted in claims of substandard workmanship by contractors, with attendant coverage issues. Other coverage issues have resulted from declarations by governors in some states that the storm was not a “hurricane” and that hurricane deductibles could not be applied, leading to disputes about whether, if insurance companies were forced to waive the hurricane deductible, resulting expenses could be passed along to reinsurers based on the principle of “follow the fortunes.”

Finally, with respect to the potential threat posed by cyber attacks, it was generally agreed that many insureds have not yet given adequate consideration to procuring insurance that addresses the full spectrum of cyber risks. So far, concern about cyber attacks has focused on breach of privacy issues, which usually involve minor measurable losses. Major cyber attacks, which have the potential to cripple businesses or entire industries, have not yet become a high profile concern, but it is not unlikely that major cyber events, including corporate sabotage, will occur in the not-so-distant future. At that point, the panelists posited, coverage for this emerging risk will likely become more commonplace. In the end, the panelists agreed that strategies employed by the reinsurance industry to adapt to previous risks have been useful in addressing emerging risks.

Ms. Bachrach is an associate in the Hartford and Boston offices of Day Pitney LLP. She may be reached at

© 2013 Day Pitney LLP. All rights reserved.

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