Ingo Trede, Branch Manager for Spain, shines the spotlight on the evolving landscape for Financial Lines and Cyber insurance in the region.
There are a number of specific regional and global trends that are impacting Spanish financial lines and cyber insurance in 2022, bringing the need for global expertise and local market knowledge to the forefront.
From an underwriting perspective, a clear divide is emerging in terms of capacity and rating environment for distinct lines of business. For smaller, not publicly traded businesses that have not been significantly affected by the pandemic, there is still abundant capacity available particularly on excess layer placements, with competitive pricing reflecting the choice available.
A tale of two cities
In contrast, large Covid-19 affected industries - such as travel and aviation - face a much harder struggle to find competitive quotes and sometimes even capacity. Wordings are also tightening for these sectors with some carriers implementing the inclusion of bankruptcy exclusions at renewal across the board.
Similarly, large publicly-listed corporations face a harder market to find capacity as insurers have limited their exposure and line sizes in relation to global businesses. Pre-market hardening, layers of up to EUR 25 million were standard, whereas nowadays there are more layers needed to reach similar capacity levels, as layer sizes reduced to EUR 10-15 million or even less for more complex placements, with more insurers participating to reach similar capacity levels.
It is even more challenging for multinational companies trading in the US and facing Securities and Exchange Commission (SEC) reporting exposure, where significant litigation and product liability exposure is restraining financial lines risk appetite across the board.
Looking back at Spain, and beyond financial lines, there is also a shortfall in cyber capacity, particularly for low attachment points - the so-called ‘burning’ layers. The Spanish cyber insurance market has matured rapidly in the last five years, with rates and wordings adjusting in line with market experience of increasing cyber attacks and ransomware causing business interruption, reputational damage and also loss of data that can result in penalties.
This means the devil is in the detail when it comes to navigating the cyber coverage that is available to ensure that insureds are getting the right deal for them.
Pandemic claims yet to emerge
Meanwhile, as far as a wave of claims resulting from the pandemic and insolvencies is concerned, it is too early to reach a firm conclusion. The market has seen an uptick in Covid-related notifications but very few bankruptcy claims as yet.
The full Covid-19 impact may translate into more insolvencies and resulting claims when the short-term work subsidies of the ERTE (expediente de regulación temporal de empleo) isn’t supported any longer by the Spanish state. There are still over 100,000 employees under that regime, which significantly reduces the cost side of many businesses.
Other than D&O claims either related to future dismissals or insolvencies, the pandemic may also affect the frequency and severity of first party fraud losses under crime insurance. While it is too early to clearly predict the impacts - as typically crime losses take time to be discovered - it is likely that home working and the following new work “order” went hand-in-hand with less controls and supervision of employees. This undoubtedly could have been spotted by some criminal minds internally (first party). Fake president frauds, which were already a major loss driver before the pandemic, may potentially also benefit from the physical separation and reduced communication among employees due to home working and show a similar increased level of activity as observed in the cyber space (third party fraud).
However, there was reduced capacity available for financial crime insurance already pre-pandemic, due to significant current and past losses and poor performances of entire portfolios of business leaving few carriers with a primary level risk appetite.
There have been headlines across Spain documenting court proceedings related to corporate crime allegations including fraud, corruption and anti-competitive behaviour.
Adapting underwriting discipline
The insurance market continues to adapt coverage elements, as well as its underwriting.
While the pandemic led to specific Covid-19 questions and proposal forms, the focus has recently shifted towards Russian sanctions exposure - with not only the changing economic environment but also the adapting legal frameworks being taken into consideration.
By way of example, under the Spanish criminal code legal entities can be held responsible for their directors’ and employees’ fraudulent wrongdoings on behalf of the company, and some wordings include sub-limited coverage for the legal entity. On the other hand, some changes in the risk landscape lead to exclusions to address areas such as money laundering, terrorist financing or corruption, or most recently to exclude coverage for Russia in its entirety.
Many of those elements need to be analysed on an individual basis, as exposures are different for each sector and activity. Some have by nature higher exposure to corruption and other criminal acts such as price-fixing due to market monopolies, or public tender exposures. Telecommunication and construction are two industries where we keep a closer eye on such exposures - especially in territories where corruption is more commonplace.
For financial institutions, the emphasis on KYC (know your customer) regulations and with it sanctioned clients, money laundering and similar, will continue to be a core underwriting focus. The on-boarding process from new clients is a major exposure.
The post-pandemic environment will certainly lead to increasing NPL (non-performing loans) and therefore we closely analyse what amount of reserves banks create in light of the pandemic and how NPLs and coverage ratios develop. Proactive measures to mitigate this emerging risk, together with conservative funding of the operation and a solid capital base are essential.
Emerging risks
Beyond financial crime exposure, other trends that the insurance sector is monitoring closely in 2022 include emerging environmental, social and governance risks as the reporting requirements around ESG evolve - with the impact of climate change in particular climbing rapidly up the agenda for all insurance providers.
This is impacting sectors such as coal, mining and the nuclear industries where minimum ESG standards are affecting insurability, while refinancing can become more challenging due to a loss of investor appetite for companies with weak ESG ratings - ultimately impacting the financial stability of some businesses in these sectors.
Similarly, product exposure investigations are being monitored closely, particularly for industries such as the automotive or pharmaceutical / biotechnology sectors that traditionally have higher exposure to product liability.
Additionally, sanctions and embargoes look likely to play a bigger role this year amidst increasing global geopolitical tension, in particular with reference to any sanctions that are imposed against Russia. Increasing inflation rates and central banks worldwide trying to counter this by adjusting interest rates will add further challenges for businesses over and above the already difficult economic outlook.
Expert advice and local knowledge
All of these trends are pointing to the very clear need for an increased dialogue with insurers and significant local awareness and experience in the Spanish insurance market. Each risk placement must be assessed with an expert eye, focused around client advisory and risk management services as well as securing the right limits and breadth of coverage.