5 key specialty lines insurance trends affecting businesses

It’s no secret that the COVID-19 pandemic has had a devastating effect on many businesses. What began with supply chain issues soon transformed into even more complicated challenges, including labor market difficulties, an economic recession, and fraught geopolitical obstacles.

These changes left risk managers and other business stakeholders looking for innovative ways to help protect their specific and sometimes unusual risks — something they could only find in the specialty lines market.

Kristin McMahon, senior vice president, Global Risk Solutions North America specialty claims for Liberty Mutual and Ironshore, outlines five trends affecting the specialty lines market that businesses should be aware of and prepare for in the current risk environment.

As businesses increase their reliance on video platforms, continue to store more data in the cloud, and adopt remote and hybrid working models, the danger of cyberthreats looms larger.

“Cyber is one of the only risks that has the capacity to impact every company and industry,” said McMahon.

And while any industry size and type can be affected, businesses with fewer than 100 employees are currently experiencing 350 percent more attacks than larger companies.

“Historically it was the larger accounts in the crosshairs,” McMahon said. “But this year, we are seeing small- and medium-sized businesses suffer ransomware events more frequently than larger operations.”

Why? According to 2022 research by CNBC, small businesses are ill-prepared to handle cyberthreats. Less than half of small businesses have installed antivirus software or backed up their files externally, while only a third have implemented basic security measures like automatic software updates and two-factor authentication. Noted McMahon, “Without the proper digital ‘hygiene’ and contingency plans in place, organizations will increasingly place themselves in harm’s way.”

This doesn’t mean that larger organizations can be complacent. According to a 2021 Accenture survey of senior executives, the average number of cyberattacks experienced per company increased 31 percent compared to 2020.

“For larger companies, cyber hygiene is certainly critical. What’s also important is having the board of directors take an active role in protecting the business from cybercrime. Getting support from the top helps an organization prioritize cybersecurity and take active steps to stay on top of trends, conduct due diligence of third-party vendors, and more,” said McMahon.

As businesses closed their doors to mitigate the spread of COVID-19, so, too, did the courts. While some innovations, such as holding trials in stadiums or over Zoom, allowed for the necessary social distancing, many cases were outright delayed. In Texas, for example, courts processed only 200 trials in 2020, compared to their normal 10,000 annual average.

Noted McMahon, “Since the return of in-person trials, the courts continue to navigate a significant case backlog. To get caught up, some judges are employing ‘rocket dockets,’ an approach that encourages plaintiffs and defendants to either settle or try their cases on an accelerated schedule.”

One side effect of this phenomenon: plaintiffs’ attorneys in some cases will settle in pretrial for a reasonable amount, opting to only try cases with juror appeal for which they could receive large jury awards.      

“It’s the older pre-COVID-19 cases accruing prejudgment interest where you have aggressive plaintiffs’ attorneys who believe in their high-damages cases — they’re going to hold out and try it to a jury,” McMahon said.   

Due to societal and legal trends, jurors often hold negative views of large corporations — especially if they feel there has been egregious corporate misconduct. This perception, along with a savvy plaintiffs’ bar and use of third-party litigation, has been driving an increase in “nuclear” verdicts, or awards of more than $10 million. So far, each of the 10 largest awards in 2022 has amounted to more than $200 million, with the largest being almost $7.5 billion.

“And while juries feel that awards are warranted, the dollar values we are seeing are significantly more than what we would have seen five years ago. Much of that increase is because of social inflation,” said McMahon.  

Companies investing in and profiting from litigation — a practice known as third-party litigation funding — are also more prevalent. In addition to being a potential conflict of interest, third-party litigation funding can also delay settlements or deprive injured plaintiffs of the damages they deserve.

“When third-party litigation funders are involved in a claim, it’s often more expensive to resolve a claim and it also typically takes longer to resolve,” McMahon continued. To address this issue, several state courts require litigants to disclose if their attorney’s fees and expenses are covered by a third-party investor in exchange for a share of the litigation awards.

Despite recent progress, the pandemic’s influence lingers as the healthcare industry grapples with rapid changes in protocol brought on by COVID-19. First, telehealth use skyrocketed during the pandemic, opening practitioners to the dual risks of misdiagnosis and cyberthreats.

Well before COVID-19, the U.S. healthcare sector faced a looming labor shortage – and COVID-19 exacerbated the issue. In fact, according to a recent study, more than 275,000 additional nurses are needed from 2020 to 2030. As a result of the current shortage, many medical professionals are feeling burned out, and that can lead to workers compensation claims from workplace injuries, and a greater likelihood of medical malpractice suits.

During the first three quarters of 2022, the healthcare sector faced approximately 450 employment-related lawsuits — nearly 23 percent of all cases — with vaccine mandates and employment discrimination accounting for almost 70 percent of these suits. Healthcare facilities face COVID-19 liability exposures relating to claims of alleged negligent or gross negligent inpatient care. “These and other pandemic-related exposures have led to an increase in claims that continue to plague the industry,” stated McMahon.

Special purpose acquisition companies (SPACs) have been in existence for decades. SPACs are investor-backed management teams that seek to acquire private companies with the intention of taking them public. The number of IPO filings for SPACs exploded during the pandemic, with 816 filed from 2020 to 2021, compared to only 105 in the prior two years.

However, that growth slowed in 2022 due, in part, to a poor return on investment on several acquisition targets. In fact, of the nearly 200 companies that went public via SPAC merger in 2021, only 11 percent trade above the offer price, and the group averages a -43 percent return. 

“The diminished price performance has also led to an increase in securities class action (SCA) lawsuits as investors lost money after the once-private companies began trading publicly. There have been approximately 50 SPAC-related securities class action lawsuits filed since January 2021, including 19 through 2022.  And approximately 40 percent of the cases so far have been filed after the defendant company’s share price declined following the publication of a short seller report,” said McMahon.

The common thread connecting these trends is that many specialty claims losses involve litigation. Forward-thinking organizations are working with their insurers to strategize on proactive legal and settlement tactics. At Liberty Mutual, for instance, companies are taking advantage of innovations such as virtual mock juries to improve their litigation management strategies. These mock juries provide a greater understanding of potential defense approaches and how jurors will respond to them.

As risk trends continue to evolve, it is critical to partner with an insurance provider with the necessary specialty expertise to keep you ahead of the curve. From cyber and healthcare liability, to environmental and directors and officers, we offer a wide range of specialty solutions to help protect businesses.