With risk exposures spanning major catastrophic events, technology, geopolitical issues and economic uncertainty, Australian businesses face the challenge of how to navigate the rising risks from these complexities. Understanding the trends and related risk insights can help businesses make more informed decisions before a renewal.
Here are five key considerations.
1. Soaring social inflation
Social inflation refers to the rising costs of insurance claims due to increased litigation, higher jury awards and broader definitions of liability. These influences drive up claim costs, ultimately leading to higher premiums and affecting the risk landscape for insurance providers.
Social inflation is reaching an inflection point as the costs of settling class action claims in particular are setting records, fuelled by the growing societal opinion that big businesses can afford the cost of damages.
The rise of litigation funding means more third parties are financing plaintiff's legal costs in exchange for a portion of any financial recovery from the lawsuit.
Increased litigation, more aggressive legal strategies and rising public expectations of higher damages settlements from commercial companies are contributing to the growing cost of liability claims. These factors, along with higher defence costs, will continue to impact liability coverage premiums.
Act now
- Bolster your risk management and loss prevention strategies by evaluating your current safety programs and employee training.
- Review your insurance program and leverage insurance broker expertise to ensure you have adequate coverage limits to protect against large legal awards and increased litigation costs.
- Be proactive with claims manager/s and third-party claims insurance provider to collaborate on defence strategies.
- Consider alternative program structures, such as self-insurance or captives, where you can retain more risk to offset costs and have more control over your insurance programs.
2. The dichotomy of AI adoption
Artificial intelligence (AI) has immense potential to boost efficiency, automate complex operations and enhance predictive data analysis. However, new and emerging technology also brings new and unforeseen risks.
A key risk is legal actions involving AI platform providers and their users defending allegations such as copyright infringement, deceptive trade practices, discrimination and breaches of privacy law, among others.
In addition, cyber threat actors are leveraging AI to execute more convincing phishing and social engineering attacks, raising concerns about deep-fake technology.
AI can be considered a significant silent peril, making it imperative for businesses to deploy a strategy for striking the balance between sound, risk-based decisions and leveraging the opportunities AI technology offers.
Insurance underwriters have been slow to address AI exposure, but as more claims emerge it can be expected that insurers will modify their policies to address these risks, either through affirmative coverage or exclusions.
As AI pervades every facet of business, it demands an enterprise-wide strategy to navigate the questions and uncertainties it brings to insurance coverage.
A practical defensive starting point is to develop an AI exposure assessment and embed an AI risk management framework into the overall enterprise risk management program.
Act now
- Assess your AI risk to understand the potential threats and vulnerabilities in your business and develop a comprehensive risk mitigation plan with the help of your insurance broker.
- Striking the right balance between gaining efficiency and driving innovation while upholding ethical and regulatory requirements requires a strategic and thoughtful approach to governance.
- Discuss your insurance program with your broker to ensure your AI activities are covered.
3. Persistent supply chain disruption
A recent Gallagher study confirms businesses remain concerned about ongoing supply chain disruptions and this trend is expected to persist. Disruptions can be caused by events like product recalls, severe weather or bushfires, cyber attacks and shutdowns of critical transport routes.
Inflation has increased manufacturing and transportation costs, further straining supply networks. Additionally supply chain cargo theft is rising, with high-demand commodities like food/beverages and electronics frequently targeted.
A distressed supply chain results in increases of business interruptions, higher costs for goods and services and potential liability issues.
Insurers may also impose stricter terms and higher premiums due to the heightened risk of supply chain disruptions.
Act now
- Talk to your broker about insurance solutions like business interruption insurance, contingent business interruption coverage and supply chain insurance.
- Update your risk management strategies to diversify your suppliers and improve supply chain transparency.
- Explore emerging technology and tools like GPS and predictive analytics that may help you anticipate and address potential supply issues.
4. Shifts in catastrophe losses
Catastrophe losses are driven by perils such as cyclones, fire and flooding, with reinsurance playing a crucial role in covering a portion of claims.
The focus on properly underwriting and pricing for secondary perils as a result of catastrophic events has been growing, due to increased severe storm, hail, flood and bushfire losses. Insurers are examining these exposures in order to appropriately underwrite these perils.
Also the cost of claims is increasing due to rising labour and material costs to repair and rebuild more frequently, and the strain on limited resources in regions affected by catastrophe events leading to insurers reevaluating their capacity for covering potential risks.
Act now
- Regularly update your property valuations to ensure coverage accurately reflects the current reinstatement value of your assets and avoid underinsurance.
- Discuss options with your broker to secure insurance rates, if available, to help ensure stability and predictability.
- Consider parametric insurance, which can offer fast payouts and transparent, scalable protection, making it an attractive option for businesses looking to bolster their resilience against the unpredictable nature of climate events.
- Consider alternative risk financing solutions including captive creation/utilisation, and structured property solutions.
5. The impacts of global politics
Geopolitical tensions can significantly impact commercial insurance by increasing risk exposure, leading to higher premiums and more claims related to political violence, terrorism and civil unrest.
Geopolitical volatility can disrupt global supply chains, cause regulatory changes and create economic challenges, affecting businesses' financial stability and insurance needs. In these conditions insurers may impose stricter terms and higher reinsurance costs, which are passed on to the business owner.
Act now
- Consider key geopolitical shifts and regulatory changes when evaluating your global operations.
- Talk with your broker about risk transfer solutions that can help reduce your risk.
How Gallagher can help
As a trusted insurance broker in Australia advising small to large companies, Gallagher can guide you on risk mitigation and risk transfer to help minimise what could be a significant financial impact should the unexpected happen.
Our specialists can help give you the confidence to build for your business future with the knowledge that you are protected.
