Welcome to the Roaring 20s: Managing Political Risk in Changing Times

A session at the 2022 RIMS conference looked at how companies and businesses can mitigate the risk brought on by global political events.

By: Emma Brenner | April 21, 2022

The global stage has had its fair share of polarizing political events within the last decade, emphasized by the weighted effects of the COVID-19 pandemic. The past two years especially have emphasized the need for adequate political risk insurance coverage to be administered to businesses and organizations.

If there’s one takeaway from these political risk moments, it’s that the landscape is ever-changing, and big events can occur at any given moment. For organizations, it’s imperative to have proper coverages and mitigation plans in place so that a political event does not deter their operations.

A session at the 2022 RIMS conference titled, “Welcome to the Roaring 20s: Political Unrest in Changing Times,” discussed the impacts of these global political events and how boards and C-suites can properly prepare.

Specifically, speakers Laura Burns, senior vice president of political risk and financial solutions at Willis Towers Watson, and Debbie Gramer, director of risk management for Arrow Electronics, Inc., discussed recent bombshell moments across global political arenas, why political risk insurance coverage is valuable, and the best practices for risk managers when responding to political risk.

A Look at Recent Events

The session began with Burns reviewing recent political risk catastrophes, some even ongoing, like the Russia-Ukraine conflict. Other events Burns touched on were Hong Kong protests in 2019 and military conflict in Myanmar in 2020, which she said, “are not the usual suspects of unrest and violence.”

As there is no shortage to these types of instances, Burns then went on to discuss the findings of a political risk survey produced by Willis Towers Watson in conjunction with Oxford Analytica. The survey looked at the several political risks, which ones incurred losses for companies and organizations, and which regions of the globe were of most concern.

A fascinating find from the survey showed that company respondents, surveyed in late December 2021, displayed major concern in the Asia Pacific region, especially in the countries of China and Taiwan. Ironically enough, the regions containing Russia and Ukraine did not have an uptick in concern.

Looking at these regions across the world is important for U.S.-based companies to review, because they could hinder present or future business opportunities. Types of incurred losses can stem from political violence, forced abandonment in particular regions and weaponization of government sanctions.

So, how can these recent events impact businesses? Burns said, “In terms of the financial impact of these losses, they tend to be generally low frequency, but they often can be high severity.”

What Is Political Risk Insurance?

It’s clear that there’s an urgent need for businesses to have political risk coverage woven into their policies. For businesses to feel confident in securing this insurance, they first must know what it entails.

So, what is political risk insurance?

According to Burns, political risk insurance “is a suite of coverages that are intended to respond and support multinational corporations investing abroad.”

This type of insurance essentially works as a property insurance that protects business assets that may abroad.

A Risk Manager’s Response

For risk managers to craft a proper response and policy for political risks, they first must understand their exposures globally. Gramer, speaking as the risk management perspective, said this is a critical initial step.

These exposures need to be looked at with a fine-tooth comb, with factors like assets, payrolls and shipments being clearly assessed. Gramer said the next step is to evaluate company operations in each country they’re in, and dive into scenarios should a political risk event take place.

Gramer gave this example: “Say a company has operations in Poland, and [it] has to suddenly put a border around Poland and can no longer [access the country]. How are they going to [submit] payroll? Where are their shipments going to and from Poland? What services can HR provide to employees?”

This type of deep analysis allows a company to create a risk portfolio that specifically focuses on not only which types of politically motivated risk resides in each region, but if these regions pose concern to business function.

Another important factor for risk managers to understand is that there is no standard policy coverage for this type of exposure. Gramer said, “This is not one size fits all. Originally, I thought buying a limit that covered perils across the board [would suffice], but it’s not one limit.”

To ensure that the right policies are being implemented for the right risks, Gramer said that risk managers must ensure that the data they are using to make these decisions are competent and respective to each region/country they are operating within. &

Emma Brenner is a staff writer with Risk & Insurance. She can be reached at [email protected].

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.