Best's Review - April 2024 Edition

ARTIFICIAL INTELLIGENCE

unich Re got the jump on AI risk early. It

insured its first AI risk in 2018, and its first

large language model in 2019, said Michael

Berger, head of the Insure AI team at Munich Re.

After meeting with a client in 2018,

Munich Re designed an insurance solution that

incorporated artificial intelligence to solve the

problem, Berger said. Then came the realization

that there might be a bigger emerging risk when

it comes to relying on AI in process automation

and automated decision-making.

Munich Re zeroed in on the issues

surrounding AI.

Munich Re officially launched its Insure AI team

in 2021 to address the potential risks associated

with AI, such as the threat

of hacking, stress on the

electrical grid, bias in

recruitment efforts and,

in some cases, simple

mistakes.

One such mistake

involved Air Canada,

which found itself on the

hook to pay a customer

after its website chatbot

erroneously told him he

could submit for a partial

reimbursement of his

travel expenses.

When the airline didn’t comply because it

claimed it wasn’t responsible for the mistake made

by the chatbot, the customer sued and won the case

in court. There are multiple ways insurance would

cover that, Berger said.

“One is for providers of AI systems, and the

other is for companies that own AI solutions or

have consulting companies build AI solutions for

them,” Berger said. “The chatbot produced an

output, which was clearly factually wrong. The

customer made a decision based on this output and

resulted in financial losses for the customer and

now the airline. This is a classic situation we would

cover.”

Over the past year, Munich Re has been working

to expand its coverage to include, among others, AI

discrimination in health care, bank loan limits and

terms and conditions, and copyright infringement

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surrounding generative AI.

“We do that by building on top of the

underwriting and pricing technologies we have

developed,” Berger said. “For example, when it

comes to the discrimination case, on first glance,

it might seem different from the performance

risk that we insured in the past. However, it’s

possible to translate these conditions into a form of

performance risk of AI. For the protected groups,

how will the AI behave for those groups, based on a

fairness metric?”

Berger said Insure AI consists of 10 employees

who are split between the United States and

Munich in order to cover North America and

Europe, plus Israel. It consists of underwriting

business managers, who

help build coverage

for AI use cases, and

research scientists to

quantify how various

models will behave. It

covers companies that

are developing a diverse

range of AI models.

“We wanted to be

set up in those markets,

in the right time zones,

with people on the

ground,” Berger said

of Munich Re’s efforts in North America and

Europe. The company also has seen recent interest

from India, Japan and China but has no plans to

expand geographically just yet.

The increased interest comes internationally

as awareness around the risks surrounding AI

increases. Artificial intelligence was among the

biggest risks listed in Swiss Re’s annual

SONAR

(Systematic Observation of Notions Associated with

Risk) report, and it was among the prime concerns

among the 900 clients Hub International Ltd.

surveyed going into the new year.

“Many didn’t even have AI as a topic in 2022

going into 2023, and now you look at 2023

going into 2024, it’s one of the top five,” Hub

International Ltd.’s Complex Risk Practice Leader

Mary-Beth Hahn said of the survey. “I think it’s

early to tell, but AI is increasing the sophistication

of attacks and ransomware.”

Risk Initiatives

CYBER

iberty Mutual Insurance Co. has been insuring

cyberrisk for more than 15 years but doubled

down on its commitment to cyber insurance in

2023 when it launched its Global Cyber Office

to build and scale its cyber capabilities around the

world, the company said.

WTW and Hub International Ltd. are among

companies also expanding their efforts on cyber.

“It’s a renewed focus,” Liberty Mutual Global

Head of Cyber Patrick Thielen said. “It’s a

recognition that what generated success and value

as the cyber insurance industry was in its infancy 10

years ago isn’t the same set of capabilities that’s going

to drive success and add customer value moving

forward as our industry reaches maturity.”

Thielen, who was

named to this role

in May 2023, leads

the development and

execution of a cyber

strategy that helps buyers

and brokers across the

world better understand,

mitigate and manage

cyber exposure.

Since his career began

in 2003, Thielen has seen

the risk evolve from data

breaches to ransomware,

and expanding regulations that evolved from dealing

with how companies address breaches to whether a

company has rights to collect data in the first place.

In 2024, many companies are shifting from a

cybersecurity setup that’s focused on looking for

known threats to using “zero-trust concepts,” like

looking for odd patterns in their data, he said.

“As an employee at an organization, I might have

access to a certain database, and let’s say I have not

accessed that database for a year. And then suddenly,

I’m in that database all day. And then tomorrow

I’m in that database again. And I’m transferring

big files around. It might be legitimate. It probably

is legitimate. But it’s worth flagging because it’s

unusual,” Thielen said.

“The next frontier in cybersecurity is identifying

things that are out of the ordinary, even if they’re

not necessarily malicious,” he said.

The way to deal with emerging threats like this is

not just with technology, but through education and

culture.

“So, in my example, it’s less efficient to me as a

user if my activity’s getting shut down by a rule that

says it’s unusual,” Thielen said. “But if there’s value

in having a second set of eyes on that type of thing,

that can be a very good security control.”

Liberty Mutual is expanding a risk engineering

team that keeps tabs on new risk, correlating new

potential risk with what’s actually happening,

Thielen said. They also work with cybersecurity

experts inside and outside the insurance industry

to ensure they’re staying up to date on the

latest developments coming out of such areas as

technology, academia and law enforcement.

“No one person or

company or industry

is ever going to solve

cyberrisk,” Thielen said.

“It’s important to engage

with experts from outside

of your own industry and

approach this complex

space with a high degree

of humility.”

Broking and advisory

firm WTW, meanwhile,

is focused on small and

medium-size enterprises,

which it says face substantial cyberrisk.

In January, it launched a new cyber solution aimed at

North American enterprises with less than $50 million

in annual revenue, including startups and pre-revenue

accounts. It has allocated dedicated underwriting staff to

focus on the solution, which it says provides quick and

easy access to competitive insurance quotes through self-

service quoting platforms.

This came a year after WTW launched CyXS,

a $50 million excess layer cyber facility, with the

help of Lloyd’s underwriters. The company made

CyXS available to WTW clients worldwide who

buy excess layer cyber programs. Two lead insurers

would deploy capacity on behalf of all the facility

insurers, streamlining the underwriting/information

requirement process, according to WTW.

Hub also is helping to prepare its clients for the

threat of cyberattacks.

“I think there was a 73% increase in cyberattacks

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in 2023,” said Hahn. “More of those attacks are

happening, and we need to make sure that our

clients are prepared.”

Hub is doing that through its Professional and

Executive Risk (ProEx) Specialty Practice, which

works with clients throughout North America. It

brings together more than 100 Hub specialists to

advise clients on how to navigate the changing risk

landscape.

In addition to cyber, the practice offers experts in

directors and officers, employment practices liability,

errors and omissions, and financial lines.

GEOPOLITICAL RISK

onflicts in Ukraine and the Middle East are

creating new exposures for insurers, specifically

in marine. In places where there is high risk, such

as the Strait of Hormuz, the Red Sea, or Ukraine,

insurance premium pricing is increasing, according

to Dan Topping, chief investment officer at private

equity firm B.P. Marsh & Partners plc.

B.P. Marsh has made three investments in marine,

most recently acquiring a 30% stake in Ai Marine

Risk Ltd, an MGA based in London.

In 2016, it subscribed for a 25% cumulative

preferred ordinary

shareholding in The

Fiducia MGA Co.

Ltd., a U.K. marine

cargo underwriting

agency specializing

in a number of risks

including cargo, transit

liability, engineering and

terrorism insurance.

In 2019, it acquired

a 30% stake in London-

based specialist marine

Lloyd’s broker Lilley

Plummer Risks Ltd.

“I think if you can be there to provide insurance

at an adequate price compared to the risk to allow

trade to take place within that risk, that’s something

that should be provided,” Topping said. “If you’re

going through the Irish Sea on a calm day, that’s

going to have one level of risk; whereas, if you’re

going through the Red Sea with missiles being fired

at you and the U.S. Navy and the Iranian navy

being in close proximity, that presents a different

risk and a different premium.”

B.P. Marsh isn’t the only one looking at

investments in marine MGAs. Rokstone recently

received long-term support from Allianz, which

provided a $25 million facility to the MGA to expand

its North American marine operations. Rokstone

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said it plans to grow the marine portfolio in North

America “aggressively” from a startup to $100 million

in five years with a focus on middle-market business.

“When you look at where marine might fall in

the pecking order of a large carrier, it might fall

three or four or five places down the line,” Michael

Nukk, head of marine, North America, Rokstone,

said. “That might drive their desire to work with an

MGA that can deliver that in a short space of time.”

Allianz plans on expanding its involvement with

Rokstone to additional marine lines. He added

Rokstone’s technology,

wholesale focus and

underwriting will give

distribution partners more

ways to access Allianz.

“We are developing

capacity for cargo

construction risks, and

particularly looking at the

renewable energy sector,

whether it’s wind, solar,

hydro or renewable fuel

technology,” Nukk said.

Alta Signa Europe

B.V. said it launched a

European marine underwriting division, based in

Italy, that will write cargo, hull and machinery,

yacht and yards business. It is backed by Alta Signa’s

panel of insurance partners, including Axeria IARD,

SiriusPoint and Sompo International, the European

boutique MGA said in a statement.

Additionally, RSA Insurance and Brit Ltd.

launched a cargo consortium to offer up to $285

million of capacity worldwide for cargo risks. The

“Project Cargo” insurance is for cover and protection

for equipment that could be lost or damaged in

transit, the underwriters said in a statement.

The consortium will provide global coverage

including delay in startup and advanced loss of

profits and will act mainly as a lead or, where

Risk Initiatives

applicable, follow capacity. There are seven insurers

in the consortium, and the cargo will involve

anything related to construction/erection projects by

land, sea or air, RSA said.

CLIMATE

hubb Ltd. last year launched Chubb Climate+

to bring together the company’s units that are

engaged in traditional, alternative, and renewable

energy, climate tech, agribusiness and risk

engineering services.

It provides a full spectrum of insurance products

and services to businesses engaged in developing or

employing new technologies and processes that help

reduce the dependence on carbon. It also provides

risk management and resiliency services to help

those managing the impact of climate change.

The increased frequency and severity of storms

is an issue that’s posed a

problem for insurers over

the past few years.

According to

Matthew McMullin,

Chubb executive vice

president Climate+ and

energy industry practice

leader, North America,

the average number

of weather-related

catastrophe events that hit

or exceeded $1 billion has

jumped from 8.5 to 20 in

the last five years and hit 28 in 2023.

“As part of our Chubb Climate+ offering, we

have a resilience-focused risk engineering team that

works with our insureds to help them model out

their critical infrastructure, their critical locations

and look at potential climate change scenarios for

those locations, both current and future looking,”

McMullin said. “They provide sound physical risk

engineering consultation services to these insureds,

with recommendations to harden their buildings, to

make their organization more resilient.”

It’s a global endeavor, with established leadership

in North America, the United Kingdom, and other

parts of the world, said Maria Guercio, Chubb

Climate+ senior vice president, climate tech industry

practice leader, North America.

Chubb is focused on supporting emerging

technologies such as battery innovation and carbon

capture, she said. It underwrites for thermal

runaway in lithium-ion batteries, highly combustible

hydrogen gas made from electrolyzers and direct air

capture equipment.

“Chubb is committed to this space, and we are

determined to find viable solutions to help our

insureds’ scale and commercialization,” Guercio said.

“We’re tackling this with in-depth knowledge. If we

don’t have knowledge on a specific subject, we go

out and seek it.”

Hub International Ltd. also has been increasing

its focus on climate risk.

It recently launched a high net worth, excess

wildfire program in

California designed to

help wealthy homeowners

secure adequate coverage

in areas with an increased

risk of wildfire frequency

and severity. It’s for

homes with less than $30

million in insured value.

HSB, a Munich Re

company that provides

equipment breakdown

and specialty insurance

and reinsurance coverages

for various customers such as farmers, businesses,

and homeowners, has been developing sensors that

can track the rate of temperature change both inside

and outside of a building.

This proved helpful for at least one business that

had a sensor in place. In this case, an air vent froze

while open, HSB Senior Vice President and Head of

the Treaty Division Jeff O’Shaughnessy said. “Cold air

was able to get into the mechanical room, and it froze

pipes. It would have burst them.”

But HSB was able to use the sensor it had put in

place to track the rate of change and saw what was

coming.

According to O’Shaughnessy, HSB told the

business owner: “Unless you get there in two hours,

you’re going to have a freezing, bursting condition.”

“They got the alert, they went down, they shut it,

they wrapped some of the pipes, and they avoided a

loss,” he said.

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PARAMETRIC PARADISE

Mangrove forests,

such as this in Florida’s Everglades National

Park, and other natural resources that offer

flood protection are increasingly considered for

parametric insurance coverage.

Parametric Insurance Contracts

May Apply to Tougher Risks

Parametric insurance contracts, which offer objective “trigger events” and

quicker payouts to those who need relief after a catastrophe, are gaining

traction in the market.

by William Borden

arametric insurance contracts, which gained

traction in developing nations to protect

against natural disasters and weather risks, are

now finding greater acceptance in a broader range

of insurance markets, including cybersecurity, and

covering risks in areas where traditional indemnity

coverage is difficult to obtain.

The flexibility of the coverage is being applied

to risks to protect not only technology, security

failures and such natural resources as coral reefs

and mangrove trees that serve as protection against

storms, but also against hazards in developing

nations or in areas that are vulnerable to natural

catastrophes, such as Florida for hurricanes and

California for earthquakes.

“We’re addressing a problem and we’re providing a

William Borden

is managing editor. He can be reached at

william.

borden@ambest.com.

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solution,” said Daniel Vetter, head of North America

at Descartes. He noted governments are typically

buyers of these contracts to address specific needs,

such as New York City buying a parametric flood

contract for low-income areas for flood insurance.

From a public policy point of view, many state

insurance commissioners are interested in the use

of parametric contracts—what they can cover and

what they do not cover—as well as how they can

complement traditional insurance, Vetter said.

Private enterprises see the contracts as an option.

“We’re seeing a lot of large corporates, especially

those with real estate footprints in the likes of

Florida, Texas or California [natural catastrophe-

prone areas] use parametric insurance programs to

complement what they may insure in the normal

property market,” said Derrick Easton, managing

director, alternative risk transfer solutions, Americas,

at WTW.

Parametric Insurance

mailto:william.borden@ambest.com

Speed and Flexibility Add Appeal

Parametric risks help insurers transfer some of

their risks in an alternative way by covering a pre-

defined event under a contract. The payout occurs

if the parameters are met or exceeded based on

data from a third-party index, which can be tied

to rainfall, heat, earthquake severity or another

objective measure. Under the arrangement, the

parametric solution can be designed as a legal

contract or financial derivative based on the needs of

the insured. The rules depend on the host country’s

regulatory and legal framework about insurable

interests and a proof of loss.

While traditional indemnity policies can take

months or longer to satisfy some claims, insurance

experts say the clearly defined triggers can lead to

payments to insureds within a month after the event.

The funds can help relief efforts after natural disasters

or to help farmers—or those who lend to them—in

cases where floods and drought devastate crops.

Jessica Botelho-Young, AM Best associate director

and author of a December 2023 Best’s Special

Report,

Parametric Solutions Offer Risk Management

and Loss Mitigation Opportunities

, says parametric

insurance typically has been used in developing

nations, where governments or nongovernmental

organizations seek protection against natural

disasters and increased climate risks.

“When you have a catastrophe, especially if you’re

a developing country in an emerging market, you

need that money as soon as possible,” said Adil

Imani, director of securities for Extreme Event

Solutions at Verisk. “You have to start rebuilding

infrastructure. You might have to create relief camps

and provide emergency supplies, and there’s all these

costs that you have not accounted for that you need

to pay immediately.”

AM Best’s report by Botelho-Young discussed

how Morocco applied this coverage in the aftermath

of the Sept. 8, 2023, earthquake that killed more

than 2,900 people and led to the displacement

of approximately 500,000 others. Many in the

region struggled with such basic needs as food,

water and shelter; later, those needs evolved into

health care, sanitation, education and psychological

support. Three years before the disaster, Morocco’s

government introduced the national Catastrophic

Event Coverage Scheme, which aimed to protect

against natural and human-made disasters.

“You can’t have a parametric product without a

“One thing to think about when

contemplating the use of new

debt as a capital source after a

significant event is, even if you

are able to get favorable terms

before that event, it’s unlikely

you can get those same terms

after the event.”

Cole Mayer

Aon plc

trigger and the trigger has got to be as objective as

possible,” said Botelho-Young. The contracts can be

“bespoke” when it comes to these trigger events and

how payments can be arranged, she said.

Catastrophic coverage for the earthquake was

established by setting aside between 1.5% and 8%

of insurance premiums for property, motor liability

and personal liability insurance contracts. The

second portion of the program provided coverage

to the uninsured through the Solidarity Fund for

Catastrophic Events—Fonds de Solidarité Contre les

Événements Catastrophiques (FSEC)—to address

the disaster coverage gap.

The Morocco earthquake was declared a catastrophic

event on Oct. 19, which opened the way for

policyholders to make insurance claims and activated

the Solidarity Fund to compensate those without

insurance. The parametric insurance pool is composed

of global reinsurers, with limited participation by

Morocco’s Société Centrale de Réassurance.

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Industry experts pointed to Mexico, Jamaica and

other nations using parametric coverage for some

risks. These policies are helpful for governments

that might face unfavorable terms from the capital

markets if they had to borrow quickly to address

disaster relief.

“One thing to think about when contemplating

the use of new debt as a capital source after a

significant event is, even if you are able to get

favorable terms before that event, it’s unlikely you

can get those same terms after the event,” Cole

Mayer, Aon plc’s leader of worldwide parametric

initiatives, said. “Depending on the size and

financial strength of your organization, the debt

markets will likely factor in the increased risk

associated with the fact that you have just been

severely impacted.”

Protecting Natural Resources

Beyond humanitarian relief, parametric

solutions are seen as a vehicle to mitigate losses

of natural resources after a catastrophic event.

Property catastrophe writers have a vested interest

in supporting biodiversity and environmental

Rapid Growth Highlights the Value of Parametric Insurance

arametric insurers create contracts for those

risks that the traditional property market “may

struggle with while also providing broader coverage

that protects more of an insured’s loss,” said Derrick

Easton, managing director, alternative risk transfer

solutions, Americas, WTW.

Parametric insurance offers insureds more

objectivity, simplicity, transparency and certainty

of claims settlement and can support traditional

indemnity products, industry experts say. Daniel

Vetter, head of North America at Descartes, said

the quick settlement of claims tends to make these

contracts “inflation neutral” since a lengthy claims

process can lead to escalating costs of materials and

labor.

While these contracts have been around since

the 1990s, the hardening reinsurance market and

expansion to protect against climate change and

cyberattacks are among the factors to drive growth

in the category, which Allied Market Research

projects to reach $29.3 billion by 2031, an increase

from $11.7 billion in 2021.

Cole Mayer, Aon plc’s leader of worldwide

parametric initiatives, said that by utilizing an index

or parameter to trigger coverage, as opposed to the

traditional indemnity approach, “we can address

difficult-to-insure exposures because often that index

value is much more reliably and easily modeled,

which allows the risk capital behind the transactions

to be much more comfortable with the risk.”

“In addition to covering these exposures that

are traditionally difficult to insure, the parametric

approach can also open up access to capital that

wouldn’t otherwise deploy it on a traditional basis,”

Mayer said.

Industry experts say writers of parametric

contracts need to incorporate feedback about the

insured’s needs, assess traditional coverage and

examine data to structure the deals to accommodate

the risks and what triggers will be used to determine

the payout. The downside of these contracts

is largely around basis risk, in which there is a

mismatch between the value of the coverage and the

property being covered.

“If you look at some of the parametric deals

that have been placed, there is always a reinsurance

broker who’s there as that intermediary supporting

the policyholders as well,” said Jessica Botelho-

Young, AM Best associate director and author of a

December 2023 Best’s Special Report,

Parametric

Solutions Offer Risk Management and Loss Mitigation

Opportunities

“Generally speaking, we need three things to

structure a parametric cover: an independent,

reliable, third-party data provider who reports

data that is well correlated with the risk; historical

data; and a robust modeling approach to quantify

the risk and market appetite to take the risk,”

Mayer said. “That’s the recipe required to

structure a parametric cover. Given the prevalence

of data now available, we can use a variety of

independent third-party indices as long as we

can satisfy those other two requirements, and

when structured correctly, parametric can solve

for exposures that traditional indemnity covers

cannot address.”

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Parametric Insurance

“When you have a catastrophe,

especially if you’re a developing

country in an emerging market,

you need that money as soon as

possible.”

Adil Imani

Verisk

protection to help reduce damage from natural

catastrophes. A payment release can be triggered

when hurricane speeds reach a certain level, for

example, rather than physical damage, allowing

policyholders to repair natural protections against

storms rather than waiting for damage assessments

by an insurer, insurance experts say.

AM Best’s report on parametric solutions detailed

how Mexico’s Quintano Roo reef was protected

under this type of coverage with a trigger tied to

hurricane wind speeds rather than in response

to physical damage. Hawaii’s coral reefs are now

covered under these contracts and additional plans

are in the works to protect reefs in Southeast Asia

and the Pacific. The Nature Conservancy has

identified several locations in the Bahamas, Florida

and Mexico as potential sites for mangrove insurance

pilot projects, the report said.

Parametric Plans May Offer Quicker Resolution After a Cyber Crisis

reater connectivity among smartphones,

computers, transportation vehicles, fitness apps,

medical devices, business supply chains and other

assorted gadgets can make data gathering easy. The

downside is that each connection point creates a

new security vulnerability for networks and data to

be compromised.

Insurance experts suggest parametric contracts—

which use a third party to designate what could

trigger a claim—may be an ideal coverage for

cybersecurity issues, since these issues typically

demand a fast response to contain any potential

damage to computer networks and to resume

business operations. The clear triggers and faster

payouts can aid in the response to cyber issues.

Cloud computing outages, data breaches and

ransomware are some of the issues confronting

organizations that need to protect customer

information, their own intellectual property,

strategic plans and other nonpublic information that

can affect an organization’s value. Also, the potential

for fines tied to privacy regulations from data

breaches has elevated the need for protection.

“This is an emerging line of business for

parametric,” said Derrick Easton, managing director,

alternative risk transfer solutions, WTW.

Cole Mayer, Aon plc’s leader of worldwide

parametric initiatives, agreed, describing it as a “new

frontier” in coverage for parametric contracts, which

have largely been used to cover natural disasters and

for crops. “This is something that’s very high on our

radar [and] on our clients’ radar as well,” Mayer said.

Recent cyber catastrophe bond offerings are

showing signs that the market is getting more

comfortable taking on cybersecurity risks, industry

observers say.

However, pricing of cyberrisks is a bit more

difficult, given the lack of historical data that has

been gathered, compared to decades of weather data

gathered worldwide.

“As with any new risk, there will be challenges

early on in pricing cyber bonds, be it on a

parametric or an indemnity basis. But as we saw

with hurricane modeling 30 years ago, it’s usually

just a matter of time,” said Adil Imani, director of

securities for Extreme Event Solutions at Verisk.

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Contents

Insurers See

Generative AI,

Climate and Cyber

as Key Risks