MARKET NEWS, DATA AND INSIGHT ALL DAY, EVERY DAY

ISSUE 4,800

MONDAY 6 MARCH 2017

Focus: Emerging risksCovering the emerging professional classes

p2 p3

p4-7

Brokers bump up margin despite soft market

P&I clubs face ‘testing’ period

insurance industry. Visit www.insuranceday.com/mergers-and-acquisitions

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NEWS www.insuranceday.com | Monday 6 March 20172

Brokers bump up margin despite soft marketExpense control remains key in low growth environment

Graham VillageGlobal markets editor

Margin improvement and shareholder reward con-tinue to be the main areas of focus for the leading

quoted broking groups and last year saw the sector make progress on both fronts despite the difficult trading environment.

But the biggest development of the year was the combination of Willis and Towers Watson in a deal valued at $18bn, which was completed in January but has had a fairly bumpy first year.

The creation of Willis Towers Watson puts the combined operation in the same bracket as rivals Aon and Marsh & Mc-Lennan Companies (MMC) in terms of broad capability at a global level span-ning broking and consulting activities.

Over time, Willis Towers Watson ex-pects to generate incremental value for shareholders of $4.7bn but the first year proved a challenge. In reaction to weak organic growth in most areas, Willis Towers Watson has recently simplified its operating and reporting structure, appointed some new heads of division and clarified responsibilities between divisional and geographic leaders.

Willis Towers Watson recorded net profit of $312m last year, down from $373m in 2015.

This year started with news of a surprising corporate move by Aon,

which has decided to offload the ben-efits administration and human re-source business process outsourcing operation it acquired when taking over Hewitt in 2010.

Aon has agreed to sell the operation to Blackstone for up to $4.8bn and ex-pects to use the net proceeds of about $3bn in cash to make selected acquisi-tions in high-growth segments and to increase share repurchases. The dispos-al should orient Aon further towards higher-margin broking business at the expense of consulting and HR activities.

Brokers like the synergies they gain from consulting operations but strug-gle to obtain a high margin from them. Aon’s operating margins were 21.2% for broking and 13.3% for HR, while at MMC margins were 24.5% for broking and 18.1% for consulting, transacted through Mercer and Oliver Wyman.

Fundamentals for the broking sector overall generally moved in the right di-

rection as firms managed to keep expens-es under control, helped by currency conversion benefits, while maintaining underlying growth around the 3% mark. The year closed in good style with even stronger growth rates for several firms.

The outlook is for more of the same, with no dramatic change in under lying conditions expected this year. Rating agency Fitch said organic growth would be a struggle as most commercial lines and reinsurance business would be subject to flat or declining rates, but “revenues from diverse product and geographic platforms including cy-ber risk insurance benefits consulting should help offset these headwinds”.

Aon acquired cyber specialist Stroz Friedberg last year.

And brokers will be set to benefit should any general economic upturn from policies introduced by president Trump materialise. Changes to the rate of corporate tax, suggested by the new administration, would provide a bene-fit for MMC and Arthur J Gallagher but less so for Aon, now based in the UK, and Willis Towers Watson, based in the Irish Republic at a group level.

Apart from the Willis Towers Wat-son combination, last year saw no me-ga-deals in the broking sector although the market remained highly active at a lower level. In particular, private equity interests see investment in brokers as a good way to tap into the profitability of the wider insurance sector.

Among the deals involving private equity firms last year, Broadstreet Part-ners, backed by Ontario Teaches’ Pen-sion Fund and Century Capital, acquired Sterling & Sterling; Prime Risk Partners, backed by Thomas H Lee, bought Old National; and Alliant, backed by Stone Point, bought Mesirow.

Companies House tomorrow brings full detail on the performance of the quoted broking firms in 2016.

Table: Major quoted brokers*, key figures

2015 2016 Change (%)

Brokerage ($m) 24,322 24,939 2.5

Revenue total ($m) 37,162 41,643 12.1

Expenses total ($m) 31,602 35,623 12.7

Expenses as % of revenue 85.0 85.5 +0.5 pts

Net profit ($m) 4078 4,273 4.8

Net profit as % of revenue 11.0 10.3 (0.7) pts

Shareholders’ funds ($m) 21,082 28,061 33.1

*Aon, MMC, Willis Towers Watson, Arthur J Gallagher, Brown & Brown and JLT

Willis Towers Watson: the merger of Willis and Towers Watson last year was the biggest news in

the broking sector in 2016

NEWSwww.insuranceday.com | Monday 6 March 2017 3

P&I clubs face ‘testing period’Low investment yields and competitive pressures to weigh on free reserves, rating agency warns

Michael FaulknerEditor

Marine protection and indemnity (P&I) clubs have been warned they face a

challenging period ahead as low interest rates and continued rat-ing pressure weigh on their finan-cial performance.

AM Best said the sector, which has seen its financial perfor-mance improve in recent years, faced a “testing period” over the next two years. 

The rating agency warned the sector’s free reserves could be

hit unless it achieves a “near- breakeven underwriting result”, which it said would be “difficult to achieve” given premium rates were under competitive pressure and a “challenging” claims envi-ronment, characterised by volatile loss experience and inflationary pressure on the cost of claims.

Historically, the clubs have been able to rely on investment income to subsidise weak under-writing results and so enhance their free reserves. But this strate-gy has been challenged by chang-ing regulation and an investment environment characterised by low interest rates and volatile eq-uity markets.

Over the past five years or so, most clubs have sought to

achieve breakeven underwriting results by pushing through rate increases, introducing minimum deductibles and increasing de-ductible levels.

Overall, the International Group of P&I clubs reported an underwriting surplus for the 2015/16 financial year with the combined ratio, based on the combined accounts of the 13 principal clubs of the Inter-national Group, falling to 89% from 97% in the previous year, according to AM Best’s analysis.

S&P recently said it expects the combined ratio to remain below 103% in 2017/18.

Clubs have benefitted from low levels of both large and smaller losses in recent years.

However, claims costs are ris-ing and large losses are vola-tile, with the potential to have a marked impact on the year-on-year performance. 

Losses have been influenced by lower levels of shipping activ-ity. But when the global economy begins to recover, there could be a corresponding increase in the frequency of loss events, AM Best said. As a result, pricing decisions made now “should reflect the pros-pect of higher claims frequency, as well as claims inflation”. 

But the rating agency said cur-rent levels of capitalisation would allow clubs to weather the these challenges. “Consequently, down-ward rating actions are not antici-pated in the near term,” it said.

Dale syndicate reports profit in freshman yearLloyd’s insurer Dale Underwriting Partners has achieved a modest underwriting profit for syndicate 1729’s first year of account, writes Michael Faulkner.

The Asta-managed syndicate, which was a new entrant into the Lloyd’s market for the 2014 year of account, writing a casualty- focused booked of business, has re-ported a profit of 0.6% on its initial

stamp capacity of £75m ($91.8m).The syndicate, led by former

Amlin senior executive Duncan Dale, wrote £45m of premium in 2014, of which 43% was new busi-ness to Lloyd’s. Its capital is sup-plied by a mixture of corporate and private investors, with ProAs-surance Corporation notable as the lead capital provider.

Dale said: “We are very proud

Pool Re increases reinsurance limit to £2bn

UK terrorism reinsurer Pool Re has increased the limit of its own reinsurance programme to £2bn ($2.4bn) at its latest placement, writes Scott Vincent.

The two-layer programme has again been brokered by Guy Car-penter, which placed Pool Re’s £1.95bn reinsurance programme last year.

Pool Re said the programme has been placed with a secure panel of reinsurers, led by Munich Re, with members of Pool Re among those on the panel.

The programme mirrors the cover currently provided to Pool Re members and includes chem-ical, biological, radioactive and nuclear terrorism risk.

Steve Coates, chief underwrit-ing officer at Pool Re, said: “This increased retrocession limit is not only evidence of Pool Re’s strate-gy to protect its stakeholders, but also to allow the market to write as much UK terrorism risk as they are able.

“We will continue to extend our protection in the future, with-in the boundaries of cost and counterparty security.”

Pool Re was founded in 1993 as a government-backed terrorism reinsurance backstop, and has embarked on a major modernisa-tion programme since the arrival of Julian Enoizi as chief executive in 2013.

The purchase of reinsurance has been part of this moderni-sation, with the goal of further distancing the taxpayer from potential liability and offer-ing a mechanism for the re- engagement of the global market in UK terrorism risk.

Pool Re has also worked to en-hance the industry’s terrorism expertise and risk control capabil-ities through the launch of a risk analysis and research unit.

In partnership with Cranfield University and Guy Carpenter, Pool Re has also been working on the development of the UK’s first terrorism risk model to include the potential impact of a chemi-cal, biological, radiological or nu-clear attack.

The company has also been working with Cambridge Uni-versity to assess how its cover-age could be revised to remove the cyber exclusion from terror-ism policies.

£45mPremium written by syndicate 1729 in the 2014 year of account

of this result considering the mar-ket conditions, our low volume of premium and the usual expense strain of a new business.”

Asta chief executive, Julian Tighe, added: “This is a good re-sult for a young business in a challenging market and exempli-fies how prudent management and sensible underwriting can achieve a positive outcome.”

FOCUS/ EMERGING RISKS www.insuranceday.com | Monday 6 March 20174 www.insuranceday.com | Monday 6 March 2017 5

Brexit and the reconfiguration of trade credit riskThe trade credit and security implications of Brexit will expose corporate risk managers and their insurers to significant connected risks

Suki BasiRussell Group

There are many challeng-es and risks facing global corporates and their insur-ers in today’s fracturing

geo-political environment. Brexit is a potential short- and medium-term disrupter. Increasing immigration is leading for calls to introduce stringent border controls. Political risk, war and cyber terror are also major boardroom concerns.

In her much-anticipated speech in January outlining the potential framework for Brexit, which clar-ified the UK government’s position on the issue, UK prime minister, Theresa May, said as a priority, she would pursue a bold and ambitious free trade agreement with the EU. The prime minister was clear, say-ing: “What I am proposing cannot mean membership of the single market. Instead we seek the great-est possible access to it through a new, comprehensive, bold and am-bitious free trade agreement.”

May went on to say: “We want to get out into the wider world, to trade and do business all around the globe. Countries including Chi-na, Brazil and the Gulf states have already expressed their interest in striking trade deals with us. We have started discussions on future trade ties with countries like Aus-tralia, New Zealand and India.”

In practice, of course, this will be easier said than done and short-term volatility in financial mar-kets and beyond will present a challenge as well as a very big op-portunity for the trade credit rein-surance market.

This market helps to provide a measure of corporate stability in an increasingly volatile and connected global trading environment. It is fair to say trade credit finance oils the wheels of the global economy as it navigates to an increasingly un-certain destination.

Ongoing political unrest in parts of the world and the effects of sanc-tions on trade are risks the credit insurance market has identified as potential threats to positive trade development. China and Brazil are under-performing. Political unrest, especially in the Middle East, and the refugee crisis in Europe make it a challenge to make predictions about the future of trade and industry.

In terms of Brexit, our discussions with members of the International Credit and Surety Association (ICISA) have made it clear Brexit is a huge unknown with the potential to dam-age market confidence. Before the UK referendum vote the trade credit market had hoped Brexit would not happen because it believes it would be detrimental to free trade. What matters to credit insurers is how easy it will be to trade.

Primary risk The Brexit risk is primarily with the exporters. Let us imagine a very

large exporter – Company X – in the FTSE 100, for example. With Brexit and Donald Trump winning the US presidency there is a realis-tic scenario in which trade freezes because suppliers are nervous that Company X will not be selling as much. That means credit insurers will likely bring the limits down, with increased risk for Company X and its suppliers. The ability of Company X to trade could be im-paired even though it is ostensibly a well-run, healthy company.

The continuing fallout of Brexit and ensuing market volatility is a good illustration of why organisa-tions buy credit insurance. Yes, it is insurance to cover the exposures that businesses have but that is only a small part of it. A greater part of the reason for buying credit insur-ance is the forward-looking ability that credit insurance provides.

The other much-remarked on aspect of Theresa May’s Brexit speech was the section on co-op-eration in the fight against ter-rorism. As the prime minister pointed out: “All of us in Europe face the challenge of cross-border crime, a deadly terrorist threat, and the dangers presented by hos-tile states. With the threats to our common security becoming more serious, our response cannot be to co-operate with one another less, but to work together more.”

The costs of death and damage caused by terrorism can be crip-plingly expensive. Loss of life and infrastructure because of the Sep-

tember 11, 2001 terror attacks cost upwards of $55bn in New York alone, while increased security efforts, decreased economic activ-ity and other costs amounted to more than $3.3trn, according to the Global Terrorism Index report from the Institute for Economics and Peace. 

This demonstrates quite clearly that political risks reach far wider than the terrorists could hope for by impacting business and caus-ing disruption to everyday life as well as affecting the economy. Risk managers and insurers are taking note as they did in the wake of the Charlie Hebdo terror attack in Jan-uary 2015.

In her Brexit speech, Theresa May’s vision of a future relation-ship with the EU includes practical arrangements on matters of law enforcement and the sharing of in-telligence material with EU allies. I would certainly echo those views in terms of practical intelligence-shar-ing arrangements for risk manag-ers and (re)insurers.

Data sharing and greater anal-ysis of political risks will also in-creasingly come into play when risk managers and underwriters assess their loss exposures and the poten-tial impact on their specialty class risks, whether they are in property, marine, aviation or simply exposed to business interruption supply chain risks. n

Suki Basi is chief executive of Russell Group

Unmanned sailing will reshape maritime risk profileThe advent of autonomous shipping will have a significant impact on how marine risks are allocated and underwritten

Michael BiltooKennedys

It will not be long before fu-ture generations laugh at strange times when oddly shaped vessels needed crew

on board.  Autonomous shipping is not just a fanciful idea that could happen in the future; it is being de-veloped now and if projections are right, we will see remotely operated local vessels in the next few years and fully autonomous ocean-going vessels by 2035.

Global shipping will be revolu-tionised on a scale not seen since containerisation, with a significant impact on marine insurance mar-kets and the allocation of risk. How-ever, its implementation comes with multiple technological and regulatory challenges.

It is envisaged that there will be different levels of autonomy on ves-sels – but the ultimate aim is to have crewless vessels controlled onshore by one person (who would be capa-ble of controlling multiple vessels at the same time) or vessels requir-ing no human interaction at all. Recognising seven different levels of autonomous sailing, in July 2016 Lloyd’s Register launched guidance setting out autonomy levels (ALs). There are seven different ALs, from AL 0 (manual with no autonomous function) to AL 6 (fully autonomous – unsupervised operation) with dif-fering levels of human interaction in between.

Leading the way in the devel-opment of autonomous ships is undoubtedly Rolls-Royce, which-projects that by 2020 we will see remotely operated local vessels. That might even come sooner as the UK’s Automated Ships Ltd and Norway’s Kongsberg Maritime build the HRÖNN, which they say could enter service as the world’s first full-size unmanned ship as early as 2018.

Rolls-Royce predicts by 2025 there will be remote-controlled, unmanned coastal vessels and, by 2030, they will be capable of sailing the ocean. This will all lead up to 2035 when we might see fully au-tonomous, unmanned ocean-going ships. To meet these projections, there have been a number of initia-

tives set up worldwide, such as the Advance Autonomous Waterborne Applications (AAWA) Initiative, led by Rolls-Royce, or the UK’s Mari-time Autonomous Systems Regula-tory Working Group (MASRWG).

The drive towards autonomous shipping is, unsurprisingly, mainly financial. Moving towards greater autonomy and unmanned shipping will cut transport costs – with sav-ings estimated to be between 22% and 44%. With little or no crew on board, there are lower staff costs and vessels will be more efficient. Certain vessel features, such as the deck house or crew quarters will either not be needed or significant-ly reduced. Ship design can then change so vessels are lighter, sleek-er and more fuel-efficient. Vessels of the future will look very differ-ent from those being built today.

Safety concernsA vessel without a crew will obvi-ously come with a number of safe-ty concerns. However according to a report published by Allianz in 2012, between 75% to 96% of ma-rine accidents can be attributed to human error, with fatigue often cited. It is also suggested without a crew on board, a host of solutions to save or secure a vessel or cargo in peril become available because crew safety will no longer be at the forefront of decision-making.

Moreover it has been report-ed there is a growing shortage of people with maritime skills who have less inclination to spend time away from home. Autonomous op-erations will mean maritime jobs in operation centres on land. This new type of “sailor” may well be-gin to attract more people to the maritime industry requiring new training, and opening up a new in-dustry in itself.

Never far from a maritime dis-cussion is piracy. It is suggested operating vessels without crews could make sailing pirate-infested waters less risky. The pirates will no longer have their most valuable asset in negoti-ations – the crew. More-over, the new designs of uncrewed vessels could be made so that they are difficult to board in the high seas and even if pirates were able to board, the vessels could be automat-

ically disabled (with no concern of the threat to the crew) giving naval authorities time to reach the vessel and take back control.

The main technological obstacle has been communication between ship and shore because of the sheer size of data to be transferred. But a new generation of communication satellites, enabling affordable band-width, should get over this hurdle. This data will be needed to monitor the vessel’s performance and condi-tion of the cargo, and for informa-tion from shore to ship.

Crewless vessels will not, how-ever, have anyone to deal with

problems that simply cannot be handled by the systems on board, such as some engine breakdowns. One idea to combat this will be to dispatch engineers to port, although that does not cater for problems re-quiring immediate attention.

Cyber riskPerhaps the greatest concern with increased autonomy is the cyber attack, and specifically the danger that the vessel’s controls (wheth-er automated or controlled from shore) could be hacked. Cyber se-curity continues to grab headlines, such as South Korea’s claim in April

2016 that North Korea disrupted fishing vessel operations by inter-fering with GPS signals. Recently, the Queen opened the National Cy-ber Security Centre, designed to im-prove Britain’s resilience to attacks. Rolls-Royce recognises this risk must be addressed but stringent criteria will no doubt be demanded before full autonomy is allowed.

It is regulation that will be the biggest obstacle. The concept of autonomous shipping means many regulations will no doubt need re-writing. Safety is one such exam-ple.  Shipping is geared towards the safety of the crew, vessel and cargo – which interact with one anoth-er. A vessel must be safe to ensure the safety of the crew and cargo. The cargo must be safe to ensure the safety of the crew and vessel. And for the vessel and cargo to be safe, there must be sufficient crew on board (eg, art 94(4) (b) of the UN Convention on the Law of the Sea, or article III, rule 1(b) of the Hague-Visby Rules). Regulations

will have to react to the new type of crewless vessel.  

Another example is the Collision Regulations, which require, among other things, good seamanship and maintaining a lookout by sight and hearing. Will autonomous ves-sels meet that criteria? Will such vessels, that will make navigation decisions based on complex algo-rithms,   be capable of good sea-manship and making decisions “outside the box”, especially con-sidering the unpredictability of the sea, or will the computer say “no” when faced with a problem not in their algorithm?

The drive for automated vessels is firmly under way, pulled along by technological advancement. Regulation, however, will be the sobering anchor to this revolution in shipping. n

 Michael Biltoo is a senior associate at Kennedys

Autonomous ship: how container vessels of the future may look

75% to 96%

Percentage of marine accidents that can be attributed to human error, according to

Allianz report from 2012

Global shipping will be revolutionised on a scale not seen since containerisation, with a significant impact on marine insurance markets and the allocation of risk

22% to 44%

Estimated savings in transport costs that

autonomous shipping could bring

© Rolls-Royce

FOCUS/EMERGING RISKS www.insuranceday.com | Monday 6 March 20176 www.insuranceday.com | Monday 6 March 2017 7

Covering emerging professional classes Miscellaneous professional risks is a growing area, but it requires careful underwriting

Ben Goodier and Claire RevellRPC

Several years ago, “miscella-neous risks” was the name given to the small group of firms that did not fit into a

“traditional” profession but required professional indemnity insurance. However, the word miscellaneous has been replaced by “specialist” or “emerging” as the class of business grows and becomes ever more pop-ular with insurers.

Miscellaneous professional in-demnity – as the name suggests – is probably the widest and most diverse class of business that most insurers will offer, ranging from archaeologists to zoologists and all the weird and wonderful in between. In the recent past, at RPC alone, we have defended the following insured clients, none of whom are traditionally considered to be targets for claims for profes-sional negligence: agronomists; surety bond providers; graphic designers; telemarketing compa-

nies; wedding photographers; Pub-watch; exhibition organisers; trade unions; fluvial geomorphologists; and undertakers.

In addition, in these increasingly litigious times, more claims are be-ing made against professionals that were once exempt from litigation, such as independent expert wit-nesses and mediators.

It is easy to see how each pro-fession’s needs can vary wildly, as well as the industries and legisla-tive spheres in which they operate. Therefore, while there are trends within miscellaneous professional indemnity as a class, it is impossi-ble to be an expert in each individ-ual profession.

The industry’s focus in recent months has therefore been on understanding the client, their industry and their needs. Many pol-icyholders will require a bespoke product as most existing products on the market simply do not fit the demands of such individual busi-nesses. Each set of individual cir-cumstances must be considered in detail, and there may be no easy answer. Those who have purchased off the shelf products may be dis-

appointed when the time comes to present a claim.

Many clients in this sector may be green as far as purchasing in-surance goes. They might not know what insurance they need or even why they need it.  As a result, both the broker and the insurer have key roles to play, which leads to added responsibility and risk, but presents opportunities to the bro-ker or insurer who is used to going the extra mile for their client. The businesses do not fit into tradi-tional professions, so they are not governed by a regulatory body and they tend not to benefit from mini-mum terms of insurance.

This can leave businesses more open to risks from fraud; the busi-nesses may be passion projects run by those who are passionate about what they do but less so about the day-to-day running of the business. Who keeps an eye on the manage-ment of the company? Who deals with their accounts – and are they qualified to do so? Do they know what to do when a claim comes in?

Further, often the professions are evolving far more quickly than that of traditional ones. A client acting

as an interior designer now could move into project management in the next few months. What are their plans for the next year? Do they know they should tell their broker if they do change their plans? Will their policy cover them if they move in to new areas?

The rise of multi-disciplinary practices also brings new challeng-es for those placing risks. Picture the accountant who also acts as an independent financial adviser: do the minimum terms for accoun-tants apply? On the other hand, what about the regulatory risk of selling insurance to a client that does not actually need it?

Taking the above into account, it can be difficult to establish precise-ly what a client actually does and, as a consequence, what their in-surance needs are. This can create significant difficulties when a claim comes in.   Key problems posed in considering claims include estab-lishing the professional standard against which each of these busi-nesses should be judged? In a nar-row field, who can provide expert evidence on the reasonable skill and care of a fluvial geomorpholo-

gist?  Further, how do you quantify loss when an undertaker acts negli-gently and loses a body?

A two-minute Google search should help the unwary client to source professional indemni-ty products from as little as £6 ($7.30) per month. This can create quite the headache both for the broker and the policyholder. The products are rarely bespoke and so there is a real risk they will fail to meet the frequently niche needs of the policyholder. Many policy-holders will choose the product based on the initial outlay and worry about the level of cover lat-er but this can often end in tears – such as the recruitment consul-tant whose policy only covered her for claims arising from her own employees and not those she had placed elsewhere.

Insureds, insurers and brokers need to satisfy themselves that the policy fits the brief in every respect and not just the initial cost.

Miscellaneous risks is a popular area for insurers, with many insur-ers looking to expand their books and capitalise on a growing market. Insurers consider this a relatively

Navigating the claims challenges of the interconnected world

When the insurance market looks at the issue of emerg-ing risks, the most

pressing for the market will be those that relate to the prolifera-tion of connected devices in our daily lives. This “internet of things” will complicate both accountability and attribution of failure when the complexity of this mesh of services results in an unpredictable, unfor-tunate outcome. 

For example, where a car is con-nected to other cars, the road, a smart city and the wearable device of the driver (indicating their health),

as well as to weather satellites, GPS satellites and so on, and there is a mass accident, unpicking which spe-cific system it was that caused the incident, and who is therefore liable, could prove a challenge.

The second set of challenges arise from accountability and attribution of responsibility where technology, rather than people, make decisions.  For example, the rise in the use of artificial intelligence (AI) is a case in point and highlights the issues that markets need to address over who is to blame when things go wrong. AI is, in many ways, a living algorithm. What happens when it makes a decision or choice it has not been programmed to do?

An example could well be if we have an AI system in a driverless vehicle that has been designed to avoid injuring living beings. The

car swerves to avoid two dogs cross-ing the road but in doing so it hits a six-year-old child on the pavement. Who would be deemed responsible for the incident and held liable for the consequences of the vehicle’s decision and outcome?

Is it down to the software devel-opers who have programmed the AI system? It looks highly likely as AI becomes ever more ingrained in our lives and systems that software developers are likely to find they are working in a new environment when it comes to liability.

Assigning blameFor insurers, the question that needs answering will be who pays the claim: how do you decide who is to blame and who should therefore shoulder the liability?

The third set of challenges arises

Self-driving Miss Daisy

Imagine, if you will, a scene from a classic American road movie. Our hero sits in his Ford Mustang cruising a high-

way that stretches to the desert horizon. Ahead of him, a weath-er-beaten roadside diner, a gas sta-tion, a coffee shop – all the mythic paraphernalia of the US road; all of it now under threat from the rise of the autonomous vehicle.

A drive up the A1 might not con-jure such powerfully iconic imagery, but the issue in the UK is the same. This week, the government’s Vehi-cle Technology and Aviation Bill has its second reading in the House of Commons. The bill, combined with a recently concluded consultation on autonomous vehicle technologies, aims to pave the way for the intro-duction of these new technologies, securing Britain’s place in the first wave of implementation. Whatever the results of this consultation, its implications will not be felt fully for some years – arguably not until the price of autonomous and semi-au-tonomous vehicles becomes afford-able for the general public – but the repercussions could be huge. Jobs, infrastructure, road design, driver behaviour and the insurance indus-try itself are all faced with the pros-pect of seismic change.

Motor insurance is one of only two major compulsory classes of in-surance in the UK, the other being employers’ liability. For some insur-ers, motor remains the backbone of their book. Even Warren Buffett has gone on record as saying self- driving vehicles could be “negative for auto insurers”. The commonly held view is, with the rise of ma-chine-driven vehicles and the de-cline of human involvement in the process, accident numbers will fall. Granted, even a minor shunt for a sophisticated Tesla vehicle could result in expensive damage to cam-eras and other sensors, but it will become harder to justify high pre-miums.  Young drivers in particular could benefit substantially. Mum and dad will no longer need to buy Junior his or her own car – they will simply use their parents’ vehicle –

and their lack of driving experience ceases to be a major rating issue as the car itself will be doing most of the work.

Heavy impact Claims is one area of an insurer’s operations that will be heavily af-fected. The new breed of intelligent cars such as those produced by Tes-la and Volvo positively bristle with sensors, whose data is recorded and passed to the manufacturer. When an accident takes place, insurers will have access to sufficient data to virtually recreate the collision, possibly even watch it via camera footage or be able to interrogate the onboard computer.

When a Tesla crashed in Florida in May 2016 killing its driver, who was alleged to have been watching a Harry Potter video at the moment of impact, the data from the car painted a precise picture of what had taken place. It was possible to discern that the driver had not braked and his final action had been to set the car’s cruise control at 74mph two minutes before the accident. Tesla’s Model S Sedan has been named as the safest car ever tested by US National Highway Traf-fic Safety Administration while Vol-vo’s vision is that no one should be killed or injured by one of their new models by 2020. Interestingly, Tes-la’s cars already have the ability to drive fully autonomously; the only thing holding them back is the law.

In the UK, the approach adopted by the government is minimalist: we already have compulsory insur-ance for drivers, so let us use the same policy but expand it to cover accidents caused by the vehicle it-self. If it is the driver’s fault, then it’s business as usual; if it is the vehicle’s fault, the insurer is liable directly to the victim – which, interestingly, could include the driver. It’s a neat

low risk area and envisage a low frequency of claims, coupled with relatively few catastrophic losses. It is therefore attractive and poten-tially lucrative.

However, this requires care-ful underwriting by insurers and equally careful selection of the re-sulting product by the broker. In times where brokers’ risks have increased significantly thanks to recent case law, statute and regu-latory review, there are plenty of opportunities for the conscientious broker but beware the risks of dab-bling and give each individual cli-ent careful thought and attention.

Don’t forget: there will be no min-imum terms to save you if you get it wrong.

As this category of insureds can only increase in the coming months and years, we anticipate seeing a corresponding increase in claims. Insurers must consider carefully how they will realistically be able to defend any claim that comes through the door – and brokers should consider very carefully how that claim might come through the door in the first place. n

Ben Goodier is a partner and Claire Revell is a senior associate at RPC

approach, but one that places the onus firmly on the driver. Not wish-ing to see insurance as a barrier to sales, Tesla is exploring the idea of providing insurance with the vehi-cle as a package. Again, this is a neat solution, but it does raise the ques-tion of whether Tesla will continue to accept liability as the car ages, or if it is resold.

Even though fully autonomous vehicles on our roads are some years away, semi-autonomous ve-hicles are packed with artificial in-telligence such as intelligent cruise control and lane control. These fea-tures alone make the possibility of taking one’s hands off the steering wheel quite conceivable. But it is this handover between car and hu-man driver that is fraught with dan-ger. If a car receives inconsistent data from its sensors so sounds an alert for the driver to take control, what happens if that driver is sound asleep? Or will a driver engrossed in a video respond in time to the ping-ping-ping as the car finds itself in a situation that “does not com-pute”? These are the questions leg-islators and insurers must address – and soon.

Businesses will, in all likelihood, be the first to adopt autonomous vehicles in a major way. One can foresee logistics firms having a fleet of self-driving lorries or using “pla-toons” – one human-driven lorry followed closely by a number of autonomous trucks. This will have a huge impact on employment as driving is the number-one job of working class males in the UK. Com-bined with the overall impact of ar-tificial intelligence and robotics, the rise of the autonomous road vehi-cle will transform the employment market for millions of people.

Ultimately, we may be looking at a some kind of hybrid autonomous vehicle – one that drives itself on motorways and larger roads, but reverts to its human driver in more taxing conditions such as city cen-tres. But regardless of whether the human driver plays an active or passive role, the cultural and com-mercial change will be seismic. And as for the road movie, you may have to look under “historical drama” to find it on Netflix. n

Nigel Brook and Mark Hemsted are partners at Clyde & Co

The implications for insurers of autonomous vehicles will be seismic

Nigel Brook and Mark HemstedClyde & Co

from the huge amount of data avail-able to support insurers and the technology being introduced that will enhance the insurers’ ability to collect real-time data and change their approach to underwriting.

The amount of data available does enable underwriters to be more specific in the targeting of policyholders who they deem to be good risks, and can support the development of more innovative, timely products. However, it will also lead to issues around the ex-clusions of certain sectors of soci-ety and with it ethical implications as to how the data has been used.

For example, the growing use of wearable technology also has impli-cations for underwriters. The ability for the monitoring of policyholders on a real-time basis can facilitate the development of new covers.

These three areas of emerging risk also offer an opportunity to those looking to exploit a system. People often look to misuse or subvert technology to their own benefit.  In a complex, intercon-nected risk ecosystem with auto-mated decision-making based on huge amounts of data there will be many opportunities for peo-ple to alter outcomes to their own benefits. Cyber crime may change to being far more subtle, and far more difficult to detect, as you will always have a situation where smart people are looking to adapt systems to benefit themselves.

The challenge may not be those online looking to access the technol-ogy to steal. Instead, you may well have people who will be genuinely looking to work the systems to their personal benefit.

With the advent of speed cam-eras came dashboard systems that would notify the driver when they were approaching a camera. What we may see are systems that will be used to adapt and amend the data being sent from wearable technol-ogy that could reduce premiums. They may even adapt systems whereby they benefit the policy-holder but a neighbour is unwit-tingly paying for it.

The environment is also set to get ever more complex. In the future, there is every likelihood autono-mous cars will be linked to smart roads and they in turn will form links with smart cities.

Such connective systems could give rise to the higher aggregation of risk and a more complex equation when it comes to liability issues.

Insurers may well need to look at

how they calculate their exposure and aggregation management to en-sure they fully understand the risks their products cover.

With these challenges come op-portunities for insurers. Undoubt-edly, the rise in the use of technology will deliver benefits and efficiencies to underwriters and will enhance their ability to understand and price certain risks.

Insurers will need to balance those opportunities with a recogni-tion that these emerging risks will pose questions for the industry. The biggest may well be the ability to identify who has the liability for the actions of machines that have been specifically designed to think and act for themselves. n

Steve Williams is a partner at Moore Stephens

Establishing liability in a complex, interconnected risk ecosystem controlled by automated decision - making will be very challenging

Steve WilliamsMoore Stephens

For some insurers, motor remains the backbone of their book. Even Warren Buffett has gone on record as saying self-driving vehicles could be ‘negative for auto insurers’

Brown & Brown wins $20m in settlement of poaching lawsuit

Settlement ‘unprecedented’ in restricted covenant case, broker’s attorney says

John Shutt, Los AngelesUS correspondent

US broking group Brown & Brown is to receive $20m in the settlement of a 2016 lawsuit against

rival firm AssuredPartners.The Florida-based broker ac-

cused AssuredPartners of poach-ing its employees and some of its customers. Also named in the lawsuit were AssuredPartners’ founders and former Brown & Brown employees Jim Henderson and Tom Riley.

Powell Brown, chief executive

of Brown & Brown, said: “We are satisfied with the settlement in this second litigated case with Assured-Partners and we believe this mat-ter was resolved appropriately within the judicial process.”

Brown & Brown’s attorney Tom Leek said “the amount of the set-tlement payment is unprecedent-ed in a restricted covenant case”.

It marks Brown & Brown’s second settlement of a poaching lawsuit against AssuredPartners, Henderson and Riley following a deal in 2001 that barred Assured-Partners from hiring Brown & Brown employees for 18 months and from soliciting clients for two years. Financial terms of that set-tlement were not disclosed.

Kinetic looks to grow North American binder bookLloyd’s broker Kinetic has ap-pointed Mark Bain to grow its book of North American binding authorities, writes Scott Vincent.

Bain has spent more than 35 years in the London insurance market, during which time he produced and developed a broad

spectrum of property and casual-ty accounts.

Kinetic, founded in 1976, was acquired by investment group Torlea from Hamilton Insurance Group last year. Hamilton had previously acquired it as part of the deal that saw it take over

Sportscover Underwriting in 2014. The broker was previously owned by Sportscover’s parent company, Wild Goose Holdings.

Last month Kinetic appointed Ian Ashworth and Kieron Burrows to develop its portfolio of broker accounts and binding authorities.

Liberty Mutual’s Q4 income falls 65% on motor losses and realised lossesUS property/casualty group Lib-erty Mutual Holding saw its fourth-quarter net earnings drop 65% to $143m, writes John Shutt, Los Angeles.

The insurer said the decline was caused by elevated loss trends in its US motor liability business and a $103m increase in realised in-vestment losses.

Chairman and chief execu-tive David Long attributed the increase in motor losses to the doubling of repair costs for new vehicular safety features.

Results also reflected a $100m charge for prior-year asbestos and environmental losses, $70m in re-structuring costs and a $67m loss on the extinguishment of debt.

For the full year, the Boston- based group’s net income nearly doubled to $1bn from $514m, re-flecting a year-earlier charge of $909m relating to discontinued operations.

Liberty Mutual: the insurer posted Q4 net earnings of $143m as realised investment losses hit $103m

‘The amount of the settlement payment is unprecedented in a restricted covenant case’

Tom Leek Brown & Brown

New York: Lloyd’s broker Kinetic has appointed Mark Bain to drive growth in its North American binder business