With reduced capacity, increasing rates and the coronavirus pandemic, agents and insureds are facing difficult choices in the public entities market.
As social inflation, pressure on pricing, capacity and the coronavirus pandemic turn up the heat on the public entity insurance market, many of the existing troubling trends, such as cyber liability, the growth of technology and the waning economy continue to leave insurance professionals scratching their heads when trying to find solutions for clients.
“Public entities should plan for an evolving landscape in terms of higher rates, shrinking capacity and potentially increased liabilities," says Bradley York, president of OneBeacon Government Risks. “We are truly in a new environment."
During the coronavirus pandemic, cybercrime skyrocketed. A month into the pandemic, the FBI reported that it was receiving between 3,000 and 4,000 cybersecurity complaints each day, a major jump from prior to the pandemic when about 1,000 complaints were received daily.
For public entities, the warning signs about cyber liability risks have been well known for some time. In 2018, cybercriminals infected the city of Atlanta's municipal operations systems with malware and demanded a ransom of approximately $50,000 in bitcoin to restore them.
In May 2019, Baltimore's government computer systems were infected with a new and aggressive ransomware. All servers, with the exception of essential services, were taken offline. In a ransom note, hackers demanded roughly $76,280 in bitcoin in exchange for keys to restore access. Later that year, Baltimore officials voted to transfer $6 million from a fund for parks and public facilities to help pay for the devastating impact of the attack.
“Cyber is on the minds of many in the wake of some national cyber-related headline incidents in larger cities like those in Atlanta and Baltimore and in smaller, less recognized towns, too," says Mark McCrary, president of Glatfelter Public Practice, a division of Glatfelter Program Managers. “Cyber liability and misconduct coverages are emerging as important areas of potential risks for public entities. Agents should look for important coverages that may be lacking and start conversations with clients and prospects."
Additionally, “drones are continuing to evolve and are now considered vital tools in everyday and emergency response situations," he says. “These should be areas of concern for agents because as new needs arise, these coverages are changing, and you'll want to look for potential gaps in coverages on an ongoing basis."
“Ask yourself, does the cyber offering provide both first- and third-party coverage, as well as coverage for extortion?" he adds. “Does an umbrella or excess policy sit over the underlying cyber liability? Does the drone coverage offer property or inland marine coverage for the insured, and what about liability?"
With public entities balancing a myriad of exposures on a limited budget amid often aging infrastructures, many of the cyber challenges they face today are set to be exacerbated by continuing social trends that take more data, systems and information online or into the cloud.
“Data and network security exposures for local governments do not seem to receive the required attention from a risk control or risk financing perspective," York says. “Public entities should more effectively take advantage of risk management resources offered by their carriers and agents, especially those at no additional cost. Too often, a public entity focuses on the premium costs only and doesn't take into account other available value-added services."
Meanwhile, “the restriction in capacity from the large direct writers is making an impact as more accounts come into the excess & surplus market to pick up capacity that was once offered by the standard marketplace," says Harry Tucker, executive vice president, national property practice leaders, AmWINS Group.
“As underwriters are inundated with these new deals and even restructuring renewals placements, companies can be more selective than ever before. If they don't like a deal or the terms presented, they may simply move on to another on their desk," he adds.
However, a larger layered deal presents a risk to the agent, who needs to be aware of the intricacies of the layered deal, including definitions, occurrence, step-down or drop-down, and erosion provisions, explains Darron S. Johnston, vice president, AmWINS Brokerage of Georgia, LLC.
“The importance of addressing areas of concern when it comes to matching up markets so that a shared and layered program reacts the way it should in the event of a loss cannot be overstated," Johnston says. “There are intricacies involved with any risk, so make sure to utilize a wholesale partner that can help you identify and avoid issues when it comes to public entities. If you aren't, the person who'll take your account away probably is."
Throughout 2020, particularly in the wake of heavy coronavirus-related losses, parametric coverages have been gaining traction. While they are not new, “they are a viable option to increase CAT coverage," says Johnson. “They do not work in all scenarios—parametric coverages are currently available for the perils of named storms and earthquakes.
“However, parametric coverage is not simply a bolt-on product to the property program," he adds. “It does not have the same trigger requirements as property programs, making it key to work with brokers that understand the intricacies that must be accounted for in order to create programs that complement each other to provide the desired coverage."
Will Jones is IA managing editor.