Part of the GC Up At Night series INSURANCE SECTOR OUTLOOK

1 � Insurance Sector Outlook www.huschblackwell.com

INSURANCE SECTOR OUTLOOK

Part of the GC Up At Night series


Despite posting strong financial results for the 2018 fiscal year, the insurance industry continues to face significant and ever-evolving risk.

In partnership with ALM Intelligence, Husch Blackwell surveyed legal department leadership from a broad and diverse group of companies within the insurance sector to assess the issues that are keeping in-house lawyers up at night.

Executive summary.

“The insurance industry

continues to face significant

and ever-evolving risk.”

Key findings

Data security and privacy and state regulatory issues were identified as the top two risks by a significant margin.

Data security and privacy was also identified as the practice area where respondents believe their legal departments need the most help in meeting the challenges presented.

Dealing with often complex and frequently unique state regulatory requirements creates significant budgetary and compliance challenges for legal departments, according to the survey respondents.

Though respondents were divided on their level of interest in the regulatory changes brought about by the legalization of marijuana, nearly 70% expressed at least a little interest in the matter.


According to the U.S. Bureau of Labor Statistics (BLS), as of September 2019, approximately 2.73 million Americans are employed within the insurance sector, with roughly 25% comprising sales and claims processors and adjusters. Data from the National Association of Insurance Commissioners (NAIC) reveals that in 2018, property and casualty (P&C) insurance comprised roughly just 27% of the nearly $2.5 trillion in total insurance premiums for the United States.

Last year saw a tremendous increase in the net income of the P&C insurance industry, with industry ratings provider A.M. Best concluding a 70% increase over 2017. This was driven by revenue that surpassed $61 billion, growing more than $25 billion over the previous year. According to A.M. Best, the surge in net income was driven by the combination of increases from

investment income and the reduction in catastrophic losses.

Since 2009, the total premiums in the U.S. have increased nearly 51%, with health (92%) and title (56%) insurance leading the growth. Behind the strong growth numbers lies the reality of life for in-house counsel in the insurance sector. Over the last decade, the rapid development of new technology, the rise in political instability, and the enormous scale of the global economy have presented new challenges for an historically change-averse industry. Headlined by navigating regulatory regimes across state and international borders and the emergence of data privacy and security as a significant corporate risk, operating in an uncertain environment has become the status quo for many insurance industry general counsel.

The state of the insurance industry.


This report outlines what lawyers in the Insurance sector are thinking, their most significant concerns and how they mitigate the associated risks, as well as their strategies to deal with regulatory changes and crises when they arise.

It is based on data from a detailed survey which canvassed opinions across every segment of the insurance sector – health, property, liability and auto; life and annuity products; cyber, environmental and marine; as well as surplus lines and run off portfolios.

All respondents were surveyed the first quarter of 2019. Drawn from a broad cross-section of companies which operate in the insurance sector, 72 respondents completed the survey. A number of them operate in more than one segment, comprised as follows:

Half of legal departments represented in the survey data have fewer than ten lawyers, while 14% have more than 200 lawyers. This divergence is reflected in the gross annual revenue of respondents. While 45% have annual revenues of less than $500 million, more than a fifth (21%) have revenues exceeding $10 billion.

In terms of their role/responsibility, 29% are Staff Attorney/Counsel/Corporate Counsel; 25% are

Managing/Senior Counsel; 24% are General Counsel/Chief Legal Officer while 15% are Deputy General Counsel and 7% are Other.

Methodology.

Respondents by insurance sector segment

Other

8%3%

4%

Environmental

Runoff

Cyber 6%

Surplus lines

8%

Auto

9%

Life

12%

Liability

15%

Property

16%

Health

17%


What’s keeping in-house counsel up at night? Data Security & Privacy, State Regulatory Activity, and Federal Regulatory Activity are the three standout areas of concern. This is reflected in both the write-in responses and the structured feedback.

Practice area challenges.

% of respondents identifying issue as a “moderate”, “high”, or “existential” threat to businesses in the

insurance sector

Respondent comments

“Data privacy is the highest area of risk for all industries, particularly those with access to health care information.”

“The [data security & privacy] regulations are evolving so quickly at the state, federal, and international level it is extremely hard to keep up.”

“Health insurance regulation at the state level is arcane, balkanized, and subject to desk drawer rules in most states.”

“There is always concern around federal regulatory activity, particularly in the securities space.”

Mergers & Acquisitions

Intellectual Property

Tax Compliance

Insurance Defense

Finance & Banking

White-Collar/Professional

Liability

Labor & Employment

State or Federal

Lobbying

Coverage & Bad Faith Litigation

Corporate Governance

Federal Regulatory

Activity

State Regulatory

Activity

Data Security & Privacy

75%

72%

56%

54%53%

47%

40%39% 39% 39%

36%35% 35%


In their capacity to manage risk, many legal departments can’t handle the burden alone. For issues like data security and privacy roughly seven out of 10 respondents indicated their departments need at least some outside help to properly manage the issue.

Reflecting the data, the respondent commentary focuses heavily on data privacy and cybersecurity. “Worried re: hacking,” and “Hackers” are typical short responses. Another respondent adds: “Growing legislation and fear of having each jurisdiction adopting differing regulations.”

The same applies same applies with state and federal regulatory activity. ‘State regulation is inconsistent,’ says one respondent. ‘Unpredictable moves by the federal government makes planning almost impossible,’ suggests another, while a third concludes: ‘The State has a great impact on how we conduct our business.’

Practice area challenges.

Expert view

Prior year development in a claims book over multiple

quarters is often an indication of a systemic issue

which neither the claims, underwriting, or actuarial

departments can adequately assess alone. Outside

counsel can assist in integrating those varying

perspectives to evaluate the overall business risks

from a problem book and to implement loss mitigation

strategies from a corporate perspective.

Scott Davis, Partner at Husch Blackwell

% of respondents selecting “some help needed”, “significant help needed”, or “totally inadequate” when asked to describe their legal department’s

capacity to each area of concern

Finance & Banking


Federal Regulatory

Activity

Corporate Governance

Tax Compliance

White-Collar/Professional

Liability

Labor & Employment

Insurance Defense

Mergers & Acquisitions

Intellectual Property

State or Federal

Lobbying

State Regulatory

Activity

Data Security & Privacy

72%

52% 52%

50% 50%49%

47% 47%

45% 45%44%

43%

35%


Regulation, compliance and enforcement are intertwined. The range and complexity of new regulations make detecting compliance the number one risk followed by regulatory changes and maintaining compliance across multiple jurisdictions.

General counsel in the insurance sector appreciate that regulation is constantly evolving, as are market dynamics and technological advances. In response, lobbying, working closely with regulators and the use of outside counsel/consultants are commonplace.

Navigating regulation and enforcement.

Which issue related to regulation and enforcement poses the most risk to your company?

Respondent comments

“The rules in every state are different. Compliance is complicated and costly.”

“[Regulatory] changes can completely defeat strategy.”

“Regulations can change quickly: it’s difficult to operate across multiple states in a scalable way.”

“New laws make multijurisdictional compliance difficult.”

Deregulation

Responding to regulatory investigations

Stricter enforcement

Other

Fines and sanctions from regulatory violations

Increases in the number of new regulations

Maintaining compliance across multiple jurisdictions

Changes to existing regulations

Detecting compliance issues

26%

21%

17%

8%

8%

6%

6%

6%

4%



Expert view

Recently, New Hampshire joined South Carolina, Michigan, and Ohio in adopting some form of the Model Insurance Data Security Law issued by the National Association of Insurance Commissioners, and versions of it are circulating in the Connecticut, Mississippi, Nevada and Rhode Island legislatures. These laws obligate insurance companies to maintain appropriate data security standards to protect their customer data, and they impose an onerous breach notification timeframe of 72 hours after a breach has been discovered. Add these to the California Consumer Privacy Act, which sets extremely stringent data privacy standards for businesses with annual gross revenues in excess of $25 million and is set to go into effect at the beginning of next year, and it becomes clear that insurance companies will need to significantly overhaul their data gathering, use, retention, and protection practices or face significant financial consequences. Yet despite looming deadlines, many businesses have either not started the process towards compliance or have made only minimal efforts. The time to establish applicable privacy and cybersecurity protocols and train staff is before the laws and regulation go into effect, not months or years after the fact. Trusted and knowledgeable privacy counsel is key to navigating each law’s nuances and requirements and to making sure that insurers are compliant before disaster strikes.

Eric Levy, Senior Counsel at Husch Blackwell

Respondent level of interest in electronic data privacy legal and regulatory changes

Not at all interestedA little interestedModerately interestedVery interested

52%

25%

10%

13%



Respondent comment

“We have studied the issue very closely and would like to enter the markets servicing the cannabis industry but the continued conflict of state vs. federal law, the difficulty in getting banking services and the overall concern about flaunting the Controlled Substances Act make it difficult to safely navigate through these challenges.”

Expert view

Cannabis industry participants face heightened risks when purchasing and using insurance products, with the end result being that many cannabis operators believe they have adequately insured potential risks when in fact they haven’t. Insurance companies should work with the brokers and prospective customers to ensure that they fully understand the coverage such insurance will provide, and to help identify potential coverage gaps and pitfalls.

Tyler Scott, Partner at Husch Blackwell

Respondent interest level in legal and regulatory changes involving the legalization of marijuana

Not at all interestedA little interestedModerately interestedVery interested

27%

15%

27%

31%


Concern over the types litigation is varied, so there is no single preventative silver bullet.

Litigation.

Steps taken by respondents to mitigate risks

associated with litigation

“Use of outside counsel to maintain compliance with applicable regulations.”

“Tracking new state and federal laws.”

“Tighter contracting processes, development of vendor management function.”

“Working closely with our professional staff liability insurer to rethink our strategies.”

“Seeking third-party certifications, e.g. HITRUST – preventive rather than reactive.”

“Implementation of a robust compliance program.”

% of respondents that identified the issue as the greatest litigation concern for their company

2% Data Security & Privacy Litigation

Regulatory Compliance & Enforcement Actions


Employment Litigation

Reinsurance Disputes

Securities Litigation

Subrogation Claims

White-Collar/Professional Liability Claims

Commercial Contract Disputes

Corporate Governance Disputes

Patent Litigation

2%4%

5%

5%

5%

9%

13%

13%

20%

22%

www.huschblackwell.com1 0 � Insurance Sector Outlook

Given their responsibility for planning, monitoring, reporting, and responding to a crisis, general counsel need to know what to do.

A critical part of this is devising their company’s crisis management plan, and to ensure that it is tested and up to date.

Crisis management.

Are insurance sector businesses ready for a corporate crisis?

Has your company experienced a corporate crisis in the

last 12 months?

Do you believe your company is well prepared to

handle a corporate crisis?

Does your company have a formal crisis management plan, in the event

of a corporate crisis?

79%

Yes

71%

21%

29%

15%

85%

No

1 1 � Insurance Sector Outlook www.huschblackwell.com

Companies operating in the insurance sector have many concerns. The burden of new regulation is time-consuming and can too often distract from operational issues or become legal problems in their own right.

In-house insurance legal teams are facing regulatory uncertainty at both a state and federal level, while cybersecurity and the risks associated with technology are a constant concern. So too is potential litigation. In compliance, lawyers are having to adjust and keep pace with constant change in the scope and scale of regulations in multiple jurisdictions, recognizing that detecting compliance issues is becoming increasingly difficult.

As insurance companies recalibrate their response to market conditions, their in-house lawyers have to keep pace with new challenges: increasingly onerous

regulations at a state and federal level which require significant effort in meeting compliance standards; unpredictable international changes in regulation in overseas jurisdictions; and significant risks of data security privacy and potential cyber attacks.

To overcome these challenges, help provided by external legal advice is often critical, as evident from the data in this report: in-house insurance lawyers rely on expert lawyers for help more than half the time in data security and privacy, state regulatory activity, intellectual property, state or federal lobbying and insurance defense matters. Working together with experts who understand the full spectrum of insurance-related legal issues can also help reduce the regulatory burden and pre-empt litigation before it arises.

Conclusion

1 2 � Insurance Sector Outlook www.huschblackwell.com

About Husch Blackwell

Husch Blackwell leads our clients from where they are to where they want to be. From offices in 18 U.S. cities, we deliver legal insight and business leadership that help our clients identify smart solutions, advance their goals and move forward. Please visit www.huschblackwell.com for more information.

About ALM Intelligence

ALM Intelligence, a division of ALM Media LLC, supports legal, consulting, and benefits decision-makers seeking guidance on critical business challenges. Our proprietary market reports and analysis, rating guides, prospecting tools, surveys, and rankings, inform and empower business leaders to meet business challenges with confidence. Please visit www.alm.com/intelligence for more information.

About the authors.

Part of the GC Up At Night series

Part of the GC Up At Night series INSURANCE SECTOR OUTLOOK

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