Three insurance predictions for 2023

Clyde & Co’s annual predictions highlight some challenges and opportunities for MGAs

Making predictions is never a straightforward exercise. But shifts in the insurance landscape, driven by global recession, by cyber fraud and digital disruption, and against the backdrop of the war in Ukraine and its impact on the cost of living, have made this exercise all the more complex.

Nonetheless, our experts across our global offices have come together to identify what’s on the horizon for insurance in the coming year. The result is ‘Insurance 2023 - the year ahead’, and Clyde & Co lawyers are keen to share these findings with the MGAA membership - identifying the trends behind the news, the challenges to be managed, and the opportunities that can be seized by stakeholders in the sector. 

Claims inflation has been a growing theme in recent years across multiple insurance markets, and as Clyde & Co Partner James Cooper writes in his 2023 prediction piece, claims managers and underwriters alike will have challenges to address this year in this respect.

While the global markets are so volatile, and with ongoing geopolitical instability increasing uncertainty, the Bank of England’s current forecasts suggest inflation will remain high throughout 2023.

For lines such as motor, property and construction, the impact of inflation has been most immediate, as disrupted supply chains and rising energy costs have had a direct impact. Other business lines, particularly those with longer tails will continue to face sustained exposure. Claims managers are increasingly focusing on mitigating the cost of this economic environment, particularly by looking for efficiency in managing claims, and developing strategies to reduce claims life cycles, whilst keeping reserves under review.

Underwriting faces similar challenges, balancing premium increases with customer expectations and the risks of undervaluation and underinsurance.

Meanwhile, Clyde & Co Partner Helen Bourne and Legal Director Rosehana Amin, detail how the appointment of a new Information Commissioner, John Edwards, in 2022, is bringing renewed vigour to the regulatory focus of the UK Information Commissioner's Office (ICO), which will undoubtedly lead to further change in 2023.

The ICO has indicated that a monetary fine is only one of a number of enforcement tools, with issuing of such fines reduced in cases involving public authorities. The ICO will also publish all reprimands issued from January 2022 onwards.

While the ICO is likely to be more circumspect in issuing fines to organisations, particularly public authorities, we anticipate the publication of reprimands will increase potential litigation risk exposure and reputation damage for organisations subject to such reprimands. 

The use of children’s data is a key focus. In September 2022, the ICO issued social media giant TikTok with a notice of intent for a £27 million fine, due to its failure to protect children’s privacy. Mr Edwards confirmed the ICO is investigating companies which don’t conform with the UK’s Children’s Code. He considers the UK could be a leading force for change in children’s safety online across jurisdictions.

Throughout 2022, the ICO focussed on clamping down on predatory marketing calls. Marketing calls which include an element of profiling will face larger penalties (such as the fine issued to Easylife Ltd for £1.4 million). The current form of the new Data Protection and Digital Information Bill proposes increasing the ICO’s power to fine companies for such breaches.

Biometric technology is a sensitive area which may face further regulatory scrutiny. In May 2022, the ICO fined Clearview AI £7.5m for collecting data to create a facial recognition database . ICO guidance on the use of biometric technology is due in Spring 2023.

Of course, this is all against the backdrop of the new Data Protection and Digital Information Bill, and we wait to see how this will impact the role of the ICO.

In his article ‘Recession-related claims will come to FIDO…but they won’t all look the same’, Clyde & Co Partner Stuart Maleno explains how a different recession, regulatory environment and litigation market can lead to different exposures for insureds and risk carriers.

While there is a clear link between recessionary conditions and claims against financial institutions, financial services professionals and directors and officers, the lessons from recessions in the early 1990s and 2008 onwards only take us so far in predicting the outcomes this time, given the different economic base going in and the catalysts for this recession (which include the pandemic, the war in Ukraine and high inflation).

Most notably, this recession is not credit driven and, from a claims perspective, given that the financial services sector underwent significant reforms following the 2008 global financial crisis, with tougher regulatory regimes and enhanced corporate governance standards, we do not expect the same volume of regulatory misconduct claims seen previously. That said, some exposures arising from this recession will likely be familiar.

In times of economic crisis, we can expect more fraud to occur, with fraudsters taking advantage of the opportunity (and potential gaps in internal controls), the desperation of consumers and investors and increased economic uncertainty to perpetrate fraud. But such conditions are also more likely to expose existing frauds, such as employee theft and Ponzi schemes.

In addition, a recessionary environment also drives D&O claims. In particular, with more insolvencies, there will be more enquiries by insolvency practitioners into the activities of the directors at the relevant times, in addition to claims by trustees against the D&Os. Civil, regulatory and disqualification proceedings may follow as a result.

Therefore, while we may not see exactly the same exposures this time around, there are exposures nonetheless - perhaps spurred on by the more mature litigation funding market, and more litigation tools in place which could deepen exposures.

Looking ahead to the prospects for the insurance sector in 2023, the flexibility and agility of the MGA space, coupled with its ability to leverage cutting-edge technology and claims automation, will be a critical component of how the industry manages claims inflation in the year ahead.

Increased regulatory activity around data protection issues is likely to sharpen the focus on cyber insurance, and while regulatory fines are not typically insurable, the importance of the insurance sector as a driver of improved cyber security and risk management cannot be overstated. The need for affirmative cover that encompasses more insurable cyber risks will be an area of opportunity for MGAs.

And amid a more litigious environment driven by recessionary pressures, the need for specialist capacity and expertise for D&O and other professional liability lines will be more pressing than ever. A mature MGA sector, providing flexible access to specialist markets will be a key element of addressing increasing liability exposures.

Click to read the 2023 and 2022 reports.

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