JLT Specialty's experienced professionals from various teams and JLT Re's Josh Darr, Senior Vice President and Lead Meteorologist, provide valuable insights into the world of risk for 2017.
Here are a few of their findings across their specialist sectors:
Construction: The UK construction industry ended 2016 on an upbeat note, with growing output and an uptick in new orders. However, one of its biggest emerging issues is the growing threat of a skills shortage. Brexit is further compounding the problem due to the uncertainty around access to foreign workers from the European Union (EU). The other big issue that emerged in 2016 and is set to continue into 2017 is inflation – the cost of building material, particularly imported material which constitutes a quarter of the construction material in the UK, is increasing.
Real Estate: Although technology is helping to make commercial and residential buildings more efficient and user friendly, smart buildings are known to be vulnerable to cyber attacks. The smart building market is expected to reach USD 24.73 billion by 2021, up from USD 5.73 billion in 2016. Some 20% of the UK’s commercial buildings are already considered to be ‘smart’. A recent survey by the Electrical Contractors' Association (ECA) and Scottish electrical trade body found that some four in ten smart buildings in the UK do not currently take any steps to counter cyber threats. Should a cyber attack result in property damage, bodily injury or the theft of personal data, property owners could face significant liabilities, financial loss and reputational damage.
Food and Agri: Food inflation is expected to return in 2017. Farmers, food manufacturers and restaurants rely heavily on EU migrant workers who make up approximately 30% of the UK's food manufacturing labour force. The fall in the pound and Brexit are already discouraging some EU workers from coming to the UK, raising concerns of a growing shortage of labour in food and agriculture. This could have a ripple effect on labour costs as well. With low levels of unemployment and increasing demand, wage inflation appears to be a real prospect.
Fine Art, Jewellery and Specie: Political uncertainty is often linked to higher commodity prices as investors seek safe havens in assets like gold, jewellery and fine art. However, commodity prices are proving hard to predict for 2017. The election of Donald Trump in November triggered a surprising fall in the price of gold at the end of 2016. In contrast, the UK’s Brexit referendum in June caused an upward spike in the price of gold while concerns of a so-called ‘Hard Brexit’ boosted the price of gold again in January 2017. So, it might be prudent to prepare for a period of volatility. Potential volatility in the price of precious metals and jewellery has implications for insured values. Insureds will need to make sure that they are adequately covered for potential movements in commodity prices.
Cyber risks: The European Union’s General Data Protection Regulation (GDPR) will come into force on 25 May 2018 and companies will need to carry out a significant amount of work to comply with the GDPR. The regulation is expected to drive demand for specialist cyber insurance and potentially double the cyber insurance penetration rate from 10% to 20% this year. The GDPR will bring the EU more in line with the US where data breach notification requirements and substantial penalties have been driving the cyber insurance market for a number of years.
Prepare for claims inflation in 2017: UK commercial insurers have been making louder noises about claims inflation in 2016. Costs have been increasing in a number of areas, including materials, repairs, labour as well as claims handling. Claims inflation is likely to become a pressing issue in 2017, requiring a greater focus on risk management and loss mitigation.
Mining: The surprise rally in commodity prices at the end of 2016 has reignited exploration activity and is expected to lead to an overall increase in production. Higher commodity prices will, however, have a material influence on the risk profile of mining operations and accentuate the implications of unforeseen downtime and outages. Mine operators should, therefore, review loss prevention and business continuity plans if they are to make the best of higher prices while they last.
Life Science: The regulatory burden for the life sciences sector continues to grow year on year, and 2017 is unlikely to be an exception. Increased controls add cost and potentially hamper innovation. The US Food & Drug Administration (FDA) is phasing in tougher rules to track and trace products and ingredients in the pharmaceutical supply chain. Similar supply chain rules are being developed in Europe. Medical device manufacturers are also facing increased risk management and post market surveillance requirements. In Europe, the EU is expected to adopt new medical device regulations in 2017.
Credit, Political and Security risks: The rise of populism, as seen in the Brexit vote and US election, will elevate uncertainty in 2017 as unpredictable political leaders, such as Donald Trump, respond to voter discontent by implementing policies that alter the foundations of the global economy and trade. Populist politics are also likely to feature prominently in key European elections in 2017. Changes to the global trade framework and increased protectionism may inhibit growth opportunities for companies trading globally and the earning potential of companies who win contracts internationally.
Kidnap and Ransom (People risks): Terrorist attacks in Europe and elsewhere during 2015 and 2016 have highlighted changing attitudes to people risks. The UK terrorism reinsurance facility Pool Re has predicted that the most likely terrorist attack scenario in the UK and Europe would involve Islamist terrorists targeting people in attacks using knives or vehicles. Perceptions of people risk will continue to evolve in 2017 as companies seek to protect employees against a broader range of perils and re-evaluate previously low-risk markets such as Europe.
Extreme weather in Europe: Last year, the storms in Europe – the result of a blocking of the jet stream – together with hailstorms in the Netherlands caused USD 6.1 billion in damage, of which USD 3 billion was insured. Some 20 people died in France alone and 20,000 were evacuated, while 500 homes and 200 bridges were damaged in Germany. Recent years have seen a notable rise in the media coverage of severe rainstorms in Western Europe leading to severe flooding, and atmospheric data suggest that the conditions are certainly conducive to an increase in such events.
Extreme weather in the US: In Texas between March and May 2016, clusters of hailstorms over a period of six weeks caused damage to property worth billions of dollars. 2016 was not a year for major catastrophes in North America, but it was a year in which localised extreme weather events continued to cause multi-billion dollar losses. Research indicates a potential elongation of the US convective storm season, and a longer season suggests an increased risk. However, there is some evidence that peak months of May and June appear to be less active than they once were.