Insurance platform Finlex expects high inflation, the energy crisis and supply chain issues to affect cyber and D&O insurance premiums. Furthermore, the costs of damage caused by cyber attacks are increasing significantly at the same time.
The inflation rate is the highest in decades. While the German consumer price index was just +2.3 percent in June last year, it rose to 7.6 percent in June 2022, according to the Federal Statistical Office.
The price increase is also noticeable in much of commercial and industrial insurance, including D&O and cyber insurance. Finlex suspects that inflation will result in a significantly higher liability risk for managers. In addition, damage is likely to become more expensive in the future and lead to higher costs. Therefore, companies and business leaders urgently need to review their D&O and cyber insurance coverage.
Energy crisis and supply chain problems
The main trigger for the rapid rise in inflation is Russia’s attack on Ukraine. As a result, an energy crisis arose from the reduction of gas supply, which resulted in drastic price increases.
This is accompanied by increasing pressure on global supply chains. Long lead times, coupled with production bottlenecks, staff and material shortages, as well as raw material shortages and sharply rising raw material prices, are causing supply chains to collapse completely. supply in some cases.
Increased liability risks for managers in D&O insurance
This translates into enormous challenges for companies. Therefore, its board members and managing directors are exposed to significantly higher liability risk. “In recent months, the number of inquiries from companies and company managers about issues related to liability and whether they are insured as part of their D&O has increased markedly,” reports Dr. Marcel Straub, Head of Legal Affairs and Head of Finlex claims. Because especially in times of crisis, business leaders have to identify and manage potential risks. If this is unsuccessful and a manager makes a mistake, he is liable to his private estate if he did not exercise the care of a prudent and conscientious manager in making a decision.
An example is the current case of a US company that offers technical solutions for the development, construction and maintenance of critical infrastructure. Shareholders are suing their CEO and CFO for failing to adequately respond to supply chain and inflation issues.
According to Straub, similar cases are also conceivable in Germany. “There are countless conceivable constellations in which managers can make mistakes in the current crisis situation, resulting in financial loss for their company. This includes the possible charge that a board of directors or managing director has not reacted appropriately to changing market conditions Managers are accused, for example, of buying raw materials too late or too expensive, of not developing alternative supply chains, or of not ordering materials on time, and thus production is halted. It is not uncommon for managers to subsequently be personally sued by their companies. More than ever, therefore, we advise managers to only act on well-informed information, weigh decisions and always document processes. To be on the safe side, all managers should be able to avail themselves of the most comprehensive D&O insurance coverage possible,” says Straub.
Rise in cyber insurance claims costs
The effects are already being felt in the insurance industry. In property insurance, the increase in the cost of materials and raw materials is causing the costs of rebuilding and repairing plants, machinery and buildings to rise. Additionally, material shortages or supply chain disruptions lead to delays and thus a longer disruption to operations.
Something similar can also be observed in cyber insurance. If a company’s business operations were affected or completely halted due to a cyber attack, for example through encryption or destruction of systems, more time is needed to restore systems due to lack of raw materials or delivery problems (for example, with computer chips) and thus resume operations as usual until now. The longer the systems fail, the higher the damage costs for the insured company.
Also, due to general price increases, parts and materials needed to restore systems can be expected to be more expensive to purchase. “We assume that claims-related services will become considerably more expensive in the near future. We are currently seeing that IT service providers and forensic scientists who are urgently needed to deal with a cyber attack have already increased their hourly rates in individual cases,” says Elke Seiz, Claims Advisor at Finlex.
Critically question concepts.
Due to claims inflation, Finlex advises taking a critical look at the concept of individual cyber insurance. Attention should be focused on whether the sum insured or any sublimit should be increased.
Because there is a risk that, due to rising damage costs, the sum insured will no longer be sufficient in the event of a claim or that sub-limits will be reached too quickly. The result would be that the insured companies would keep part of the insured loss, warn the experts of the insurance platform.