2023 | Business Insurance Trends

Business Insurance Trends Actions supporting resiliency MarshMMA.com

From in昀氀ation to cyber risk, doing business in today’s market requires you to understand the individual trends that make up the bigger picture. These include economic in昀氀ation, catastrophic risk, corporate governance, litigation, and cyber risk, to name a few. The impact of these trends includes higher costs for goods and services, supply chain disruptions, greater scrutiny of business practices, exposure to costly lawsuits, and attacks on digital systems. Through robust risk management and e昀昀ective risk transfer, organizations can protect their people and property as well as preserve opportunities for near-term and long-term growth. Businesses in every industry should examine these trends closely and seek ways to mitigate their impact: 01 In昀氀ation (economic and social) 02 Catastrophic risk 03 Corporate governance 04 Litigation trends 05 Cyber risk Business Insurance Trends 11

01 In昀氀ation (economic and social) In昀氀ation, while it has come o昀昀 its peak levels in 2022, remains persistently high, fueling concerns of a potential recession. Business InsurBusiness Insurance Tance Trrendsends 22

Supply chain disruptions are still above historical levels and companies are also still recovering from COVID-related challenges. In昀氀ation occurs in the normal course of economic activity, rising and falling over time. Usually, it doesn’t draw much attention until it results in sharply higher prices and reduces consumers’ purchasing power. In January 2023, the Consumer Price Index (CPI) for urban consumers, including food and energy, was about 6.35%, whereas two years earlier, the CPI was only 1.39%. The U.S. Federal Reserve raises interest rates to curb in昀氀ation, which corresponds with higher borrowing costs. Two common measures of The current trend in economic in昀氀ation is at its highest point in 40 years. That economic in昀氀ation are the change in the Consumer translates into signi昀椀cant challenges Price Index (CPI) and for individuals and businesses. Producer Price Index (PPI). The CPI for all items has Social in昀氀ation refers to the phenomenon of higher jury verdicts risen 6.4% since January and court awards, typically because of changing attitudes 2022, while the PPI for that favor plainti昀昀s. Unlike economic in昀氀ation, however, social 昀椀nal demand (i.e., 昀椀nished in昀氀ation cannot be adjusted by raising interest rates. Judicial goods) has increased 6.2% reform is one path to reducing growth in claim expenses. since December 2021. Additionally, social in昀氀ation continues to raise its head in the Those increases are the form of event-driven litigation. Virtually any major negative steepest in decades. corporate news event spawns costly director’s and o昀케cer’s (D&O) litigation, including derivative lawsuits against directors whose settlements are not indemni昀椀able. What these trends mean for businesses For businesses across all industries, rising economic and social in昀氀ation are immediate challenges. In addition to paying more for materials and labor, businesses are seeing changes in the valuation of their insured property and emerging risks in their supply chains. Higher costs of production usually result in increased prices for purchasers, which can reduce pro昀椀tability and force businesses to defer growth initiatives. Higher interest rates also raise the cost of capital, which can impact businesses’ debt burdens and access to credit. Meanwhile, social in昀氀ation is causing steep growth of claims expenses in property, liability, health care, and workers’ compensation insurance programs. Business InsurBusiness Insurance Tance Trrendsends 33

Recommended actions and how we can help Businesses experiencing in昀氀ation can become resilient and even transform their operations, according to Oliver Wyman, a sister company to Marsh McLennan Agency (MMA). Understanding and mitigating risk is critical to achieving sustainable growth in every industry during any economic cycle. Businesses should discuss their needs and goals with MMA, which can provide tools and insights including: Property valuation services to ensure you’re not 01 under- or over-insured Risk 昀椀nance and risk management programs to 02 optimize your overall insurance program structure Cost of risk analytics to help you understand insurance 03 costs, benchmark against industry peers, and identify opportunities to optimize risk management e昀昀orts and make informed decisions about your strategy End-to-end supply chain consulting to assist with greater 04 visibility and to help solve the most critical areas of concern Businesses in many industries are experiencing challenges in purchasing insurance. One solution is using alternative risk transfer (ART), a proven way to address hardening in the insurance marketplace when capacity shrinks and rates rise sharply. ART tools such as captives, structured program design, and parametric insurance can provide long-term relief with access to needed coverage. Business Insurance Trends 44

02 Catastrophic risk Risk is becoming more complex and volatile for businesses. Business Business InsurInsurance ance TTrrendsends 55

A single event, whether a natural catastrophe or something caused by human activities, can have a signi昀椀cant impact on any organization. An occurrence does not necessarily have to be local to generate severe losses. The interconnectedness of supply chains means challenges remain. “We believe the overall that incidents on the other side of the world can semiconductor shortage will now drift into 2024, disrupt critical supplies and result in catastrophic from our earlier estimates in 2023, just because losses for businesses that are unprepared. the shortages have now hit equipment and some of those factory ramps will be more challenged,” One example of this resulted from Hurricane he told CNBC. Maria, which struck Puerto Rico and the continental United States in 2017. A major It took the scope of COVID-19 disruptions to signal hospital supplier was unable to maintain to the world how catastrophic pandemics can production, leading to a 600% increase in the upend global economies. Even before COVID-19 cost of intravenous equipment used by U.S. and its challenges, the World Bank found hospitals, according the United Nations O昀케ce sustained reductions in productivity following for Disaster Risk Reduction. biological disasters, in a study of four epidemics Another more recent example involves the occurring between 2000 and 2018. Factors in reduced productivity include depletion of labor, shortage of chips used to create a variety of weakened capital resources, disrupted supply electronic devices, largely as a result of the chains, lower business investment, and reduced COVID-19 pandemic. From video game consoles consumer demand. and smartphones to cars and LED lights, a wide swath of industries were—and still are—a昀昀ected Catastrophic risk can by this shortage. CEO of Intel Pat Gelsinger threaten the survival of noted that while things have improved, di昀昀erent organizations of all sizes. Business InsurBusiness Insurance Tance Trrendsends 66

What these trends mean for businesses Catastrophic risk comes in many forms. The even excessive snowmelt or ice jams on rivers can next pandemic or epidemic is tough to predict. cause severe 昀氀ooding. In the U.S., many would However, natural events will likely continue to cause assume coastal areas account for most of the devastation and disruption around the world, in national 昀氀ood insurance program (NFIP) claims. the form of storms, 昀氀oods, wild昀椀res, earthquakes, Surprisingly, it’s actually regions outside of high-risk and other events. The loss toll is often particularly areas 昀椀ling approximately 40% of NFIP claims—a high in North America, which accounted for 98% staggering $2.4 billion in NFIP losses annually. of insured catastrophe losses in 2022, according to Munich Re. Between 2017 and 2021, overall Human-caused losses that have had catastrophic impacts include oil spills, chemical releases, and losses averaged $270 billion worldwide. Contingent explosions. Another frequent and sometimes business interruption losses soared in the past two years, according to an analysis by Allianz Global catastrophic risk is 昀椀re in nonresidential structures. Corporate & Specialty, including a February 2021 Annually, 昀椀res cause dozens of fatalities and more than $2 billion in damage, according to National deep freeze in Texas that crippled infrastructure and Fire Protection Association data. forced many businesses to shut down, leading to economic losses of more than $150 billion. In addition to being di昀케cult to predict, catastrophic risk compounds uncertainty by causing direct as 2021 was another signi昀椀cant year for wild昀椀res with well as indirect losses. These include business more than 7.34 million acres burned across the country. But make no mistake, 昀氀oods represent interruptions and supply chain pressures. Another the number one cause of natural disaster losses in consequence of the string of losses is reduced insurance capacity. Amid these trends, businesses the U.S. causing about half of all catastrophic risk should examine their property exposures, risk deaths. Anywhere it can rain, it can 昀氀ood. However, preparedness, and seek to improve their resiliency. U.S. 2022 Billion-Dollar Weather and Climate Disasters Central Severe North Central North Central North Central Weather Severe Weather Hail Storms Hail Storms June 7–8 May 11–12 May 9 May 19 North Central and Eastern Severe Weather July 22–24 Central and Eastern Winter Storm and Cold Wave December 21–26 Central Derecho June 13 Kentucky and Missouri Flooding July 26–28 Western/Central Southeastern Drought and Tornado Outbreak Heat Wave 2022 April 4–6 Western Wildfires Hurricane Nicole Spring–Fall November 10–11 Southern and Central Hurricane Ian Severe Weather September 28–30 May 1–3 Southern Severe Southern Texas Hail Storms Weather Tornado Outbreak February 21–22 April 11–13 March 30 Hurricane Fiona September 17–18 This map denotes the approximate location for each of the 18 separate billion-dollar weather and climate disasters that impacted the United States in 2022. Source: NOAA National Centers for Environmental Information (NCEI) U.S. Billion-Dollar Weather and Climate Disasters (2023). https://www.ncei.noaa.gov/access/billions/, DOI: 10.25921/stkw-7w73 Business Business Business InsurInsurInsurance ance ance TTTrrrendsendsends 777

Recommended actions and how we can help Identifying, measuring, and managing catastrophe risk are strengths of MMA. For businesses in all industries, our team can deliver leading solutions in: Data and analytics—from property strati昀椀cation of values, 01 catastrophe modeling, to property valuation and beyond, we can assist with the management of the physical risks of natural hazards for a single location or across an entire portfolio 02 Solving capacity constraints in the insurance marketplace Post-loss operations and recovery, including claims 03 advocacy and advisory services Resiliency and preparedness, including business 04 continuity and crisis management planning Catastrophic risk is multifaceted and therefore businesses may need to consider a variety of solutions relevant to their industry since no one size 昀椀ts all. Business Insurance Trends 88

03 Corporate governance In the age of rising expectations from a diverse set of stakeholders, business practices matter more than ever. Business Business InsurInsurance ance TTrrendsends 99

Corporate governance is attracting more attention from investors, regulators, customers, employees, and others. Stakeholders increasingly want to see businesses operate ethically, follow through on commitments to reduce negative impacts on the environment, support social programs that promote equality and opportunity, and give back to the communities they serve. This trend is exposing publicly traded as well as privately held enterprises to public pressure, regulatory inquiries, and even litigation. What these trends mean for businesses Another way to de昀椀ne corporate governance is company’s risk function was not actively seeking decision making and action that creates sustainable external insights to assess and monitor risks. value for a business’ stakeholders. In other words, The SEC is expected to 昀椀nalize several proposed good governance is closely aligned with e昀昀ective rules in 2023, including those related to risk management. For many businesses, a desire cybersecurity risk governance. Small businesses to improve their organization takes the form of will be a昀昀ected as part of the supply chain for working toward developing and implementing those large companies a昀昀ected by the SEC rules. an environmental, social, and governance (ESG) Embedding ESG initiatives is increasingly a source program. Although the “G” is listed last, governance of competitive advantage to the organizations is foundational to meeting ESG commitments. that do it well. Risks arise from perceived ESG gaps, ranging from D&O liability, to employment practices liability, to Providing a clear framework reputational damage. The Securities and Exchange from which to better understand Commission (SEC) is proposing climate disclosure ESG performance, make more rules for publicly traded companies to disclose climate exposures and increased disclosures have informed investment decisions, the potential to impact D&O risk. Even privately held and potentially negotiate better businesses are under scrutiny and expected to be insurance outcomes is a key priority. more transparent about their governance practices. Marsh’s Global Insurance Market Index (GIMI) In addition, certain investment advisors and funds shows that pricing in U.S. professional and will have to make improved disclosures about the 昀椀nancial lines of insurance, which include factors they consider and the characteristics of the D&O liability coverage, began easing in 2022. ESG focused-funds. This will likely impact investors’ This comes after double-digit rate increases expectations of the equities they invest in. dating back to the third quarter of 2019. With the 昀椀nalization of the new rules looming, D&O Across all industries, businesses should remain insurers are watching closely and it remains to be vigilant about governance and a sizable number seen whether the rate decreases will continue in might not be. For example, in a 2022 study by light of the perceived heightened exposures. PwC, 38% of corporate executives said their Business Business Business InsurInsurInsurance ance ance TTTrrrendsendsends 101010

Recommended actions and how we can help Many businesses view ESG goals as a good way to better their organizations, but company leadership may be unclear on where to start or how to implement ESG initiatives. Retaining and self-funding risks through captive insurance entities, which even smaller organizations are using more, is one way to demonstrate good governance and assist in embedding ESG throughout an enterprise. MMA can help, with services including: Proprietary ESG Risk Rating Tool and Pulse Check ESG Risk Rating benchmarking ESG and sustainability strategy and improvement plans MMA Environmental ESG consulting ESG framework development Captive advisory services Other specialized advisory services Corporate governance risks can expose C-suite executives to personal liability, making it imperative for businesses to manage their D&O liability exposures. MMA can support businesses across industries with leading risk management insights and products, including: 01 Extensive experience placing D&O liability insurance for publicly traded, privately held, and not-for-pro昀椀t organizations 02 Blue[i] D&O Analytics Suite 03 D&O peer benchmarking 04 Historical claims and settlement data 05 Thought leadership and education on current and anticipated future governance and litigation trends 06 ESG initiative, including services provided by partner law 昀椀rms which may lead to enhanced D&O insurance coverage 07 D&O guidance on balancing corporate balance sheet protection versus individual asset protection Business Insur ance Trends 111111

04 Litigation trends Liability risk has long been a concern of businesses, and current trends in litigation have made mitigating that risk more urgent. For example, consumer lawsuits are increasingly aimed at businesses’ use of personal data without consent. Business InsurBusiness Insurance Tance Trrendsends 1212

This trend coincides with data privacy regulations in several states, including the California Consumer Privacy Act, which is expected to take e昀昀ect in 2023. Another litigation trend involves commercial the ripple e昀昀ects on technology companies, landlord-tenant disputes, which have become 昀椀ntechs, life sciences organizations, and other more frequent as businesses adapt to remote businesses or startups that rely on regional work and occupancy remains reduced. In addition banks,” writes Matt McLellan, D&O Product to private litigation, businesses are seeing Leader for Marsh. While this trend is not new regulatory enforcement actions by agencies such and shouldn’t be the cause of panic, it certainly as the Federal Trade Commission and Department warrants caution, observation, and careful review of Justice on matters from employment practices of your executive liability policies. “Organizations to antitrust to data security. should focus on reviewing their insurance coverages to understand fully the protections One litigation trend that is they have for liabilities resulting from such at the top of mind for many institutions, customers, or other possible losses,” is the looming threat of concludes McLellan. potential bank insolvency. Finally, the litigation over excessive fees has continued to increase. Excessive fee claims The turmoil surrounding Silicon Valley Bank and generally allege plan sponsors and/or plan Signature Bank is a stark reminder of the risks 昀椀duciaries breached their ERISA 昀椀duciary duties present in the 昀椀nancial industry. “Since March by requiring participants to pay excessive fees. 9, there has been a focus on other banks with comparable exposures, as well as concern over Business InsurBusiness Insurance Tance Trrendsends 1313

What these trends mean for businesses For small and midsize businesses, defending litigation is costly and distracting. Compounding this risk is the di昀케culty in predicting lawsuit outcomes, with social in昀氀ation leading to larger awards and pressuring defendants to make bigger settlements. In this environment, even seemingly minor incidents can lead to signi昀椀cant lawsuits. For example, auto accidents involving 昀氀eet vehicles have become preferred targets for plainti昀昀s’ attorneys. During challenging economic conditions, claims by employees and third parties tend to increase. Businesses should carefully examine their liability exposures and seek to mitigate those through robust risk management and insurance. Amid current litigation trends, working with quali昀椀ed professionals in law and insurance is essential to ensure businesses are protected. “Nuclear verdicts”—those totaling more than $10 million in damages—not only are becoming more frequent, but they also are getting larger. A 2022 U.S. Chamber of Commerce study analyzed nuclear verdicts nationwide. The study found that between 2010 and 2019, juries issued 1,376 nuclear 1,376 verdicts. Two-thirds of the verdicts involved product nuclear verdicts issued by liability, auto accidents, and medical liability. More than juries between 2010 and 2019 15% of the verdicts involved premises liability. For businesses, nuclear verdicts have direct and indirect impacts. The publication of huge jury awards tends to 2/3 make settling lawsuits more expensive, and insurance of the verdicts involved companies paying out large liability claims generally product liability, auto raise rates and become more selective about the accidents, and medical liability industries they insure. One reason for higher verdicts is growth in litigation 昀椀nance, in which third parties provide funding for plainti昀昀s’ lawsuits. Legislators are beginning to limit or regulate litigation funding. 15%+ As of late January 2023, according to a Greenberg of the verdicts involved premises liability Traurig analysis, eight pieces of legislation or regulations pertaining to litigation 昀椀nancing were pending nationwide. Business Business InsurInsurance ance TTrrendsends 1414

Recommended actions and how we can help Businesses can be hit with lawsuits for a wide range of internal and external incidents, including those seemingly beyond their control. Mitigating litigation exposure calls for advice from trusted risk specialists and proper liability coverage. MMA has deep industry-speci昀椀c knowledge on how to manage and transfer liability risks. Among the risk solutions available to clients are: Fleet solutions and behavioral driving programs Safety and risk control services Claims management and advocacy Contractual risk transfer services Proprietary excess liability coverage Excess liability probable maximum loss analysis Total Cost of Risk analytics Various types of insurance can provide valuable support for liability risks, tailored to di昀昀erent industries. Products that MMA can deliver include: Executive and professional liability including enhanced 01 excess liability protection for private and public companies 02 Employment practices liability 03 Wage and hour coverage 04 Active assailant coverage 05 Enhanced cyber coverage Business Insurance Trends 151515

05 Cyber risk Cyber risk remains a critical threat for businesses. Business InsurBusiness Insurance Tance Trrendsends 1616

Trends in this area include new tactics by cybercriminals to extort payments, novel social engineering attempts to obtain access to sensitive data, and attacks shifting from information technology networks to operations technology. The last trend is speci昀椀cally concerning, as it raises the possibility of bodily injury and property damage. Ransomware attacks more than doubled in 2021 and remained high in 2022, and that threat continues to evolve and persist across all industries and sizes. A Marsh Risk in Context podcast explores a trend in ransomware-as-a-service, which makes the malware widely available to threat actors. What these trends mean for businesses Cyber risk is pervasive, unpredictable and often third-party technology providers (e.g., cloud debilitating from an operational and reputational service providers) where security and privacy perspective. The complex cybercriminal ecosystem con昀椀gurations and controls may not be optimal, has evolved to 昀椀nd new ways to monetize audited, or adapted to the latest security in昀椀ltration directly and via dependent third-party vulnerabilities, and privacy regulations. In its applications that can have a dire impact on small- 2023 Global Threat Report, Crowdstrike identi昀椀ed to medium-sized enterprises (SMEs). Whether an increase of 95% in cloud exploitations which the security or privacy event is unintentional or can disproportionally impact SMEs given this malicious in origin, the impact on businesses in increased target environment. In its 2022 cyber every industry can be signi昀椀cant. Incidents can claims study, NetDiligence found that 98% of the halt operations, disrupt supply chains, generate claims involved SMEs, or organizations with $2 signi昀椀cant 昀椀nancial outlays, contribute to billion or less in revenue. Ransomware was the reputational harm, and potentially invite litigation largest single source of cyber claims for SMEs, and regulatory enforcement actions. followed by hacking. Privacy regulations continue to evolve and In a 2022 study, Marsh found almost enforcements actions are expected to continue 75% of organizations reported to increase to ensure safeguarding of data experiencing at least one cyber including usage, collection, and retention of incident in the past 12 months. third-party information. SMEs tend to be attractive targets by threat Notably, only 3% rated their organization’s cyber actors, because most SMEs rely on data and hygiene as “excellent.” Almost three in four networks but have fewer cybersecurity resources respondents deemed their organization’s cyber than larger organizations. They often rely on hygiene as “satisfactory” or “needs improvement.” Business Business Business InsurInsurInsurance ance ance TTTrrrendsendsends 171717

Recommended actions and how we can help With the right tools and insights, cyber resiliency is possible. Insurance plays an important role in protecting businesses from the impact of cyber incidents, and so do cybersecurity services that identify and address vulnerabilities. MMA has numerous capabilities to help businesses improve their resilience, including: Proprietary Cyber Resiliency Network including 01 complimentary and discounted rates as well as tabletop exercises to prepare for the likelihood of cyber incidents Blue[i] Cyber Analytics Suite—addressing privacy, 02 business interruption, and ransomware risks 03 Cyber risk placement benchmarking 04 A comprehensive cyber risk self-assessment 05 Access to leading cybersecurity services 06 Vast experience in placing cyber insurance Industries vary in their exposure to cyber incidents, and therefore businesses need coverage that 昀椀ts their situations. MMA’s cyber specialists can design and deliver cyber insurance and technology errors and omissions liability coverage to suit clients’ needs. Learn more about MMA's cyber insurance options. Business Insurance Trends 181818

What are your key strategies during periods of volatility? MMA wants to help you make the most of your opportunities. MMA will work in partnership with you to create a strategic plan that aligns with your short- and long-term organizational goals. We o昀昀er choices, alternatives, and advice. MMA is your resiliency- focused risk champion. Reach out to a specialist today. Interested in Employee Health & Bene昀椀ts Trends? Read about them here. This document is not intended to be taken as advice regarding any individual situation and should not be Business Insurance relied upon as such. Marsh & McLennan Agency LLC shall have no obligation to update this publication Employee Health & Bene昀椀ts and shall have no liability to you or any other party arising out of this publication or any matter contained Private Client Services herein. Any statements concerning actuarial, tax, accounting or legal matters are based solely on our Retirement Services experience as consultants and are not to be relied upon as actuarial, accounting, tax or legal advice, for which you should consult your own professional advisors. Any modeling analytics or projections are subject to inherent uncertainty and the analysis could be materially affected if any underlying assumptions, conditions, information or factors are inaccurate or incomplete or should change. d/b/a in California as Marsh & McLennan Insurance Agency LLC; CA Insurance Lic: 0H18131. Copyright © 2023 Marsh & McLennan Agency LLC. All rights reserved. MarshMMA.com