Crime Market Update: Management Liability Auxiliary Lines, Part 3

In this three-part series, Woodruff Sawyer management liability expert Jon Janes shines a light on three often-overlooked lines of management liability coverages: Employment Practices Liability, Fiduciary Liability, and Crime Insurance. Although referred to as “auxiliary lines” or “ancillary lines,” this trio of insurance policies are essential to most organizations. They also are being impacted by the pandemic, changes in the workforce, and fluctuating market conditions, just like many other lines of insurance. In this “Management Liability Auxiliary Lines” series, Jon examines how pricing, retention, capacity, and terms are being impacted—and what it means for you. This week Jon provides a crime insurance market update. —Priya Huskins

Crime policies cover theft of money, tangible property, and securities by employees and others. The crime market is currently stable. But could it be the calm before the impact of the work-from-home storm is fully known? Crime underwriters are closely watching how companies adapt to new environments while trying to protect company assets. They are also evaluating their cyber-related risks and how to provide solutions to insure their digital assets.

Renewal Trends

Here are the current renewal trends we are monitoring.

Price: Pricing remains stable on crime renewals. Companies that have materially grown, expanded locations, including internationally, or have experienced recent losses should expect premiums to increase.

Deductibles: Deductibles remain flat for most renewals. Similar to pricing, companies whose risk profile has changed or that have experienced a recent loss should expect deductibles to increase.

Terms & Conditions: Crime insurers have restricted or clarified coverage where courts have interpreted policy wording more broadly than perhaps intended by crime insurers. Crime underwriters are also eliminating cyber-like coverage, including “destruction of data” clauses. Coverage for digital assets—especially cryptocurrency—is still difficult to secure, but more insurers appear to be entertaining these risks.

Capacity: Capacity remains consistent, although larger, more complex risks and risks with crypto exposure will find primary and low-excess capacity difficult to secure.

Hot Topics

You can take a look at the news headlines to get an idea of the hot topics that affect the crime insurance market. Here are the three main issues we are closely following.

Remote Work (Working from Home): What the ramifications of the work-from-home trend will be is a big question in the crime insurance market. As a result of the pandemic, remote work will continue to be the norm for many companies, forcing changes to policies and procedures.

Many companies also have had to reduce staff and combine job roles due to the pandemic and the Great Resignation. New and untested policies, the inability to separate different job functions, and relaxed controls to handle remote workers and reduced staff may lead to an uptick in employee theft claims.

Carving Out Cyber Exposure: Insurers are focused on eliminating coverage for cyber exposures from crime policies that may also be addressed in cyber policies. For example, crime underwriters are eliminating destruction of data clauses, forcing buyers to rely on the equivalent coverage available under cyber policies. The crime insurers that are still providing kidnap, ransom, and extortion coverage (primarily in financial institution bonds) are cutting limits or dropping the coverage altogether, pointing to equivalent coverage available in cyber policies.

Digital Assets: More companies now own and hold digital assets like cryptocurrency and non-fungible tokens (NFTs). These assets are increasingly becoming the target of criminals, and companies are searching for ways to protect them.

The crime insurance market has not yet provided a blanket solution. More insurers, however, are willing to entertain crypto and related risks although capacity can be constrained and pricing extremely high in comparison to crime for money, securities, and tangible property.

What’s Ahead for the Crime Insurance Market?

I recently spoke with Wesley Holekamp, Director, Fidelity/Crime, Great American Insurance Group, to get his take on the current crime insurance market and where it is headed.

Is Social Engineering Fraud still a concern for companies and crime underwriters?

Social Engineering Fraud (SEF) continues to be a concern for any insurance carrier offering this coverage extension. In recent years, the FBI IC3 unit has received over 20,000 SEF-related incident complaints, targeting both businesses and individuals performing transfers of funds.

Carriers are actively bringing down SEF limits on both commercial and financial institution crime exposures. In most cases, applications are being requested that indicate the insured is performing callbacks as a standard operating procedure for changes being made to banking procedures on vendors, customers, and employee-to-employee.

Callbacks to banking instructions continue to be the best form of defense to these types of losses. Proactive employee education campaigns—such as fake phishing messages —have helped employees improve identification and prevention of phishing.

How is the crime market responding to digital assets like cryptocurrency and non-fungible tokens and cyber crime threats like ransomware?

Cryptocurrency continues to evolve, and a few carriers have taken measures to include crypto in their policy language or by endorsement. Cryptocurrency acceptance by main-street companies will continue as the online exchange becomes more stable.

Non-Fungible Tokens (NFTs) do not fit under the definition of covered property in crime policies. The code that creates the digital image is not contained in or stored by the NFT, and has no value by itself, and is not a physical object. Most crime markets are now specifically excluding NFT exposure.

Crime markets are taking steps to eliminate ransomware exposure from both Crime and Kidnap & Ransom polices and shift it to cyber policies, which are better suited to address these threats. Having all the cyber policies in one place eliminates confusion over where a loss should be covered.

Why should directors and officers care about crime losses?

The Association of Certified Fraud Examiners (ACFE) concluded that organizations around the globe lost over $4 trillion in fraud in 2019 with that figure growing. The typical organization loses 5% of revenues in a given year as a result of fraud of which 21% of occupational fraud reported resulted in a loss of at least $1 million.

Fifty-four percent of victim organizations did not recover any fraud losses, so crime insurance should be a focus of directors and officers. Failure to recognize these exposures and protect against them could result in claims under a customer’s D&O policy.