10 Emerging Risks & Markets to Know About

Insurance Journal examined industries experiencing changes and a few challenges due to economic forces, tough insurance market conditions, and societal pressure. Here are 10 industry sectors that could see new and emerging risks in 2023 and beyond.

Cyber Complexities

It may be a long time before cyber risk finds itself off a list of emerging risks. Though firmly established as a well-known concern, cyber risk remains dynamic and complex.

Rate increases for cyber insurance started to stabilize in 2022 following a period of recalibration by cyber insurers to stem loss ratios as they put even more emphasis on underwriting discipline with a focus on a policyholder’s controls and overall cyber hygiene.

Primary and excess cyber insurance renewals were flat to +25% in the fourth quarter 2022 — a big change from possible +200% renewals seen not too long ago. There are signs that capacity is broadening, according to WTW’s “Insurance Marketplace Realities 2023.”

“An increased level of competition from cyber underwriters eager to write new business following the recalibration of cyber rates last year has led to more nominal rate increases when organizations can demonstrate good cyber security controls year over year,” the broker summed up the situation.

2023 has already seen two significant developments in the cyber market. Specialist insurer Beazley launched the market’s first cyber catastrophe bond. The $45 million bond gives Beazley indemnity against all perils more than a $300 million catastrophe event, with the potential for additional tranches to be released through 2023 and beyond.

Beazley said this is the first time that a liquid Insurance-Linked Securities (ILS) instrument has been created for cyber catastrophe risks.

“Given the ongoing challenge of the imbalance of supply and demand for insurance capacity, the opportunity for material ILS transactions to occur there is to be seized in 2023,” said Oliver Brew, cyber practice leader at Lockton Re. “This year could prove to be an inflection point, in which ILS becomes a regular source of capital to address the catastrophe components of cyber risk. This will provide much needed additional capacity to flow into the market.”

Additionally of note already this year, the Lloyd’s Market Association issued a bulletin to update exclusions for state-backed cyberattacks in standalone cyber policies to continue efforts to limit systemic risk and clear up coverage uncertainty. Eight new clauses replace the original suite of cyber war clauses published in November 2021.

Systemic risk will get increased regulatory scrutiny in 2023, according to market players. A focus will be on critical infrastructure industries such as financial services, energy, health care and communications, and will extend to several other sectors,” said a 2023 cyber insurance market outlook from Arthur J. Gallagher.

Cannabis Trends

Several macro trends undergird the health of the cannabis insurance sector in the year ahead, but perhaps none are as weighty as the volatility in cannabis flower prices in mature markets.

Some Western U.S. states face a glut of supply that have put downward pressure on prices, hurting already struggling small and midsize operations in these states. The effects of the volatile pricing promise to trickle down on cannabis insurance in the coming year.

An added drag on the cannabis industry is a downward trend in capital coming into the market, as financiers put the brakes on their enthusiasm for the green rush.

Roy Bingham, CEO of cannabis data firm BDSA, recently forecast continued cannabis flower price stagnation in states like Arizona, California, Colorado, Nevada and Oregon, as well as “substantial consolidation of both the brands and retailer operators.” Bingham said he sees the pricing problems short-term and merely a step in the continued evolution of a newly emerging industry.

It’s not all negative. Massive growth is forecast in newly emerging East Coast markets, particularly with New York rolling out adult-use sales.

These new East Coast markets promise to bolster the industry through what appears to be the first challenge in the short history of its legal existence.

Retail insurance brokers are feeling the impact of falling flower pricing, which is pinching operators’ bottom-lines, resulting in some businesses cutting their insurance spend.

Despite the fervor that drove so much monetary and human capital to the green rush of the past few years, insurers have been slow to get into the space — leaving those who work in insuring cannabis without an overabundance of competition.

That lack of capacity has been good for those steeped in the specialty, but bad for businesses that face high insurance rates. While cannabis insurance capacity has improved in recent years, it’s expected to be a challenge into the foreseeable near future.

Jay Virdi, chief sales officer for Hub International’s cannabis specialty practice, who oversees a force of roughly 200 brokers who specialize in insuring cannabis, is one of those who believes lagging capacity will continue to prop up high rates in certain lines.

“There are a couple more players that are entering,” he said on a recent Insuring Cannabis podcast on InsuranceJournal.tv. Favorable reinsurance terms and profitability brought some capacity into the market in 2022 for certain lines. But it’s still not enough, he added.

Lines like crime, environmental and cybersecurity are “very challenging segments,” he said.

Flower prices are down for now, but cannabis is a large industry that includes myriad consumption forms, and it extends into other commercial segments.

Subsets of the cannabis industry include CBD, or cannabidiol, a compound found in marijuana that is non-impairing. CBD is often used for therapeutic purposes like pain and stress relief.

Many projections call for rapid growth of CBD products, as CBD is being increasingly included in beverages, foods, supplements, and beauty products. Recent data from IBISWorld put the market size for CBD alone at over $2 billion, with growth in revenue projections at 28% from 2023 to 2024.

The Food Network

The food supply chain that runs from farms to tables is enormous, complex and, obviously, supremely important. Agriculture, food, and related industries contribute 5.4% to U.S. gross domestic product and provide 10.5% of U.S. jobs. On average, Americans spend 12% of their household budgets on food.

The food chain includes people and companies in production, processing, distribution, consumption and disposal.

The network includes owners, growers, pickers, animals, crops, shippers, truckers, cargo, butchers, packers, grocers, cooks, caterers, waiters, food trucks, pantries and recyclers. Their operations are different, but they depend on one another and on insurance to manage some unprecedented risks. The pandemic exacerbated certain vulnerabilities in the network, and then inflation came along.

The other risks the network faces include extreme weather, labor shortages, shipping disruptions, materials scarcity, energy costs, import restrictions, safety requirements, wage pressures, government regulations, equipment breakdowns, chemical exposures, liability issues, changing consumer preferences and cyber risks. Not to mention human errors, mental stress, bad actors, employee attitudes and generous juries.

Wherever or whenever the risks descend, insurance is critical including: To rebuild a vineyard destroyed by a wildfire and implement a recall of contaminated peanut butter. To nurse a waitress injured after slipping on a greasy floor and care for workers burned in a poultry plant accident. To defend a claim that a granola is organic and replace inventory after the refrigeration fails. To settle discrimination claims by former employees and respond to an allegation of food poisoning.

Current trends are a recipe for challenge and change. Consumers are demanding increased transparency over where and how their food is produced. Farms are diversifying by adding specialty crops such as hemp, herbs and mushrooms. Meats are being grown in labs. Kitchens are cooking up plant-based foods, mood foods and butter boards. Technology is also on every menu. Be on the lookout for more regenerative farming, smart packaging, DNA fingerprinting, biosensor testing, autonomous trucks and tractors, ghost kitchens, robochefs and even bioplastics.

Like businesses in other sectors, many are also looking to reflect social responsibility in their operations. Insurers will need to know what controls and monitoring systems a business has in place and what changes a business makes. Insureds should be hungry for custom risk management and insurance. But the question is: Will they be able to stomach the prices?

Renewable Energy

The renewable energy insurance market is set to grow by more than $200 billion worldwide in the next decade. Solar and wind outpace other forms of renewable energy deployment in North America, while the continent trails Europe and parts of Asia in developing offshore renewable sources.

Solar, in particular, is on the rise, driven by its affordability as well as federal incentives included in the Inflation Reduction Act. Solar has experienced a 33% average annual growth rate in the last decade, according to Solar Energy Industries Association, and with that expansion comes increased exposure to natural catastrophe risks.

An October report from GCube Underwriting found that natural catastrophe and extreme weather event claims continue to hit the renewables sector with greater frequency and severity. The report found that Texas hailstorms resulted in solar losses almost twice as severe as the other top renewable losses of the last three years combined. Advancements in solar engineering have led to the development of panels that are more resistant by moving away from hail or turning in the right direction to protect themselves. However, this emerging technology comes at a much higher price tag that may not appeal to buyers.

Plus, carriers have begun charging solar developers higher premiums with large deductibles in response to recent hail losses. “In 2019 it was really cheap for a solar developer to pay someone else to take the risk at the end of the day,” said Jason Kaminsky, CEO of kWh Analytics, an insurtech that delivers data-enabled insurance for zero-carbon assets. That’s changed, he said. “In the last two or three years, clients are now realizing, ‘Oh I have to wear the risk. I’m wearing a huge deductible and a sublimit and my lender is more exposed to these risks.'” Now that owners are more on the hook, the solar industry has begun an era of “really high innovation” to understand what’s working and what’s not, said Kaminsky.

The wind energy sector, the most prevalent source of renewable electricity in the U.S., has also experienced multiple significant loss events in the past few years, including Hurricane Hanna in 2020 and Tropical Storm Nicholas in 2021. The storms led to losses of $25 million and $35 million, according to GCube. 2021 Winter Storm Uri proved that wind is also susceptible to freezes.

While the U.S. renewable energy market growth slowed its pace in 2022 due to rising costs and project delays driven by supply chain disruption, trade policy uncertainty, inflation, increasing interest rates, and other delays, growth in this emerging sector is likely to accelerate in 2023, according to a recent report by Deloitte.

In 2023, the sector is expected to see continued growth in new areas, such as offshore wind, clean hydrogen production and low-income solar programs.

“Overall, as the industry heads into 2023, soaring demand and attractive, long-term incentives are creating strong tailwinds, but there’s still a patch of turbulence to get through,” Deloitte says.

Environmental, Social and Governance

Environmental, social and governance continues to be an important topic across all industries but being ESG and promoting a company as being ESG is not without risks.

Credit rating agency Moody’s recently forecast heightened ESG credit risks this year. The risks were heightened by economic and political turbulence caused by the COVID-19 pandemic and Russia’s invasion of Ukraine.

According to Moody’s, company emission reduction efforts will come under increased scrutiny as more ambitious, transparent and credible objectives are required by investors despite short-term energy security concerns.

Some lawsuits began to emerge last year over companies overstating their ESG practices. Jonathan Meer, an attorney with Wilson Elser, talked to Insurance Journal for a recent podcast about the risks.

Meer is advising clients to look closely at the ESG claims being made.

“Is that something you’re saying, but you’re not going to do it, or try to do it, or make substantial efforts to do it?” he said. “So, if you’re a company that says, I am going to invest in ESG-type entities, but you are not, that’s when the liability could potential be.”

He added: “Are you going to walk the walk? Are you going to … have diversity in the workforce and actually do something about it? Are you going to try to have the best cyber policies as you say? Or you’re just saying it to get the companies to feel better about you, that’s where the potential concerns can come in from, for those D&Os.”

While ESG seems to be all the rage, it may not be as big a deal as some think.

Bloomberg recently reported the U.S. market for ESG-related products is less than half the size previously reported.

The U.S. SIF Foundation reported sustainable assets totaled roughly $8.4 trillion in 2022, down from the $17.1 trillion stated two years ago.

One reason for the drop could be tied to the risk of companies overstating their ESG attainments.

Europe has started stripping ESG labels from funds amid stricter rules in the region, and Asian regulators have also set stricter standards, Bloomberg reported.

Crypto Market

Months of turmoil in the cryptocurrency sector has toppled several major crypto investors, lenders, and exchanges as $1.3 trillion was wiped off the value of crypto tokens. Crypto exchange FTX headlined the bankruptcies after billions of dollars were withdrawn in three days, and charges were levied against its CEO.

Recent developments have shined a spotlight on the crypto market, which typically means increased regulation for the crypto industry.

The Securities and Exchange Commission is sharpening its teeth when it comes to crypto firms. Federal lawmakers have introduced bills to tune cryptocurrency regulation.

The Federal Reserve, Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency (OCC) said they are concerned about the safety and soundness of bank business models that are highly concentrated in crypto and about fraud and misleading statements from crypto firms, as well.

The insurance industry had been warming to the crypto market, introducing some solutions despite concerns of meager regulation as well as volatility. But old fears resurfaced, as well as reports that insurers were denying or limiting coverage to clients with exposure to FTX.

Nevertheless, the need for crypto insurance will remain and may be stronger. In fact, insurance may be an angle for crypto firms to attract investors once more. Firms have advertised their insurance purchases to bolster trust and pick up business, said one broker, who added submissions for tech E&O, D&O, Cyber and Crime insurance have been rolling in steadily.

Healthcare: In-Home Care and Mental Health Services

Within the healthcare sector, two subsectors in particular appear to present opportunities: home health care and mental health care. Demand for their services is expected to increase even as they face challenges, particularly in staffing, to meet those expectations.

The market for mental wellness will be driven by the increased awareness of mental illnesses, more government initiatives supporting mental health services, the increasing role of employers in providing mental health benefits, the continued aging of the population and a growing appreciation of the value or earlier intervention.

The launch of the 988 national suicide prevention line in 2022 is one new service that could drive demand. The market is expected to rise from about $80 billion in 2022 to $105 billion by 2029, according to Fortune Business. Executives see inflation, the threat of recession, and potential corporate layoffs in 2023 as creating a greater need for behavioral services as well as a financial challenge on providers.

Healthcare is becoming more consumer-driven — and home-oriented. A recent survey by JPMorgan of leading healthcare executives found that nine in 10 industry leaders said they plan to complement their traditional models, with a majority (52%) considering in-home care (52%) and virtual care (51%). Consultants at McKinsey found that traditional home health and personal-care services still make up about two-thirds of home health market revenues. However, emerging home care segments such as home infusions, home-based dialysis, primary home care, and hospital-at-home models are growing rapidly. These services tend to be more complex and reliant on technology including data from wearables and home monitoring devices.

Some in the field believe the staffing challenges in health care will ease in 2023, while others are not so optimistic.

Cybersecurity and fraud remain a widespread concern. More than two-thirds (71%) of those surveyed by JPMorgan indicated they have been directly impacted by cyberattacks in the last six months.

Behavioral Health Business expects more newcomers will enter the field and established providers will expand beyond mild to moderate mental health conditions to address more serious conditions. And while there may be more digital providers, it’s unlikely they will impact this space.

Pet Services

A 2019-2020 National Pet Owners Survey found that two-thirds of American families have at least one pet. The data varies on how many households have added pets since the pandemic, with one report indicating five million and another 12 million. But a rise in pet ownership is a main driver behind what continues to be a boom in spending on pet services. Morgan Stanley Research predicts such spending will rise 143% by 2030 to $118 billion, which represents an 8% annual growth rate, one of the largest rates of return in any retail segment.

Demographics also play a role in the spending spree on veterinarian medical care, grooming and boarding, and pet food. Morgan Stanley Research found that younger Americans (18- to 34-years-old) account for 32% of those with new pets, which is good news for the pet industry as these owners tend to spend more on food, treats and care for their pets. More and more of these owners like to pamper their pets with luxury items, gourmet foods, organic treats and accessories, even Halloween costumes — indulgences made easier by savvy online sellers and subscription services. They are also buying supplements like hemp chew sticks and fish oils for allergies. And, yes, there is such a thing as pet tech that includes self-cleaning litter boxes and collars with GPS trackers.

Another driver for the industry is the increasing adoption of pet insurance that is boosting demand for veterinarians, who have also been expanding their care to include medications, wellness services and diagnostic tests that previously were available only to humans. According to the Bureau of Labor Statistics, veterinary positions are projected to grow 16% by 2029, nearly four times the average of most other occupations. Vet tech jobs are expected to increase nearly 20% in the next five years. The number of pet stores is estimated to be 12,800, according to IBISWorld., and growing.

Pet boarders and sitters who may have struggled during the pandemic should now benefit as owners start to travel again.

This labor-intensive industry faces its share of risks including staff shortages and burnouts, rising wages and rents, and increased competition. There are bite, scratch and kick wounds and strains, sprains and back injuries. Liability lawsuits are not all that common, and damages are limited. However, as more people perceive their pets as members of their families, have support animals, and bring their pets with them to more places, the liability picture may change.

Success in this business is not a walk in the park. Survival requires hard work, innovation, discipline, talent, and, increasingly, technology such as AI in customer service and in the surgical unit. But it can be rewarding and profitable.

“It’s a huge growth industry,” one veterinarian insurance veteran told Insurance Journal.

“I’ve had colleagues tell me, ‘If you go out of business now, you would have to be trying.'”

Political Risk

Economic uncertainty and disruptions in the global supply chain continue to worry business leaders who report feeling unprepared for growing geopolitical risks and inflation.

The geopolitical and macroeconomic shocks that occurred during 2022 included the war in Ukraine, fractured energy markets, 40-year high inflation, interest rate hikes, depleted capital and Hurricane Ian, the second most expensive natural disaster.

Aside from war, businesses are also concerned about increasing disruption from strikes, riots and civil commotion activity as the cost-of-living crisis affects many countries, according to Allianz’s Risk Barometer 2023.

Across the UK and U.S., fewer business leaders feel well prepared to manage geopolitical risks and concerns about the possible consequences of war — notably, war and terrorism risks and economic unrest — are off the scale compared with a year ago.

Inflation is a dominating concern, said Beazley in its report titled Spotlight on Geopolitical Risks published in mid-2022.

The report emphasized that business leaders need to better understand their geopolitical risks and prepare for and seek to mitigate them where possible. Specialist political risk, trade credit and terrorism insurers have a role to play in providing appropriate cover that provides the risk mitigation that they need, it explained.

Further, businesses will need to consider the likely heightened need for additional insurance cover such as D&O and trade credit.

Commenting on the scourge of deadly weapons attacks in the U.S., the report said, the U.S. domestic threat environment “is almost as challenging as overseas.”

The report indicated that it is vital that U.S. risk managers are not complacent about this risk. They need to actively prepare “to help prevent and mitigate the impact of these horrendous incidents,” according to Chris Parker, head of Terrorism and Kidnap & Ransom, who was quoted in the report.

Secondhand Treasures

The resale industry is one of the fastest growing segments of the retail economy. While there remains discrepancy on the annual revenues reported for the U.S. resale industry, estimates show this is a thriving multi-billion dollar sector of the economy.

First Research, a division of Dun & Bradstreet, estimates the used merchandise industry in the U.S. includes about 20,000 stores with combined annual revenue of about $15 billion.

The secondhand and resale market is forecast to reach about $53 billion in 2023, according to the annual forecast from thredUP, an online resale marketplace. A report by GlobalData estimates that the U.S. secondhand market will more than double by 2026, reaching $82 billion.

Coresight Research, a global research and advisory firm specializing in retail and technology, reported recently that it expects continued momentum in 2023 and 2024, with year-over-year growth of 14.6% and 13.0%, respectively.

The luxury resale fashion industry will gain market share this year, driven by consumer demand for pre-owned luxury, the resiliency of luxury shoppers in an inflationary environment and the more affordable offerings of luxury resale platforms, according to Coresight. Luxury players including Balenciaga, Kering, Gucci, Valentino and Coach all stepped up their involvement in the resale space.

There are numerous reasons for the growing popularity of resale, says The Association of Resale Professionals (NART). One reason for the growth in this sector is the public’s increased awareness of recycling, NART says.

“People would rather consign, sell or donate their unwanted or unneeded items than add to the waste stream,” NART’s website says.

Increased consumer commitment to resale has resulted in new shops being opened throughout the country.

NART offers its members an exclusive insurance program designed specifically for resale and thrift shops through The Horton Group, underwritten by Travelers Insurance.

“More and more consumers will consider buying secondhand clothes, bags and accessories to avoid the overall resource waste in the fashion market and extend the lifecycles of fashion products,” Coresight wrote in its recent report on the sector.

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Insurance Journal February 6, 2023
February 6, 2023
Insurance Journal National Magazine

Agents of the Year; Emerging Markets