The Convergence of Technology, Regulation, and Litigation in Executive Risk Management
Article written by EPIC’s Kelly Geary, published in Insurance Business Review magazine.
Rising Regulatory Pressure on Directors & Officers
One of the key challenges in the current regulatory environment is the high degree of unpredictability and uncertainty with respect to expectations of regulators. This translates into more risk for directors and officers because it’s hard to ensure compliance and govern without clear expectations and guidance from regulators. In addition, the duty of risk oversight for directors and officers is a growing area of focus, given the challenging risk environment. Regulators and shareholders expect directors and officers to be proactively identifying, evaluating, mitigating and transferring a complex range of emerging risks, including geopolitical and social instability, supply chain disruptions, cybersecurity threats, AI/Generative AI, data privacy, environmental risks, etc.
Closing Coverage Gaps in Cyber Incidents
Cyber risk has most certainly blurred the lines of all insurance products. In recent years, the insurance market as a whole has moved to address “silent cyber” in an effort to protect the integrity of the non-cyber insurance products – to ensure they do not trigger in the event of a cyber incident. One of the ways they have done this is to affirmatively grant cyber coverage subject to low sub limits and tight definitions. In many ways, this makes things more difficult for insurance buyers. They need to really look at their entire insurance portfolio holistically, so they know where the cyber coverage is and where it is not. Organizations should engage their brokers or insurance consultants/ lawyers to conduct a holistic cyber gap analysis across their entire insurance portfolio and ensure coverage is coordinated where appropriate.
Litigation Funding Driving Bigger Claims
Unfortunately, litigation funding is having a growing impact on the frequency and severity of claim activity in the professional and executive risk space. Third-party litigation financing increases the cost, length, and complexity of claims. Those costs will ultimately result in higher premiums and/or tighter terms and conditions for insurance buyers. We are starting to see the impact in the healthcare space. One of the most challenging and controversial things about Third-Party Litigation Financing is its clandestine nature. In most instances, the parties involved intentionally keep the funding agreements and identity of the investors secret from opposing parties, judges, and claims professionals. Thankfully, there is growing support on the federal and state levels to try to regulate this space. Hopefully, this can help balance things a bit.
The Next Wave of Cyber Liabilities
Artificial Intelligence and other emerging technologies are a double-edged sword. Advances in technology offer businesses the potential for increased efficiency and productivity, but also present serious risks like the spread of mis/disinformation, network security and data privacy risk and discrimination/bias in decision-making. The rapid evolution of AI/ GenAI, specifically coupled with the rush to adopt or implement AI-powered tools, is and will continue to present companies with significant potential liabilities – some we can anticipate and some that we cannot. The key challenge is that our existing legal and regulatory framework is human-centric; it does not fully contemplate the idea of autonomous machine decision-making and learning. Most of the lawsuits we have seen thus far involving AI revolve around Intellectual Property Infringement, Discrimination/Bias, Data Privacy Violations, and Misrepresentations about the use of GenAI (AI Washing). I anticipate that those types of lawsuits will continue, and the legal liability landscape will become even more complex as technology develops further.
Future-Proofing Against Executive & Cyber Risks
We are living in a highly dynamic risk environment today – technology is at the core of much of this. The speed of technological advances has no historical precedent. Technology is disrupting all aspects of our world right now – societal norms, economies, legal frameworks, etc. We are in the midst of an industrial revolution. Risk leaders need to recognize that and approach risk and risk transfer proactively and holistically. Recognizing that traditional risk transfer mechanisms (insurance and contractual) will be impacted by this rapidly evolving risk environment.
