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New technology to impact on future liability

Defective products or work represent the largest cause of liability loss for businesses, accounting for 43% of the value of all claims in the UK. The average value of such claims is in excess of £312,000, with the cost of product recalls a major factor.

Larger liability claims are more likely in the future and those claims could be more complex and international in nature, according to a report from insurer Allianz Global and Corporate Specialty (AGCS).

“The number of recalls in the pharmaceutical, engineering, food, automotive, electronics and energy/utility industries has been rising steadily, with increased focus on product and workplace safety, as well as more proactive regulation,” said Stewart Eaton, head of product recall for AGCS’ Regional Unit London.

The report – Global Claims Review 2017 – says corporate liability exposures, whether industrial, environmental or product based, are becoming increasingly expensive. It suggests that a host of risks, driven by increasing global interconnectivity and the growth in new technology, is emerging.

Last year’s automotive emissions testing issues are an example of how complex liability losses can be, giving rise to multi-jurisdictional regulatory investigations and expensive litigation.

When the news broke that Volkswagen had been installing ‘defeat device’ software, it became apparent that other automotive companies had been doing something similar.

In October 2016, Volkswagen agreed to a $15billion settlement with a group of US federal and state regulators covering some 475,000 vehicle owners in the US.

According to Allianz, while very large liability losses can impact individual companies, they can also trigger systemic risks. As global supply chains become more complex, with large numbers of products and suppliers concentrated on supplying fewer large companies, product liability and recall claims will become larger and more challenging to settle.

Another example of the risks associated with product liability involved Samsung, when it suspended sales of its Galaxy Note 7 smartphone following reports of battery explosions. By the time the issue became evident, Samsung had made 2.5million Note 7 phones and sold 1m. Samsung’s stock valuation plunge by about $7bn as customers posted videos and images of the phones catching fire or exploding while they were being charged.

Based on analysis of more than 100,000 claims from more than 100 countries, defective products/work accounted for around a quarter of the value of the claims received by the insurance industry in the past five years, according to the report, which noted that such claims increased by 65% in Europe between 2011 and 2015.

In fact, the report notes the number of incidents has increased and is being driven by growing complexity of the global supply chain which can result in larger claims that are more challenging to settle because established lines of liability are being undermined.

Regulators have become tougher and companies are having to contend with greater investor activism as well as consumer protection laws which have been strengthened. All of which means there is greater awareness among consumers of the compensation available to them, as well as a growing awareness of claims associated with cyber risk and environmental liability.

The report suggests that new technology will help to drive a significant shift in liability claims and, although it thinks the frequency of claims could fall.

The report also suggests the digital economy is becoming more complex, posing another risk. Many of these companies operate beyond traditional borders, making liability harder to apportion and claims more complex.

Industry 4.0, smart factories and greater automation are also likely to see a shift in product liability. The report notes ‘Automation is likely to lead to increased product liability for machinery manufacturers, component manufacturers and software providers’.

The rise of autonomous driving (ADAS) will have implications for insurers, with the report saying this technology is likely to result in a significant decline in over-all car ownership. Instead, there will be a move in favour of managed motor fleets, car-sharing and driverless taxis.

Insurers will have to move away from providing traditional insurance policies for individual drivers and move to offering larger policies that will be purchased by manufacturers, fleet operators and owners.

Obviously, while manufacturers will need to become more aware of the risks associated with new technology, the insurance industry will, in turn, have to develop new technical expertise and move away from its reliance on historic data and driver profiling.

The concept of the ‘sharing economy’ also raises questions about liability.

For example, how will liability be apportioned when there is an accident featuring a shared autonomous vehicle? It could not only involve the vehicle manufacturer, but also the software provider, the fleet operator and third parties.

All of this means the insurance industry will have to invest in claims expertise and knowledge as product liability becomes more complex and technical. According to Allianz, an accident involving an ADAS assisted vehicle will require claims handlers to understand sensors and algorithms if they are to determine the cause of an accident.

The report also considers 3D printing. ‘Insurers will have to keep an eye on how the materials used in 3D printing perform in the long-term’ it finds. ‘For example, products made on 3D printers use new materials, new techniques, and are used in new applications, all of which are untested over time.

‘On one hand, it could reduce an over-reliance on key suppliers and bring down the time and cost of providing replacement parts. On the other hand, it could add complexity to some supply chains and make it harder to trace faults’.

Cyber crime costs the top ten global economies in excess of $250bn annually and it is now one of the top three corporate risks confronted by businesses in the UK, who are now seeing far more sophisticated attacks.

According to the Cyber Security Breaches Survey 2017, run by the Department of Culture Media and Sport, nearly seven in ten large businesses identified a breach or attack in 2016, with the average cost being £20,000; far more in some cases. Nine in ten UK businesses now regularly update their software and malware protection; and two thirds of businesses invest money in cyber security measures.

Companies need to have formal policies on managing cyber security risk in place and are encouraged to provide improved cyber security training as well as an incident management plan. Few companies do and, as a result, are leaving themselves open to massive potential insurance claims.

In future, digitalisation and new technologies will see a shift in the liability risk landscape, with a host of new liability threats such as increasing cyber, product liability and recall risks. New data protection laws around misuse or breaches of data will also increase cyber liability for companies, potentially resulting in heavy fines and penalties.

The report’s message? Companies need to be aware of the risks they face and make sure they are better educated and understand the changing landscape of risk. And, perhaps, make sure they have appropriate insurance in place.

Neil Tyler

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