After two years of harder market conditions, we have seen an expected softening of the crime and fidelity market (hereafter “crime”) as we close out 2022. While fears of a recession continue to loom large, many insurers see crime as a stabilizing force in an otherwise uncertain insurance market. The fact is that recent rate increases were largely the result of losses suffered over the broader professional liability portfolios of our insurance partners, not a material spike in crime losses. At no point over the past two years was the crime market in need of a “correction.” Rather, the rate increases impacting the crime space were driven by an overall rate “need” in the professional liability space and crime was there to help support this initiative. For those crime insurer’s that had a separate division, not tied to the professional liability market, underwriters took the opportunity to increase rates that had not been changed in over a decade. We believe that this is now behind us as underwriters are now more focused on shoring up this profitable line of business. However, first we will look back at how we got where we are today.
In early 2020, as the COVID-19 pandemic not only changed how people worked but also stoked fears that the changes would increase the number and/or severity of crime losses, the mindset was that there would be less supervision allowing employees to steal and less focus by employees on internal controls that would allow third parties to steal. With the benefit of hindsight, we know that these fears did not become a reality. In fact, total crime losses remained consistent over the last couple of years, despite the changes caused by the pandemic. However, the mix of losses impacting crime insurers did change.
Internal fraud (i.e., employee dishonesty) continues to drive the largest losses for insureds. These schemes often go on for years before ultimately being discovered leading to the losses’ severity. Social engineering fraud (SEF) schemes, on the other hand, continue to cause trouble and were the most frequent loss schemes impacting our commercial clients in 2022. However, SEF losses continue to be less severe with median losses of $172,000. Computer crime can also result in severe losses but SEF and old means of stealing such as robbery and forgery are relatively low severity but have an impact in terms of frequency of losses.
While insurers continue to tread lightly with respect to social engineering limits, generally offering SEF limits at a fraction of the crime policy standard coverage limits, we believe the market is beginning to turn the corner here as well. As 2022 concludes, we are seeing markets slowly beginning to offer increases in SEF sub-limits, especially in the FI space. Markets are expected to continue to home in on and require additional underwriting information about how clients manage their payment functions. Yet, unlike in years past where securing additional limits for SEF was limited to pushing small incremental increases up the insurance tower, some carriers are now offering more meaningful limits starting in the primary layer. Still, SEF limits continue to be provided well below the policy limits for most clients apart from those with significant deductibles (i.e., in the millions). This makes sense when viewed through the lens of a claims examiner. From a frequency perspective, social engineering losses are at the top of the list. However, with a median loss of $172,000, losses impacting the crime underwriters are death by a thousand cuts. Most criminals understand that requesting a transfer of $100,000s or more will generally set off alarm bells. However, smaller amounts may continue to go undetected up and until a larger amount is breached.
We have seen changes in the crime space this past year. Fewer markets now offer Destruction of Data by Hacker or Virus in their crime policies. While this had been a standard coverage in computer crime for over 30 years, the adoption of this coverage by the cyber market has allowed most Crime markets to drop the coverage and focus only on theft and fraud related exposures.
Many carriers have also added endorsements to “clarify” that computer crime coverage does not apply to social engineering losses. This is nothing new. Crime policies often contain “funneling” exclusions to ensure that losses are constrained to certain coverage sections.
Another change we have seen in 2022 is that cryptocurrency exclusions have become more prevalent. While most policies crime forms define money to mean currency adopted by a domestic or foreign government, many crime insurers have gone the extra step to add cryptocurrency exclusions to their form, leaving no doubt about the absence of coverage under their policy. The same is also happening with respect to non-fungible tokens or NFTs. A major challenge in 2023 will be securing meaningful limits for client’s that invest in or hold cryptocurrency (and other digital assets) on behalf of clients. While there is some capacity in the London market, overall markets have been slow to offer meaningful coverage for these digital assets.
We expect the softening of the crime market to continue into 2023. The numbers continue to support the fact that crime insurance is not only profitable but, for many insurers that include fidelity in the professional or FI books, a means of bolstering their bottom lines. We would expect to see continued pressure on pricing, especially on excess layers, due to increased competition in the marketplace. Yet, we do not expect rate decreases on primary layers just yet. Rather, we would expect pricing to go back to being based on rateables and risk factors as opposed to being driven by a market “needs.” This is good news for our clients as rates should become more stable and we should begin to see many more flat renewals than we have seen in the past two years.
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
