Key takeaways from our Geopolitical instability and evolving liability risks webinar

Key takeaways from the webinar:

• Political Risk Insurance: Political risk insurance primarily covers risks related to government conduct. It covers ‘unknown’ risks, meaning the government conduct is not a certainty. Consequently, confidentiality is important to insurers to prevent states from intentionally undertaking insured conduct to trigger claims. Whether or not PRI is likely to be a helpful tool to mitigate risk depends on whether it is anticipated that government conduct could impact a business’s investments or business activities negatively. Advice for insureds includes assessing whether activities require coverage, reviewing exclusions, and maintaining confidentiality.
• Trade Credit Insurance: Trade credit insurance covers non-payment of a legal obligation to pay. Policies typically have few exclusions (examples include fraud by the insured and non-compliance with law), and will operate wherever the obligor is located. Whether tariffs will increase demand for trade credit insurance remains to be seen. As businesses seek to reconfigure supply chains by replacing existing trade partners, demand may increase to protect businesses from new partners in new geographies lacking a track record of meeting obligations. Whether claims under trade credit insurance will be impacted is difficult to predict at the moment. Whilst a slowdown in trade may not mean immediate non-payment of contracts, recession has, in the past (e.g., 2008), led to an increase in claims.
• AI Risks: AI presents opportunities but also introduces liability risks such as algorithmic errors, privacy breaches, and regulatory infringement. Traditional liability insurances, like Professional Indemnity and Cyber Insurance, are expected to cover AI-related claims unless explicitly excluded. In the London market, we are not yet seeing AI exclusions and affirmative AI cover, whilst available, has not yet gained traction. Policyholders are advised to watch out for AI-related exclusions, consider with brokers whether affirmative cover is needed, and expect greater scrutiny by insurers at policy purchase on AI-governance
• M&A Insurance:
  • Current Trends: The past five years have seen fluctuating deal-making activity, with transactions and relatedly, demand for transactional insurance dropping sharply in 2022. We are now in a “soft” phase in the M&A insurance market meaning policyholders are in a strong negotiating position. Steps that policyholders should take include pushing for lower retentions, reducing the scope of exclusions and knowledge/materiality thresholds, and considering enhancement for additional premium (such as affirmative risk cover for discrete known risks, such as tax risks).
  • Impact of Tariffs: There are no signs of the market adopting blanket exclusions for losses connected with tariff imposition. The focus should therefore be on due diligence on how an acquisition target may be exposed to tariffs to assure warranty and indemnity (W&I) insurers such that they are comfortable giving broader coverage and not including tariff-related exclusions. Areas where tariffs may affect an acquisition target and impact coverage include accounting and tax-related warranties, compliance with laws warranties, contract termination and amendment related to supply chain disruption, and valuation.
  • Claims: While the economic climate affects deal-making more than claims, the severity of claims under W&I policies has increased. Common breach events focus on financial statements, tax, and compliance warranties.
  • Specific contingent transactional risk policies: The webinar concluded with a discussion on the growth of specific contingent transactional risk policies. There has been a significant growth in the tax insurance market as buyers have become more accustomed to using contingent insurance as a solution to manage known risks, alongside their W&I which covers off the unknown risks.

Authored by Victor Fornasier, Lydia Savill, Jamie Rogers, Charlie Shute, and Ellie Rees.