As a trailblazing sector, technology companies face some challenging risks, including little understood exposures and large liabilities. With some of the risks outside the scope of traditional insurance, QBE is working with its partners to find new ways to support this innovative sector.
From fintech to healthtech, self-driving cars and artificial intelligence (AI), the UK technology sector is one of the UK’s big success stories. According to the Tech Nation Report 2018, the sector is worth nearly £184 billion and is growing more than two-and-a-half times faster than the overall economy.
The computer gaming industry alone contributes nearly £3bn to the UK economy and employs over 47,000 people, according to the British Film Institute. The UK’s AI sector is ranked third in the world, with investment in UK AI businesses exceeding £3.8 billion and rising, while fintech generates around £20 billion in revenue each year.
While the future looks bright for the UK technology sector, it faces a number of challenges in the coming years. Attracting and retaining top talent is a pressing issue for technology companies, made all the more difficult by Brexit uncertainty. The technology sector is already experiencing a skills shortage – 89% of technology companies say they find it hard to recruit, a shortage that is costing the UK economy £1.5 billion, according to STEM Learning.
Equally as challenging is the complex and evolving risk environment faced by technology companies. As innovators and pioneers, technology companies are exposed to large and little understood exposures and liabilities. At the same time, many tech companies are relatively small and own few physical assets. In fact, much of their value is in the form of intangible assets, such as intellectual property, research and development and data.
Compared with other sectors, technology companies face a range of challenging risks, including many that are either not currently insurable, or that are difficult to insure. Yet, as an industry, this does not mean we stand still. We have to keep moving forward and find ways to help technology companies manage their risks.
Experience has shown that new and untested products can have unintended or unforeseen consequences. Technology is no exception. In fact the scope and speed of current innovation makes for a particularly challenging liability risk environment.
A 2018 study by Lloyd’s of London into virtual reality technology provides a useful case study. As with other new technologies, there are as yet no long-term studies into the physical and mental implications of virtual reality technology. However, there are physical risk considerations for such technologies – immersion in, or distraction by, virtual reality tech could cause or contribute to an accident, resulting in personal injury or physical damage. There are also potentially issues with repetitive strain injuries, seizures and so-called ‘cyber-sickness’.
As a result, technology companies could face unexpected third party or product liability claims as the consequences of technology use emerge. For example, the Pokémon GO game resulted in a number of personal injury lawsuits, as well as privacy claims after users trespassed on property. In another example, a female gamer claimed psychological trauma after being assaulted in a virtual reality game.
Many of these traditional physical risks are insurable under product liability policies. The challenge for insurers, however, comes from systemic or catastrophic liability exposures that could emerge over time. Insurers paid billions of dollars in bodily injury claims related to asbestos and are mindful that new technologies could pose a similar risk in the future – for example, toxic chemicals used in devices could pose a health risk to consumers or cause environmental damage if not properly disposed of.
Liabilities are made all the more complex by the technology supply chain. Data, algorithms or hardware produced by one manufacturer are likely to be incorporated into the product of another, while R&D from one small firm may be taken on and developed by another. For example, driverless cars combine innovations in sensor technology with GPS and artificial intelligence. Liability is a material consideration in the transfer of risk and the technology sector is at the forefront of the challenge for insurers.
As insurers we are required to consider whether the client is developer, manufacturer, distributor, licensor or user. In many cases clients touch the supply chain in a number of areas. Add the complicating component that the technological aspect of the product may be ancillary to the main purpose or may be a facilitator for a potential future product innovation, and the insurable risks associated with injury or damage become much more complicated.
Cyber is another significant exposure for technology companies, as a driver for third party liability and for financial loss. As adopters of early stage technology, tech companies are exposed to vulnerabilities – flaws in new technology can be exploited by hackers, while cyber security for connected devices has long been a concern.
According to the 2018 CEO survey from PricewaterhouseCoopers, cyber risk is the top concern for senior executives at technology companies globally. The UK and US governments have repeatedly warned that foreign hackers are targeting companies and universities in a bid to steal trade secrets and research. While cyber espionage is a major concern, technology supply chain attacks are emerging as another significant threat.
Even where a company is not the intended target, it can get caught up in a wider cyber-attack. Last year’s WannaCry and NotPetya malware attacks affected thousands of companies worldwide while malware can spread much wider than its intended target. The Taiwan Semiconductor Manufacturing Company, a major supplier to Apple, recently halted production after it was infected with malware.
Data and privacy liability
Data is clearly a valuable asset for technology companies, but increasingly it is a potential liability. Technology companies collect and process personal data, which can range from simple personal or financial information to more complex data on users health, location or behaviours, like shopping habits or driving. Similarly, technology companies may hold valuable intellectual property belonging to third parties, which could be stolen by hackers or rogue employees.
Adding to the burden, technology companies face increasing regulation and scrutiny. Tough privacy rules like the EU’s General Data Protection Regulations (GDPR) have increased consumers’ privacy rights, as well as subjecting data processors to stringent requirements, with potentially hefty fines for breaches. Regulators in a number of sectors are also looking to introduce cyber security requirements and standards, in particular around connected devices.
Risks that are hard to assess and quantify pose a challenge for insurers. Many of the risks faced by technology companies are difficult to insure at present, but that does not mean insurers are not able to support technology sector clients.
In many cases, insurers will be able to provide meaningful levels of protection, such as for traditional product liability and product recall insurance. And when it comes to intangible risks and the more challenging liability exposures, underwriters could offer a degree of financial risk transfer, rather than the more traditional indemnification of losses. The use of standard terms and conditions in the technology supply chain could also aid the insurability of contractual risks.
It’s vital that insurers stay relevant. Some technology exposures lack the historical data insurers require for modelling and underwriting. However, we accept that this is a highly complex area and we are working on new ways to assess risks, including data analytics and through partnerships with specialist technology and data providers.
The growing InsurTech sector is helping companies and insurers get a better understanding of risks and help manage risk. In the first nine months of 2018, more than US$2.5 billion was invested in InsurTech startups across 204 deals, an annual high for deal activity, according to CBI Insights.
QBE, for example, has partnered with Cytora, which uses AI and open source data to assess risks and inform insurance products. QBE is also collaborating with cybersecurity management company Zeguro, which offers small- and medium-sized business customers in the US access to a virtual ‘Cybersecurity Officer’ to protect against their cyber exposures.
We are reaching out to our data and analytics colleagues to assist us in understanding the information available from non-traditional sources to facilitate increased understanding in assessment of risk. Insurers are beginning to access risk data from highly specialist bespoke companies, that are focused upon intangibles and projected scenarios rather than reliance upon previous loss experience.
Collaboration is likely to be a notable feature of the insurance market going forward, bringing together data, technology and expertise to manage and transfer risk. Emerging risks like cyber and intangibles will require a much more holistic approach, using data analytics, risk engineering and risk management services to manage the more challenging risks in the technology sector.
Insurers are part of the risk mitigation chain. Going forward, insurance will be less about pure risk transfer products and more about a wider range of services that help technology companies manage their risks. It is incumbent upon us to separate insurable risk from other exposures and where risk is insured, that there is risk engineering capability and expertise to manage the exposures.
The insurance industry should be viewed as a risk mitigation partner and facilitator of innovation. As with any new or emerging industry, insurers will initially offer limited forms of cover, but as a technology matures it is likely to become more insurable. Insurers’ skills in assessing and mitigating risk should be of huge value to technology companies and enable them to move forward and continue to innovate. QBE sees its role as helping its clients grow their business. We are very proudly and squarely an insurer that enables business to flourish.