KEY TAKEAWAYS:
--Among the other risk trends examined in the latest Allianz report are geopolitical, economic and market volatility and the inflationary environment (ranked #3).
--At the lower end of the risk rankings scale, but not to be underestimated, is the use of new technologies such as AI tools by professional services firms.
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Architects and engineers face greater scrutiny over building and fire safety defects. Financial services professionals may be accused of mismanaging investment funds hurt by inflation. A lawyer’s untrained use of artificial intelligence (AI) tools when preparing client cases could result in an error-ridden brief. The emerging risk landscape for professional services firms is multi-faceted.
A new report from professional indemnity insurer Allianz Global Corporate & Specialty (AGCS) finds that affected professions include management consultants, auditors, accountants, architects, engineers, solicitors and lawyers and media executives, all of whom may be held responsible for losses that arise from a perceived breach of their duties.
Although exposures vary, all these professions face a wide range of civil liability exposures that need to be addressed and mitigated. These could range from accusations of negligence or omissions resulting in harm or damage to the client, to misrepresentation, to failure to identify fraudulent activity, to the unintentional breach of contract, intellectual property rights or confidentiality and regulatory investigations and actions.
Building safety laws and digital dangers top the heat map
Of the 11 emerging trends in the report, evolving legislation related to building safety and cyber crime, social engineering and data loss are both ranked #1 (very high – a critical impact to operations or loss severity could be expected).
Although building safety has predominantly been a U.K. issue following the Grenfell Tower fire tragedy in 2017, some impact will be felt globally. In the U.K., extended liability periods for building and fire safety defects could bring new legal claims against manufacturers and suppliers, with a potential domino effect on all specialists in a construction project, such as architects, engineers and design and build contractors, for example.
Cyber-attacks have increased in recent years – and professional services firms are highly exposed due to the proprietary customer data and intellectual property they process or operate with. For example, cyber mercenaries are increasingly targeting law firms to illegally obtain confidential or protected data that could tip the balance in courtrooms. These "hackers-for-hire" provide technical capabilities and deniability of involvement in the cyber-attack, should it be discovered.
Claims drivers, which apply across all professions, include phishing and spoofing frauds, third-party supply chain risks, ransomware or malware, a lack of adequate systems or controls or data loss. Not only does a cyber breach present immediate first-party costs and disruption, it can also result in significant regulatory exposures, including action from data protection authorities and considerable fines. Litigation from affected data subjects may follow, including large group claims. Breaches may also lead to client and third-party liability claims, with claimants alleging losses due to business interruption or leaked information. A breach also carries the risk of reputational damage, resulting in stock drops and securities claims. Smaller firms can be more vulnerable as they typically have less sophisticated cyber-security.
See also: Best of Both: Bundling Parametric, Indemnity
Prepare for volatility and unexpected impacts from inflation and new tech
Among the other risk trends examined in the report are geopolitical, economic and market volatility (ranked #3 – moderate impact to operations or loss severity could be expected). The report notes that regulatory exposures can arise for professionals acting for clients who may potentially be caught by a rapidly evolving sanctions regime, while, for construction and design professionals, disruptions to supply chains could bring claims relating to project delays.
The inflationary environment also ranks as a #3. If inflationary pressures lead to recessionary conditions, there could be a myriad of potential exposures for professionals, including insolvency-related exposures for auditors and insolvency practitioners, lenders’ claims for solicitors and valuers and claims arising from due diligence against lawyers and accountants. Outside of recessionary conditions, financial services professionals may face mismanagement and suitability allegations relating to funds hurt by high inflation.
At the lower end of the risk rankings scale, but not to be underestimated, is the use of new technologies such as AI tools by professional services firms (ranked #4 – minor impact).
While AI has the potential to operate as a risk reducer, as technological solutions evolve rapidly so do the potential claims drivers. These include data privacy or copyright issues, the need to preserve confidentiality when using service providers, risks of errors being repeated in volume work and the level of supervision involved in machine learning tasks.
Professional services firms must continue to properly train and supervise their staff as technology evolves and to ensure the authenticity of work products considering the emergence of tools such as ChatGPT. Ultimately, a lack of awareness of how generative AI works, as well as untrained use, could lead to legal sanctions and civil claims against all types of professionals.
The full report is available here: Professional Indemnity Insurance Claims 2023.
