In working with private equity firms and corporations ahead of an acquisition on due diligence, the aim is to better understand the risks. That starts, says Neil Metzheiser, president and partner at Lockton Companies - Southeast Series, with the risk profile and the security posture of the company.
Cyber risk, he says, has evolved quite a bit. That’s changed how that risk gets covered by insurance.
“One thing that happened in the insurance world, cyber used to be covered, and then all of a sudden it got excluded, and you had to buy your own cyber policy,” Metzheiser said at the Atlanta Smart Business Dealmakers Conference. “One thing we're going to be watching out for is, how is that going to play in with AI? AI in itself, it's not a risk. It's more of a magnifier of risk, like cyber. The insurance market today is not excluding AI, but as we see AI develop and it's being used, what we're helping our clients with and understand is the big risks out there — cyber, security breaches, phishing, social engineering, deep fakes, especially around movement of money — we're really spending a lot of time understanding that. And then the regulatory issue is, there is no standard in the U.S. yet, so there's not a federal framework around AI, and there already is one in Europe. So, part of what we're trying to understand is, how is AI going to be a magnifier of those risks?”
Other emerging risks he sees as part of the due diligence process are PFAs, often referred to as forever chemicals, as they are prevalent throughout many supply chains. It’s such an issue that insurance companies now are starting to exclude PFAs.
“The insurance industry can't really get their hands around quantifying that exposure,” he says. “And so we're starting to see those exclusions pop up. If you're out there and you're doing a deal and you're going to buy someone where they could be tagged on a legacy situation, we've got to make sure we advise our buyers on that, potentially for post-consummation.”
Property insurance has also gotten a lot of attention because of climate change activity that’s been seen in some areas of the U.S. That's changing the deductible and coverage levels. He says there’s also an issue with auto for companies that have fleet exposure because the environment on the judicial side is not friendly when these cases come to court. So, insurance companies are spending a lot of time trying to understand what the exposure could be for a fleet, something he says that is causing a lot of challenges.
Insurance pricing in deals, he says, often gets forgotten. Some believe that it stays static, but it has been anything but static over the last several years.
“Sometimes they're looking at a deal, and they get the insurance deal sheet and say, ‘Here's the insurance cost for the target,’” he says. “Well, if that renewal happened nine months ago, and then all of a sudden we come in and say, ‘The world's changed in nine months, so that's not the pricing.’ And so, you have to remember, insurance is priced once a year, but every day it's like a spot market for insurance.”
He says people should understand that there are many elements to the insurance market and how it gets priced. It's never apples to apples — deductibles, exposure, limits and geography are all different and factor into the price.
“You really have to normalize the cost for the target company and to the buyer, and that is a big issue that we're seeing,” Metzheiser says.
