In our last fidelity and crime (hereafter “crime”) review, we used the term “stabilizing force” when referring to the crime product. This motto continues to be true today. The crime market has not experienced the same radical upward or downward swings felt by other lines of business. Through hard and soft market cycles, the crime product continues to be steadfast, offering consistent terms and conditions with predicable, competitive pricing.
While pricing has remained competitive, it is coupled with steady loss activity. Typically, this would signal movement toward more conservative measures from carriers, however, insurers continue to look for opportunities to grow their fidelity and crime books of business. What makes this product so attractive?
Let’s look back at key trends in 2023 and how we got to where we are today.
Crime bonds were originally written as three-party surety bonds guaranteeing the honesty of an employee. Today, crime bonds are two party insurance policies which still protect organizations against dishonest employees, as well as various types of third-party fraud. According to The Surety and Fidelity Association of America, “each year, businesses lose millions of dollars to employee theft, with some cases resulting in bankruptcy.” As time marches on, employee fraud continues to be a core component of a crime bond. Employee fraud losses tend to be the most catastrophic type of crime loss to organizations. This is often because the perpetrators have inside knowledge of how to avoid detection or bypass certain controls, resulting in fraud that can span months and sometimes several years.
Social engineering, also known as payment diversion, account impersonation or account takeover continues to be a concern for businesses of all sizes and types. Tactics include falsification of suppliers’ invoices, clients’ payment instructions or impersonation of executives. Social Engineering fraud continues to occur, despite public awareness.
According to our claims data, while the frequency and severity of social engineering losses has generally trended down since peaking in 2019, we did see an uptick in 2023 as compared to 2022.
In 2023, the sophistication of fraudulent schemes took another step forward with cybercriminals using artificial intelligence to assist them in identifying high-value targets, vulnerabilities, and in the execution of the crime itself. This is an area that we’ll continue to monitor as we move into the new year.
Insurers remain cautious with respect to the social engineering limits deployed, commonly offering the coverage on a sub-limited basis and in some instances with conditions precedent to coverage. It’s important to understand what your policy affords, as language differs per risk and per insurer.
Authentication, authentication, authentication
An adequate controls framework, including verification controls is vital in mitigating the likelihood and impact of a social engineering loss. Ensuring that processes and procedures are being followed, is equally as important as the framework itself.
Verification is key. Verbal verification with your client, vendor or internally seems to offer the best security. However, always ensure that the contact details used for verification are not sourced from the e-mail as that might be fraudulent as well.
Despite the evolving threat landscape, insurers want to write more crime business. According to 2022 calendar year data published by The Surety & Fidelity Association of America, the net loss ratio for your top 10 writers of fidelity bonds averages out to 36%. This means that for every dollar in premium collected, the carrier is retaining $0.64 after expenses and claims payments. The top 10 (of 100) writers of fidelity bonds write 73% of direct written premium. The top 10 writers are therefore better positioned to absorb losses when they do occur. Keep in mind, not all writers of crime are operating at this level of profitability. Additionally, crime is often captured within a carriers broader financial and professional lines portfolio where profitability is being managed more holistically. All of this to say, crime is one of the more sought-after lines of business.
As we close out 2023 and look forward to 2024, crime underwriters are tasked with maintaining the crime business they have while managing large growth goals in a competitive environment. We expect crime risks will continue to be underwritten and priced based on their individual merits. This is good news for our clients as rates will continue to be stable heading into the new year.
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).
