The top risks facing the technology sector in 2021

A new report from Willis Towers Watson warns that the move towards economic nationalism, provoked by the COVID-19 pandemic and the European Union’s technology regulation, is causing “increasing concern” to the technology sector and may result in lasting impacts on supply chains and IP.

The report sourced country and sector analysts from Oxford Analytica in drawing its conclusions and outlines some of the key factors that are creating growth in technology companies seeking political risk insurance.

Based on this data and interviews conducted by Willis Towers Watson researchers with a panel of external affairs and risk management professionals at the world’s, the report outlines the top geopolitical threats facing technology companies in 2021.

Commenting on the top risks, Laura Burns, U.S. political risk product leader, financial solutions, Willis Towers Watson, said, “If ‘data is the new oil,’ as the saying goes, might Big Tech be the new Big Oil?”

“Today, it appears that competition for dominance in high technology may become central to geostrategic competition, just as oil did from the 1850s to present,” Burns said in the whitepaper. “And as these Big Tech companies operate, increasingly they may collide with the geopolitical objectives of host countries and home countries. The technology sector will continue to develop and adapt, but its ability to work in a volatile business environment is critical.”

Technology is a driving force in insurance M&A

“In 40 years of practice, I have never seen a period of time when changes have happened so quickly,” Ross said. “We have some catching up to do in terms of what this all really means. But for insurance M&A it is accelerating these trends; putting them on a rocket booster in some cases.”

Mergers and acquisitions (M&A) in the insurance space are expected to surpass 220 worldwide during the first half of 2021, according to Clyde & Co., which noted the need to scale technology to fully leverage digital investments is a big driver of the sector’s transactions.

If the 2021 projections hit the mark or surpass them, it would be the first time since 2019 that level of transactional volume was reached, Clyde & Co. reported. The second half of 2021 is anticipated to see even more closings.

“From the perspective of smaller companies, many are waking up to the reality that they can’t afford to keep up with the technology that is going to be required to remain competitive in the future,” Anne Ross, a partner with Foley & Lardner LLP, told PropertyCasualty360.com. “They simply don’t have the scale needed to absorb the cost of the data analytics, artificial intelligence and other technologies that are improving expense ratios of their larger competitors.”

For companies that can afford to invest in the bleeding-edge, the question is, “should we build or buy?”

“Most companies do some of each, but we are seeing a lot of M&A activity driven by targeted acquisitions of companies that already have the technology as well as the expertise in-house to develop it further,” Ross said.

Propelling the pressure to deploy the latest technology is demand from consumers as well as producers, she explained. For consumers, the expectations of access to products and services online and through mobile devices were derived from their experience with retail and financial institutions.

“They want to comparison shop and purchase insurance online, file a claim through a mobile device and pay their premiums the same way,” Ross said. “Those carriers that work with independent agent producers are hearing from those agents ‘we need you to keep up with these developments.’”

Tech evolving M&A landscape ‘end-to-end’

Technology providers attracting the attention of potential buyers are not just working on consumer-facing products, Ross noted, explaining they run through the insurance chain from intelligent pricing and underwriting to risk mitigation and loss prevention.

“Some of the less obvious ones are more efficient claims handling and fraud detection, and data analytics, AI and telematics can all feed into that,” she said. “A lot of the technology that is less evident to consumers will be the most powerful for insurers.”

She said the most remarkable thing is how all these digitization trends have been accelerated by the pandemic.

“In 40 years of practice, I have never seen a period of time when changes have happened so quickly,” Ross said. “We have some catching up to do in terms of what this all really means. But for insurance M&A it is accelerating these trends, putting them on a rocket booster in some cases.”

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Commercial P&C Insurance

Commercial Office Space Set for a Strong Comeback

The sustained increase in demand for office space across the nation since late 2022 suggests that the market has moved past its lowest point, according to insights from the real estate technology platform, VTS. Demand for office space began to rise in late 2022 and continued into early 2023. Since then, the office market has experienced a period of stability and growth, supported by favorable economic factors, indicating a market rebound. This conclusion is drawn from the VTS Office Demand Index (VODI), which tracks unique new tenant tour requests for office properties in key U.S. markets. The VODI serves as an early indicator of future office leasing activity. According to the index, demand for office space has grown consistently over the past 12 months, closing the second quarter with a 17% year-over-year increase and a 34% rise from the VODI’s lowest point in December 2022. A significant shift in office-based employment patterns further supports the belief that demand for office space has stabilized. After reaching its peak in August 2022, office-based employment declined by 3.9% in early 2024. However, this trend has since stabilized, and employment growth has remained steady. Additionally, a recent decrease in work-from-home rates has fueled the renewed demand for office space. “They say you can only recognize a market bottom after it has passed, and the office space market is no exception. Following what we now see as the bottom, the national demand has gradually increased, though it remains susceptible to economic challenges,” said Nick Romito, CEO of VTS. “However, the growth observed in VODI over the past 18 months, coupled with positive trends in the office-using workforce, suggests that the market has reset, and the worst is behind us.” It’s important to note that this national trend does not impact all local markets equally. Cities like Los Angeles and New York City have seen healthy growth in office space demand, while markets such as San Francisco and Washington, D.C., have experienced prolonged stagnation. In Los Angeles, office space demand surged in the second quarter, briefly surpassing pre-COVID levels, driven by an increase in the average size of office spaces sought by tenants. New York City followed a similar overall pattern, though with some softness in the second quarter. Conversely, San Francisco’s demand for office space remains unpredictable, largely due to its tech-focused workforce, which continues to favor remote work more than other industries. “Markets heavily dependent on the tech sector, like San Francisco and Seattle, are on a markedly different post-COVID recovery path compared to more diversified markets like Los Angeles and New York City. It may take some time before we see office demand in San Francisco and Seattle return to pre-COVID levels,” added Ryan Masiello, Chief Strategy Officer at VTS.

Cyber Liability

Global IT Outage Puts Business Interruption Insurance in the Spotlight

In July, a global IT outage had a significant impact on business interruption insurance policies, overshadowing the effects on cyber insurance coverages. “This incident wasn’t a result of a malicious attack, which is why typical cyber insurance policies may not have been activated,” explained Peter McMurtrie, a partner in West Monroe’s insurance sector, in an interview with PropertyCasualty360.com. “Where coverage was applicable, factors like deductible amounts, waiting periods, and coverage limits played a critical role in determining the extent of exposure,” McMurtrie noted. “Standard policies for small businesses were less likely to offer coverage, while more complex policies for mid-sized companies and Fortune 500 corporations may have included broader triggers for non-malicious outages caused by third-party software issues.” The outage was triggered by a software update on July 19, 2024, by cybersecurity firm CrowdStrike, which affected organizations worldwide using Microsoft Windows. This interruption had far-reaching consequences, including disrupting hospital systems, media outlets, financial institutions, delaying thousands of flights, and halting daily business operations. McMurtrie emphasized that while the initial impact of the outage was similar for both large and small businesses, the ability to recover operations and whether insurance covered the loss of business income varied. “Larger companies are more likely to have advanced disaster recovery plans that ensure service redundancy following unexpected outages,” he added. “Their insurance programs also tend to cover a wider range of incidents.” According to Microsoft, the CrowdStrike update error affected over 8.5 million Windows devices globally. The incident highlighted the interconnected nature of our global ecosystem, including cloud providers, software platforms, security services, and their clients. “It’s a stark reminder of the importance of prioritizing safe deployment and disaster recovery across the tech industry,” the company said in a blog post. McMurtrie pointed out that the outage’s widespread impact was largely due to its effect on organizations that are critical to societal infrastructure—sectors like agriculture, airlines, banking, energy, government, healthcare, manufacturing, and retail. “Insurance companies base their risk appetite on their ability to understand and price risks appropriately. This becomes increasingly challenging with emerging threats,” he said. “However, I anticipate that insurers will respond by clarifying policy language, refining risk selection criteria, and possibly developing new products specifically designed for this evolving exposure.”

The top risks facing the technology sector in 2021