Almost every sector of the economy today is heavily reliant on technology. Digitalization has reached the core of vital industries like healthcare, professional services, manufacturing (where production is almost 100% automated), transport and retail. It’s safe to say that without technology, the world as we know it would grind to a halt.
That’s a heavy burden for technology companies to bear. There’s a lot of liability assumed in enabling vital industries and fuelling the economy, thus highlighting the importance of tech firms having adequate insurance protection and strong risk management strategies.
“The challenge for tech firms is to be able to fulfill the needs of their clients by offering applications or services that are adequately tailored. They have to fully understand the ins and outs of the specific industries they’re serving,” said Hanadi Diab (pictured), senior underwriter – specialty lines, CNA Canada. “The services, software and applications they’re offering have to be safe for use. They need to offer secure coding, regular updates and software patches, continuous service and maintenance to ensure that what they’re offering does not become a vulnerability for their clients. They also need to be flexible to quickly adjust to emerging needs.”
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As society has grown ever more digitalized, tech firms have trended towards developing specialty offerings for specific industry sectors. It’s almost impossible for a tech firm to be a jack of all trades. Time has shown that in order for tech firms to be really successful, they need a niche product offering tailored to an industry’s unique needs.
With reliance on technology so high, it’s vitally important that tech firms protect themselves from a legal perspective with strong contractual language, according to Diab. She told Insurance Business: “Contracts should include a very clear description of the scope of the services they’re offering, as well as a timeline of deliverables, and customer approvals at different stages. Some contractual clauses, such as limitation of liability or consequential damages, can also help to reduce exposure. It’s also vital that tech firms train their salespeople on the contract, so they know exactly what they’re selling, even if they were not involved in product development. Everyone should be aware of the technicality of the offering.”
From a technology perspective, best practice risk mitigation comes in the form of “testing, testing, testing,” Diab stressed. Insurers will always look at how tech firms test their offerings before installation and integration. Prior to testing, underwriters are interested in the design process itself. How did the company design its offering? How did they get to understand the needs of their customers? Do they have a formal process for software development? And have they managed clients’ expectations appropriately along the way? These are questions that underwriters could ask of tech firms today.
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“We also look at the history of payments and whether there have been any delays in a tech firm’s project or any issues around accounts receivable. It tells us a lot when customers start delaying payments, saying: ‘The product was not exactly what we were expecting; it didn’t fulfill the target that was required,’” said Diab. “And we want to know the client’s insurance history. Is this the first time they’ve bought insurance, and if so, what’s mandating that decision? If they’re canvassing the market, we want to know why. Are they premium-orientated, or do they want to improve their risk control or find better coverage? These are all points of discussion that brokers should be having with the prospect and/or insured to help them establish their risk management strategy.”
Moving forward, two key exposures for tech firms that will require special attention from insurers are the integration of artificial intelligence (AI) and cyber risk. The use cases for AI are significant; a technology firm specializing in AI could serve almost any type of industry. Once again, underwriters want to know how AI will be used, how it will be applied, what clients are expecting, and how clearly those services are detailed in the contract. Like the tech firms themselves, underwriters also have to understand the industries being served in order to fully grasp the exposure that they’re taking on.
“The biggest uncertainty for tech firms today comes in the form of cyber exposure,” Diab added. “Moving forward, clients should expect more thorough underwriting of cyber risk and stricter management of capacity and limits – and this will be on a case-by-case basis. Cyber insurance limits will be reviewed to ensure that they reflect risk exposures and protections in place - how much coverage the firm is asking for, their awareness of the risks the company is exposed to, and what kind of cyber risk controls they have in place.”
This heightened focus from underwriters ties into wider trends in the professional risks insurance market. Rates are increasing, capacity is shrinking, reinsurance prices are rising, and investment income is low. More than ever, underwriters are requiring more stringent investigations during risk selection.