Industry Views

Professional Services

Key Issues for the Industry Currently Reflected in the Risk Selection

The high rankings of cyber attacks and data breaches and damage to reputation or brand likely reflect the professional services industry’s concerns about possessing large volumes of sensitive client information that could be stolen or misused. A damaging cyber incident may also result in regulatory intervention, first-party losses and third-party claims. Increasing digitalization, connectivity and workforce mobility heighten exposure to these risks.

Increased activity and focus among regulators leads to more frequent and intense regulatory investigations and claims, with the potential for serious reputational damage and financial fallout. Corporate social responsibility (CSR) and environmental social governance (ESG) concerns, expanding legal and regulatory obligations, industry convergence risk, increasing competition, rapid technological change, and geopolitical tensions are becoming increasingly challenging for the professional services industry and have the potential to cause damage to reputation and brand.

Firms face high volatility in the global business environment, exacerbated by the COVID-19 pandemic and the resulting economic slowdown. Some types of professional services firms also face challenges obtaining sufficient insurance capacity for professional and third-party liability, including errors and omissions.

Surprises in the Top 10 Risks Selected

Third-party liability dropped out of the top 10 risks in 2021, a surprising result given the industry’s significant and ongoing risks in this area, amplified by the increasing risk of actions by regulators.

The 10th-place ranking of regulatory or legislative changes is surprisingly low, again because of increased activities and statements of intent from regulators around the world.

Finally, the high ranking for business interruption is somewhat surprising given that professional services firms demonstrated their ability to maintain required activities, operations and workflows throughout the pandemic, and adapted quickly to working from home. The ranking could reflect concerns about increasing dependence on critical nonphysical infrastructure and supply chains.

Most Underrated Risks

Third-party liability risk varies by segment, but the industry has experienced an uptick in very large claims, particularly involving law and consulting firms, coupled with a material increase in the cost of defending complex claims across all segments. In some segments, claims are becoming more diverse with respect to service lines affected, alleged wrongdoing and the parties asserting claims.

Regulatory claims are rising in the U.S. and EMEA, suggesting that the risk is underrated. Among U.S. companies, regulatory actions are resulting more frequently from violations of laws that govern behavior in other jurisdictions, such as the Foreign Corrupt Practices Act.

There is growing concern that local regulatory actions — alleging failures in work performed for a regulated client such as a financial institution — that are taken against a professional services firm in one part of the world could be picked up and pursued by U.S. regulators (for example, the U.S. Department of Justice) if the firm is based in the U.S. or has a material presence in the U.S.

Challenges the Industry Will Face in the Next 3 Years and What Organizations Can Do to Address Them

Firms need to plan for increased oversight from regulators in the provision of certain types of regulated professional services.

Increased competition for talent calls for fresh recruitment and retention strategies and policies. Multi-generational and increasingly diverse workforces will drive a need for highly innovative and flexible compensation and benefits solutions.

The industry will need targeted investments to safeguard confidential personal and commercial data and to upgrade the quality and efficiency of service delivery. Growing dependence on intangible assets and nonphysical infrastructure will drive a focus on associated first- and third-party risks, requiring more accurate (and commonly accepted) intangible asset valuation techniques and methodologies, risk quantification and modeling, and broader and more responsive risk financing solutions.

Business interruption from nonphysical events and supply chain risks will continue to evolve and increase in importance, driving a need for risk quantification and modeling tools and resources as well as broader and more responsive risk-financing solutions.

Finally, evolving third-party liability risks will drive a need for risk-sensitive client-intake tools, enhanced loss-prevention training and targeted analytics to better inform risk management and finance decision making.

How New Challenges Will Require Companies to Change Their Approaches to Risk Management and Mitigation

Professional services firms will need to take advantage of increased access to robust risk and loss data for ongoing quantification and modeling of new and emerging risks. They can target loss prevention and risk controls and measures based on analysis of emerging loss trends and pertinent analytical insights. They will also need to enhance their loss-mitigation plans and incident-response plans to address new and emerging risks.

Risk volatility and catastrophic risk are increasingly difficult to manage, driving a need for actionable and industry-specific risk insights, updates, alerts and analytics; risk quantification and modeling; and traditional and nontraditional risk financing solutions.

Firms will need to expand or modify their risk financing strategies to address new and emerging risks, including use of captives, structured prefunding, fronting, direct insurance and/or reinsurance.

Current Top 10 Risks

Predicted Future Risks

By 2024

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