The following is an opinion piece provided by John Ludlow, chief executive of Airmic, the UK-based risk management association. The views expressed within the article are not necessarily reflective of those of Corporate Risk and Insurance.
Many of the biggest names in the wholesale insurance and reinsurance industry have now returned from their annual gathering at Monte Carlo, where the talk was inevitably about market trends, especially rates and whether they are falling or rising.
The story for many years has been a pretty challenging one for underwriters, with margins squeezed and results highly vulnerable to bad catastrophe years. The obvious way out of this bind is to seek new markets and new opportunities, rather than relying too heavily on traditional products for property and other tangible risks, where competition is always intense.
The outgoing Lloyd’s chief executive Inga Beale pointed out recently that the most valuable assets are more likely to be stored in the cloud than in a warehouse. Her comments mirror the most recent survey of risk managers by Airmic, which found cyber-related risks to be their main worry, along with reputation. Although underwriters are aware of the rapidly changing requirements of their corporate customers, the insurance offering remains stuck in the slow lane.
Against a backdrop of disruption to business models, a shift from tangible to intangible assets and associated changes to risk profiles, businesses are seeking new insurance solutions and services appropriate to the digital age. The modern business is typically brand-led, it is highly leveraged and gives great returns on investment. It is vulnerable, however, to something that might cause a catastrophic loss of reputation or disruptions in the supply or value chain. For example, NotPetya, a widespread ransomware attack last year, is thought to have cost companies more than $3 billion.
In this scenario, traditional insurance can be too slow to respond and will likely offer poor protection to the balance sheet, P&L or cash flow, the latter becoming increasingly important for highly leveraged businesses. The new business world is looking for transparency of cover and speed of claims settlement. Boards are demanding that risk and insurance professionals find new solutions for new risks.
This all adds up to a great opportunity and pent-up demand for the insurance market – along with the reinsurers that support it. They need to seize it or they will become steadily less relevant to corporations around the world. Yet in some areas, such as business interruption, things actually appear to have gone backwards.
In defense of the insurance and reinsurance industry, it is trying hard. It was encouraging at this year’s Monte Carlo, for example, to learn that Amlin is setting up Envelop Risk for the sourcing,
underwriting, product development and marketing of cyber reinsurance. Things are moving forward, with new products gradually coming on stream, though sometimes the policy terms and restrictions limit their attractiveness. And the greater use of parametric products has the potential to fill gaps in the market.
It should also be acknowledged that insurers face some big challenges. Intangible events can be very difficult to define or quantify, the data demands daunting and the aggregate exposures unknown but huge, especially at the reinsurance level.
Buyers, meanwhile, sometimes lack the knowledge or the willingness to pay the kind of premiums that underwriters consider to be an adequate reflection of the risk. At a recent seminar an underwriter complained that risk managers who put cyber at the top of their risk map would nonetheless insist on paying much less for this type of cover compared to traditional forms of property insurance. She had a point.
One challenge for the insurance buyer is to persuade the board and/or finance director to set aside more money for new types of insurance at a time when companies are looking to concentrate their budgets on more obviously productive activities. This challenge underlines the need for risk managers to acquire wider and softer business skills and a broad influence within their organizations, and to make the case for insurance as a strategic purchase
Identifying what needs to be done in theory to make insurance relevant going forward is a lot easier than coming up with workable solutions. Doing so will require all sections of the market – underwriters, brokers and buyers – to work together. Intangible risks represent a new frontier for us all.
