“The past is a foreign country: they do things differently there.” The opening line of
‘The Go Between’
by LP Hartley is one of the most famous in 20th century literature and came to mind recently as perhaps a perfect description of how insurers of the future might look back on today’s industry.
For there seems to be a growing consensus among business leaders that if insurance is to remain relevant to the global economy, then the industry needs to adapt and innovate. Increasingly it seems that the issues keeping risk managers awake at night are not those for which insurance cover is adequately available.
This state of affairs represents a tremendous opportunity for companies to gain new business. Anyone worried about gaining market share need only look towards a number of areas where demand is as yet largely untapped.
As XL Catlin’s chief executive (CEO), Mike McGavick, stated at the Global Insurance Forum in New York earlier this month, developments in analytics offer firms the chance to “unlock entirely new horizons of insurable activity.” Indeed, he argued that the industry could be on the cusp of a renaissance if it can rise to the challenge of innovating new products.
Certainly there is a pressing need for some kind of response to one or two troubling trends. McGavick stated that property and casualty insurance as a percentage of economic activity had shrunk from 3.4% in 2002 to 2.8% by 2011.
Meanwhile, according to a survey among members of the UK’s Association of Risk and Insurance Managers (Airmic), reputational risk is the top concern in the profession. Yet of those who highlighted it as an issue, more than 90% do not obtain protection through the purchase of insurance cover.
Meeting New Needs
The IUA is working closely with Airmic to encourage innovation and enable London to build on its reputation as a global centre for the development of new policies. Two new groups have been established, comprising both underwriters and risk managers, to explore how best insurers can respond to changing business needs.
One group will focus on business interruption (aka business income) cover and the need to protect virtual assets as much as traditional physical property. The other is set to explore how cyber risk limits and scope can be expanded, to make such policies more attractive to buyers.
This is a start. Looking ahead it seems that a collaborative approach offers the best chance of encouraging innovation and reducing the gap between the exposures risk managers are most concerned about and the coverage available in the London Market.
Where exactly will this path lead us? Speculating about the risks of the future can be a fun exercise and one in which that many of us in the industry were encouraged to indulge in by the publication of
Swiss Re’s SONAR report
on new emerging risks.
The main conclusion to be drawn from this fascinating piece of research is that there is no shortage of potential risks for which the insurance industry and its financial and risk professionals might be called upon to provide cover.
A number, such as pandemic risk and genetic engineering are already well-known having been drawn upon for Hollywood sci-fi movie scripts. Yet there are others, which have received little previous attention but are no less potentially damaging.
Groundwater mismanagement, for example, could lead to some coastal cities literally sinking into the soil. This might put them at much greater risk from natural catastrophes than the rather more widely-publicised threat of rising sea levels resulting from climate change.
Another more mundane – but no less serious – issue is the poor condition of critical infrastructure in various countries, which could give rise to large losses. Energy, transportation, IT and health care services are all at risk. Swiss Re’s report states that even in the US, 85% of dams will have outlived their average 50-year lifespan within the next two decades and explosions from aging gas pipes have resulted in multiple deaths.
So, while the future may be bright it certainly does not appear to be risk-free and that means that the insurance industry should be as relevant as ever. The only challenge is to make sure that the evolution of its underwriting offerings keeps pace with the evolving needs of the global economy.
To end this piece as it started – by stealing another great quote – let’s take one from US president Ronald Reagan’s 1986 State of the Union Address: “Never has there been a more exciting time to be alive, a time of rousing wonder and heroic achievement. As they said in the film Back to the Future, ‘Where we’re going, we don’t need roads’.”
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