Understanding insurance megatrends

Shock­ing bush fires in Aus­tralia recent­ly dom­i­nat­ed head­lines around the world and will dom­i­nate insur­ers’ inbox­es for some time to come as fam­i­lies and busi­ness­es count the cost of the dev­as­ta­tion. But were this season’s fires a one-off extreme event or a new norm?

“It’s impos­si­ble to say at the moment” says Simon Laird, glob­al head of insur­ance at law firm RPC. “We are see­ing a series of new and evolv­ing risks that are hard to quan­ti­fy in tra­di­tion­al ways.”

Insur­ance, as a busi­ness, demands a wealth of data to be prof­itable. You can, of course, insure any­thing from an alien abduc­tion to a sky­div­ing nona­ge­nar­i­an, but such one-off events are a spe­cial­ist side of the indus­try. Set­ting the right pre­mi­um gen­er­al­ly relies on an in-depth under­stand­ing of the cus­tomer, the prod­uct and the prob­a­bil­i­ty of insured events occur­ring.

An under­writer assess­ing risk will be look­ing to the past for that under­stand­ing; with­out a reli­able data set behind it, risk assess­ment becomes con­sid­er­ably more dif­fi­cult.

But under­writ­ers are now hav­ing to cope with a rapid­ly chang­ing world that is plac­ing unusu­al­ly high demands on the pro­fes­sion and impact­ing the port­fo­lio of risks insur­ers cov­er.

“While insur­ers have always faced change, it is the num­ber of mega­trends that is unusu­al,” says Laird. He cites as exam­ples the increas­ing use of tech­nol­o­gy, polit­i­cal unrest, cyber and cli­mate change. “The chal­lenge for insur­ers is that it is hard to pre­dict the new and evolv­ing risks aris­ing out of these glob­al mega­trends,” he adds.

“Insur­ers talk about the impor­tance of mak­ing evi­dence-based deci­sions. These mega­trends are chang­ing the nature, fre­quen­cy or sever­i­ty of insured events. The data insur­ers have to hand does not nec­es­sar­i­ly help them to under­stand that chang­ing risk. Take the bush fires; there have been bush fires for years, but how will the fre­quen­cy and sever­i­ty be ampli­fied by cli­mate change?”

Insur­ers are experts at assess­ing prob­a­bil­i­ties, but the present age of dis­rup­tion can make it hard to under­stand claim trends. In some cas­es, the law is play­ing catch up. It has tak­en two years already for the UK courts to weigh the evi­dence on whether super­mar­ket chain Mor­risons is vic­ar­i­ous­ly liable for the actions of a rogue employ­ee who pub­lished sen­si­tive staff details online and the final deci­sion is not expect­ed until lat­er this year.

It is time to take stock of the port­fo­lio of risks your busi­ness cov­ers and ensure you under­stand the impact of these mega­trends

Uncer­tain­ty such as this is often resolved by legal dis­putes or chang­ing reg­u­la­tion. In the mean­time, how do insur­ers assess and price the risks of that kind of data breach?

Or take the issue of “silent cyber”, where­by an insur­er may have to pay out on cyber loss­es under a pol­i­cy not designed for that pur­pose. The cyber risk aris­ing out of the tech­nol­o­gy mega­trend has arguably caught out insur­ers and the mar­kets are now tak­ing steps to clar­i­fy whether cyber risk is cov­ered under their exist­ing suite of poli­cies.

“It can be dif­fi­cult to assess the ade­qua­cy of exist­ing prod­ucts,” says Laird. “There are a whole series of uncer­tain­ties which means insur­ers need to con­stant­ly be review­ing their prod­ucts, pric­ing and ade­qua­cy of reserves. Ade­qua­cy of reserves is incred­i­bly impor­tant for insur­ers and some­thing the reg­u­la­tor takes a keen inter­est in.”

The indus­try needs urgent­ly to exam­ine how these mega­trends might affect its port­fo­lio of risks and keep an eye out for new ones on the hori­zon. Will, for exam­ple, the law around men­tal health devel­op in such a way as to intro­duce a new mega­trend?

Not sur­pris­ing­ly, those who best under­stand the uncer­tain­ties as they evolve will be best placed to deliv­er sus­tain­able under­writ­ing prof­its. That may well mean a foren­sic re-exam­i­na­tion of con­tracts; “stan­dard” claus­es may need to be revised or new prod­ucts devel­oped to meet new chal­lenges. Insur­ers will need to inno­vate to stay ahead of the game in a dig­i­tal­ly trans­formed world.

Despite the over­flow­ing data pools that are being pro­duced by new tech­nol­o­gy, insur­ers are wrestling with a series of unknown unknowns. It is time to take stock of the port­fo­lio of risks your busi­ness cov­ers and ensure you under­stand the impact of these mega­trends.

For more infor­ma­tion please vis­it www.rpc.co.uk