The very nature of insurance, its role and its relationship with society is undergoing a profound and irreversible transformation. Helen Faulkner, Wendy Hopkins, Hans Allnutt and Simon Jones provide a strategic view of the changes transforming the market
Two of the biggest drivers of change in the insurance sector are globalisation and technology, but alongside them is the changing nature of risk itself. At one end of the scale, lifestyle changes and increased automation mean the established model of annual insurance contracts is being overtaken by a demand for short-term cover that, for example, insures people's mobility through car pools and daily leasing arrangements and which is available through a full range of mobile technologies. At the other, we are facing increasingly complex global supply chains, the threat of major cyberattacks and the impact of climate change on natural catastrophes.
GLOBAL SUPPLY CHAINS
The global technology revolution is turning even everyday objects into complex products supported by highly connected and equally complex global supply chains. This digital interdependency is creating new, unforeseen and often unmanaged risks, as well as exposing gaps in information and understanding that need to be addressed by both insureds and insurers. It also brings a new focus on resilience and business continuity.
Mapping the potential risks along the chain around the world -- fire, natural catastrophe, industrial action, regulation, trade wars, the spread of isolationism and cyber to name a few -- is fraught with difficulty. And the potential information saviour -- sophisticated digital connectivity -- is itself vulnerable to cyberattack, system failure and energy supply disruption.
There are insurance products designed to protect companies against supply chain disruption outside standard property and business interruption cover. Policies now exist that provide broad, multi-tier cover, not just for physical damage events but a range of non-physical risks such as industrial disputes, transportation and logistics disruption, supplier insolvency and cyber -- but take-up is low. According to the Business Continuity Institute's (BCI) Supply Chain Resilience Report 2017 (supported by Zurich), 69% of respondents do not have full visibility of their supply chains and more than half do not insure for supply chain losses.
It is the issue of the relevant risk information that sits at the very centre of the global supply chain and insurance challenge. If companies do not know -- or are not asked -- who their second, third or fourth tier suppliers are, how can insurance underwriters correctly assess, measure and price the risks? If underwriting is challenging, then handling claims and identifying liability in this hyperconnected world is even more difficult.
However, this is an area where insurers can and are helping insureds to undertake basic research into their critical supply chains. There has been a flurry of investment in technology startups using artificial intelligence and big data to help companies drive transparency across their supply chain risks and there is a need to embrace this innovation. Equally important however, is communication.
As technology develops, so too does the risk of cyberattacks, with criminals developing new lines of attack faster than responses can be devised. With cyberterrorism now a serious threat and cyberwarfare between states a reality, the need to rethink the scope of cyber risks and how the insurance industry responds to them has become urgent. Many businesses are ill-prepared for the potential impact of major cyberattacks, with smaller firms often believing they are too small to target. This leaves them vulnerable because they frequently do not put the policies, staff training and technical measures in place or buy the insurance protection that would provide them with the right indemnification and support when an attack comes.
"The insurance markets around the world are facing ever-increasing demands to cover catastrophe-related perils and are simultaneously continuing to innovate with a view to cutting related costs"
Awareness of the need to take cybersecurity seriously and insure against the consequences of attacks and data breaches was, however, given a major boost by the arrival of the General Data Protection Regulation in Europe at the end of May. In addition, major incidents such as last year's worldwide cyberattacks involving the WannaCry and NotPetya cryptoworms dispelled a lot of complacency.
The potential for targeted attacks to propagate and have a serious impact on a wide range of businesses creates a potential 'shrapnel effect', in which businesses far away from the centre of an attack suffer. Although not the original target of the attack, many small businesses can still be affected by it. Covering this risk means taking a much broader view of the range of business interruption cover required.
If that is not already a big enough challenge, identifying the source of attack is getting harder too. Methods of attack are wide ranging and the people motivated to carry them out are increasingly diverse. They could be states, criminals, terrorists, activists -- or just a renegade with some basic technology skill. For the insured who has bought cyber cover, they just want the insurer to move quickly to help them mitigate their losses and get back to normality as quickly as possible, secure in the knowledge they will indemnify them against the losses suffered. The policyholder does not want a lot of questions about whether a terrorist or a malicious individual was behind the attack, but insurers are looking for greater clarity and will need to ask precisely those questions. The answers might determine whether -- or to what extent -- the policyholder is covered.
There are no easy answers when defining the scope of cover to safeguard both potential victims of such an attack and the insurance profession as a whole. The challenge of reconciling them is going to draw the industry into another debate about its role in modern society.
As reported by Munich Re, 2017 was the worst year on record for losses resulting from natural catastrophes. The insurance markets around the world are facing ever-increasing demands to cover catastrophe-related perils and are simultaneously continuing to innovate with a view to cutting related costs.
Parametric insurance is increasingly being used as a claims solution. It provides a rapid-response solution, making immediate payments based on a specified trigger or intensity of an event (for example, wind speed or earthquake magnitude) or the amount of loss calculated in a pre-agreed model. Unlike traditional insurance settlements that require an on-the-ground assessment of individual losses, parametric insurance relies on an assessment of losses using a predefined methodology.
As the triggers for claims payouts are already agreed, there will be less need to send teams of adjusters out to disaster areas in the immediate aftermath to carry out a traditional claims assessment and, once the triggers are affirmed as met, claims payments should flow very quickly. There are, however, potential complications, if the assessment of the requirements cannot be proved to have been complied with at the outset. For example, whether a specific area has been impacted by a category one, two or three hurricane is simple, but determining whether there have been sustained wind speeds in a specific area can be far more difficult, particularly if there is no wind speed-measuring equipment at that location or if it is inoperable due to the hurricane.
REIMAGINING THE FUTURE
The industry now needs to reimagine the skills insurers, brokers and service providers, including law firms, need to flourish in the future. Regulators will need to move at a pace that supports the profession in responding to the changes in how society wants to buy insurance and interact with the industry. Forging new relationships with society, governments and regulators will in itself require imagination. Those with the imagination and courage to apply it will thrive in the digital age and meet the challenge of protecting society against the consequences of risks that are transforming apace.
Helen Faulkner is head of insurance and Wendy Hopkins, Hans Allnutt and Simon Jones are partners at DAC Beachcroft