For an industry that depends on lots of data to develop products and price them according to risk, the insurance industry finds covering new and emerging risks to be no easy task.
Carriers try to address new risks, particularly those with technology, but they tend to be risk-adverse where there is little experience or data to go on.
According to Graeme Newman, an “emerging risk” is a risk that results from a fundamental change in how people live or work, or in the environment/climate.
Newman, marketing director at London-based CFC Underwriting, says the problem with new risk is that there aren’t years of loss data for insurers to use to quantify and assess what it is that needs to be insured.
“When you have something like cloud computing and you’re trying to insure the risks associated with storing data in the cloud, nobody has even 10 years’ worth of loss data to assess and quantify it. So insurers’ natural reactions, rather than to look for ways to include it, is to find ways to exclude it,” Newman says.
Consequently, insurance policies have not adapted quickly or effectively enough to adequately cover new risks, he says.
A managing general agency, CFC works with emerging risks related to technology, life sciences and social media. CFC was one of the pioneers of cyber liability insurance.
“Ten to 15 years ago, far fewer businesses were connected or online. Now we live in a world where everybody’s connected almost all of the time,” says Newman. “Even though the risks themselves haven’t necessarily changed, the scale upon which those things happen has.”
Inuring emerging risks comes back to basics. Newman says carriers need to rely on fundamental principles of insuring pools of risks, managing their limits, ensuring they’ve got the right level of retention, starting off with tightly-crafted insurance policies that have the right exclusions and conditions, then managing it step-by-step. As the risks evolve, the industry will gather the data it needs to stay profitable.
“How on earth do you design insurance products for areas of risk where there is little to no data; where there’s little to no underwriting experience? It’s not easy,” Newman says. “It’s a case of taking it in baby steps. That’s the only way you can do this. But actually sitting back doing nothing simply isn’t an option, because we’ll never learn and we’ll never advance.”
Newman thinks the industry can adapt to the changing world, but that it must start with its own technology.
“We’ve got a lot of very big businesses with some very old systems and it’s going to take some brave people to make large investment decisions to upgrade that to change it and make them work in the modern era,” he says.
Insurers also need to take advantage of the new tools including social media so they can market themselves better and give customers a voice when it comes to discussing what products they need, says Newman.
The same is true for agents. Newman acknowledges it is a challenge for agents and brokers to keep abreast of all the new risks and many are intimidated by new technology. Agents also worry about discussing these new areas with their clients.
The bottom line, according to Newman, is technology is going to continue to change the world and the insurance industry will need to change with it, despite the fear of the unknown.
Watch MyNewMarket Editor O’Connor’s interview with Graeme Newman on insuring emerging risks including reputational and technology risk.