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 to go on.
“An emerging risk is any type of new risk that comes about as a result of a fundamental change in either the world we live in, the way we operate, the way we work, or the environment/climate,” says Graeme Newman, marketing director at London-based CFC Underwriting.
“The problem with new risk is that we don’t have hundreds of years of loss data in order to quantify and assess what it is that we are actually trying to insure,” he says. “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.”
As a result, insurance policies have not adapted quickly or effectively enough to adequately cover new risks, he says.
A managing general agency, CFC was founded in the late '90s at the time of the first dotcom boom and works with emerging risks that have come about as a result of new technologies, such as cyber risks, life sciences, and social media. Newman says CFC was one of the pioneers of cyber liability insurance and now focuses on evolving the coverage to address businesses' needs.
“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.”
Newman says many companies, not just those in technology, now have access to or store massive amounts of customer data. This has become even truer since the invention of cloud technology, which Newman says is itself an emerging technology risk.
“We are seeing businesses and individuals storing more of their data not on their own systems but on systems of third parties…that is an area that is really changing the way that businesses work," says Newman. "It’s making it far easier and far quicker for people to access information, but at the same time, it is introducing new risks.”
Emerging risks ultimately beg the question of whether the insurance industry can adapt quickly enough to remain relevant to buyers. Newman thinks the industry can adapt, but it has to start with its own technology systems.
“The problem is that the insurance industry is encumbered by legacy technology,” he says. “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.”
Newman says the insurance industry is operating in the technological world and has the ability to fully utilize an online buying process, but there is still a lot of work to do to make the process more efficient.
“For an industry that has a virtual product, one of the easiest products to sell online or to transact electronically, it’s amazing that we generate so much paper and so much physical paperwork, and that the transaction can take so long to do,” he says.
Some businesses or industries, such as the travel industry or retail, have dissolved because they didn’t react to technology changes quickly enough, says Newman. If insurance carriers and agents want to stay in business, they have to pay attention to how technology is changing the business they operate in and react to it appropriately, whether that be through online sales portals or policies that address technology risks.
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 what products they need, says Newman.
The same is true for agents. Newman acknowledges it is a huge challenge for agents and brokers to keep abreast of all the new risks that exist and many are intimidated by new technology and its implications. Agents also worry about discussing these new areas with their clients, but carriers can help with education if agents just reach out. The relationship should also work the other way so agents can help carriers develop products that their clients need, and at the same time prove the agent’s own value.
“Many insurers sit happy in their ivory towers very distant from the client. That’s why we see such a disparity between what the clients really want and what the insurance market provides,” says Newman. “It’s the role of the broker to solve that and bring those two parties together.”
The bottom line, says 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.
Insurance 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, and managing step-by-step. As the risks evolve, the industry will gather the data and information 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.”