New and emerging risks: a bumpy road ahead for insurance

Innovation in the insurance industry is not just important, it is essential. A more dynamic market has meant insurers are venturing into non-traditional sectors as well as looking for more advanced ways of serving existing markets. The industry must ramp up its innovation efforts if it is to tackle increasingly threatening risks, such as climate events and cyber-attacks.

Insurance is somewhat of an invisible product, at least when things are to going according to plan. If you were to ask a consumer how many times a day do they think about insurance, the answer will likely be not many.

And yet, insurance ultimately enables much of the world’s innovation. At least according to Richard Gunn, CRO at InsurTech hyperexponential. Insurance can be used to solve externalities that other industries create. Gunn said this is especially true of specialty insurance. “There are no rocket launches without insurance, driverless cars won’t be possible on public roads without insurance.”

Insurance is, at its core, an instrument to reduce financial uncertainty and mitigate losses. Jimmy Spears, head of automotive at Tractable, said the key to designing new insurance products is “finding the moment of financial uncertainty in any consumer’s or businesses’ course of daily interactions.” Tow and roadside products for example, found their way there through flat tires, running out of fuel, and mechanical breakdown. Spears said future products will involve EV’s running out of battery life and needing to have charge brought to it, or the vehicle being brought to a charging station.

How can insurance solve problems that others haven’t been able to?

An increasingly innovative and dynamic insurance market has meant newcomers are looking for opportunities to solve these moments of financial loss or uncertainty Spears referred to, particularly so in areas of life that have otherwise gone unnoticed or are underserved.

A poignant example of such a case is the startup Gaia, which provides insurance payment plans to finance IVF treatments. The Gaia model means that those who do not have a live birth pay a lower cost of IVF treatment, and those that do, spread the cost into monthly payments. Essentially, it insures the risk involved in pursuing fertility treatment, which consequently expands access to IVF and reduces the financial burden.

Tractable’s Spears pointed to Cuvva as another example. Cuvva is a carrier that provides auto insurance coverage by the hour, day or week. Initially a niche and overlooked market, this company now has competitors following suit, including Day Insure and Tempcover.

hyperexponential’s Gunn said there are many examples of companies innovating in new products or viewing similar products in a new way. He highlighted the growing trend of parametric insurance, which tackles existing product lines in a new way, as well as unlocking new ones. Descarte for example, provides parametric insurance against climate related property risk.

Any event, activity or entity can in theory be insured. According to Alan Haskins, North America insurance business development director at Quantexa, this is possible providing there is access to enough data and predictive analytics. “There will always be a new innovator in the insurance market willing to insure a risk that others have not thought of taking.” He predicted that specialty insurance and non-traditional insurance will steadily increase in the next five years.

Should insurers be more widely backing ‘wild card’ products?

With many facets of life causing financial uncertainty, it can be said that insurers should focus on innovating in the markets in which they are already present, before venturing into new ones. However, many in the industry believe they would also do well to back ‘wild card’ products as part of the effort to innovate.

“Innovation drives competition,” Quantexa’s Haskins said. “Insurers are always looking for the next product or tool that drives a better consumer experience or identifies a clearer picture of risk. Backing new technology and solutions is how the industry will stay relevant and competitive in a fast and ever-changing insurance market.”

There does not need to be a trade-off between innovating in existing markets or backing more ‘wild card’ products. Tractable’s Spears said backing new products and innovating in core products is equal and necessary for carriers to survive. This can be done by investing in new technologies such as AI.

Similarly, hyperexponential’s Gunn said insurers should pursue both of these aims. “Ultimately, insurance companies and their clients should be working in partnership to make risks insurable as early as possible.”

The cyber threat

An area in which this sort of partnership is most evident is cyber. Gunn said in this sphere, insurers have been working directly with companies to understand the landscape of risk and what they can be doing to mitigate exposure. An example of this is the Hiscox Cyber Academy, which allows insured clients to decrease their excess by investing in training their staff.

Melanie Hayes, CMO and co-founder of cyber InsurTech KYND defined ‘wild card’ products as products which have been designed to assist the insurance industry by organisations outside of it. In the cyber insurance sector, these are quickly becoming a “vital resource” for driving innovation.

Hayes went on to explain that as insurers struggle with issues of capacity in handling the increasing number of applications, as well as managing risk appetite versus the evolving cyber threat landscape, innovation in the form of faster and more accurate application processing, alongside better insights into risk, is difficult to come by.

“In-house as tech isn’t necessarily in the DNA of insurers. “Wild card” products can bridge this gap with tech that’s powerful but also simple to understand and easy to use. This means that cyber insurers should focus on backing more wild card products, as it will drive innovation in the cyber insurance industry.”

Those that have done so, Hayes continued, are now able to process applications and get the insights they really need into a candidate and portfolio risk quickly and accurately. As such, have been able to experience growth at a faster rate, without having to compromise on underwriter requirements.

Evolving risks

Encountering something unexpected, in which there was little to no planning in place for, can have devastating and far-reaching consequences. The pandemic made this loud and clear. Hence, it is not only important, but perhaps vital, to look ahead to the future risks that are emerging which could pose challenges, if they haven’t already.

According to Quantexa’s Haskins, anyone who has been in the insurance industry for the past five years sees and understands that climate change and cyber risk are at the top of every insurers’ mind. Turning to cyber firstly, Haskins said this type of risk is the least understood, and has potential for the largest risk exposure, yet we don’t have the historical data for it in the same way as other types of risk.

KYND’s Hayes strongly echoes this sentiment, “The cyber threat landscape is constantly evolving, and the rate, method and style of cyber attacks is changing with it. The potential for new and emerging risks is arguably much greater in cyber insurance than in other specialties,” she said.

A prime example of one of these risks, Hayes added, is the growing threat of ransomware, which now accounts for a large percentage of cybercrimes committed. In fact, its reported that 80% of UK organisations experienced a successful attack in 2021/22. “Landmark events like the Colonial Pipeline ransomware attack which resulted in a $4.4m payout to criminals, as well as the growth in state-sponsored attacks have forced the industry to sit up and take notice,” she added.

The good news is InsurTechs have been able to offer their assistance and it’s making a real difference. “A recent report by Beazley has actually pointed to a downturn in the rate of ransomware attacks and this can be linked to better visibility and management of this particular type of threat,” Hayes said. Moreover, KYND’s own service enables insurers to see where risk lies “at a glance”, as well as get better insights through clear and easy-to-understand profiles for every prospect. “We also provide a real-time view of risks that helps insurers stay ahead of threats before they develop thanks to regularly updated, on-demand reports for entire portfolios.”

Climate risk

Another challenge on the top of insurers minds when considering emerging risks and devastating consequences, is the impact of climate change. Ruth Fisk, VP of strategy at Smart Communications, pointed to data from Munich Re which reported that 2020 saw over $210bn of overall losses from natural catastrophes, which was a 27% increase from the previous year.

According to Tractable’s Spears, “Catastrophes have always been the moment of truth for a carrier.” He said the main question carriers need to be prepared to answer at all times is: “Are we ready to handle an event at scale to provide access to our services, offer a customised experience and deliver top customer service?”

A consensus in the industry is that in order to be able to tackle this, technology must be leveraged to help insurers proactively prepare for when disaster strikes. Fisk said, “During a catastrophic event communication is key and begins long before the event occurs.  At the start of the storm season (hurricane, tornado, etc.) Insurers that take proactive measures to help educate and prepare insureds for an unfortunate event can help to reduce exposure and severity while greatly enhancing the customer experience.”

Some of examples of this, Fisk continued, would be providing advice for steps to reduce the severity, emergency preparedness tips, and making the insured familiar with the claim procedures prior to a storm can be seen as a value-add service. Once a storm has been indicated where possible, sending personalised messages to help bring awareness to the situation but also not always possible so in those situations, getting staff into the field as soon as possible is critical. “It is important for Insurers to have a business continuity plan enacted so that they can access their core systems to ensure they have information they need to start processing claims,” she added.

Other emerging risks

Insurers have their work cut out for them. Beyond emerging climate risks, there are other risks that are evolving that are perhaps even less well understood. hyperexponential’s Gunn sad intangible assets, for example, could pose challenges for the industry.

“Much of the world’s value is now driven by intangible assets – marking a shift whereby the world’s most valuable hotel chains used to be those with bricks and mortar on their balance sheet, now it’s Airbnb.” Traditionally, insurance pricing has been driven by understanding tangible assets and exposures related to that, Gunn continued, hence insurers will need to adapt to build products which are relevant these companies whose balance sheets aren’t driven by, or underpinned with, tangible assets.

Quantexa’s Haskins said other emerging risks that have the potential for just as big of an impact to consumers include political risk and the Internet of Things (IoT). Such risks pose difficulties to insurers to underwrite though traditional models. To overcome these challenges, Haskins said insurers need to deploy the best-in-class data and technology tools that bring together disparate data sets from across their entire business enterprise and lines of business. They should also look to incorporate external data sources that will provide context to the risks they are identifying and intelligence to decisions they make and the platform that adds them in those decisions.

The belief that the key to adapting to evolving risks and being better equipped for future ones, lies with data, is a commonly held one. hyperexponential’s Gunn said, “Unlocking a greater understanding of the data behind these new risks, and quickly, is the secret to making new products insurable.” This will enable insurers to achieve revenue growth in tandem with the right level of confidence in expected profitability, he added.

“The latter is particularly important, as the huge levels of uncertainty in the world – geopolitically and economically, particularly with respect to inflation – set the insurance industry up for a bumpy ride in the coming years!”

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