Insurers grapple with growing demand for cover against intangible risks

“The risk landscape is moving faster than ever before and in many dimensions at the same time.”

These were the words of John Hurrell, outgoing CEO of the UK insurance and risk management association Airmic, speaking at his last Airmic conference before retirement.

Against a backdrop of more complex and harder-to-define risks, the insurance industry is starting to recognise that traditional insurance is losing its relevance, added deputy CEO Julia Graham.

Intelligent Insurer attended June’s Airmic Conference 2017 in Birmingham, UK, and spoke to various executives about how the market is responding to the changing landscape.

Airmic research—in collaboration with AXA Corporate Solutions, Chubb and JLT Specialty—suggests that the growth of intangible assets is outpacing that of tangible assets, and the industry must move away from a transaction-driven model towards a collaborative model where insurers and brokers work with risk managers to improve the understanding, prevention and mitigation of today’s risks.

Chubb argued that digital advancement and emerging technologies are key areas where insurers and risk managers should work together.

Furthermore, digital advancement and the subsequent disruption of emerging technologies was perceived by Airmic members as the fastest growing risk, which in turn has revealed a clear demand for greater support in terms of insurance and value-added services.

Grasping the intangible
An increasing number of board-level risks still do not have insurable solutions, according to Hurrell.

One such example is insuring and managing the intangible—assets which can be hard to quantify.

“In a corporate crisis, when a company has been the victim of a cyber attack, insurers and risk managers are now grappling with global reputation risk and the impact of social media that comes with this,” Hurrell said.

In fact, the quantification of reputational damage a company faces from a cyber attack was identified as one of the biggest challenges the insurance market faces, according to a panel of cyber specialists at the conference.

The panel cited the recent global system outage of British Airways, the ransomware attack on the NHS, and the data breach of TalkTalk, and the subsequent damage that arises from these examples, as issues the industry still needs to address.

“It’s what keeps businesses awake,” said Christian Stanley, performance management directorate at Lloyd’s of London. “It’s a domino effect; it just gets worse and worse.”

All the intangible costs that arise from reputational damage would not be picked up, argued William Wright, joint head of privacy, cyber and technology at Paragon International Insurance Brokers.

For example, reputational damage can transfer through loss of income, the costs of public relations and managing a brand—on social media, for example—in light of an event.

“Share price drops, investor fallouts, extra costs to boards; all of these intangibles would not be picked up by your standard cyber policy, but they’re huge,” said Wright.

“It would be a wonderful world if there was a metric that can pinpoint where a business stands before and after an event, with a payout calculated accordingly. I applaud any insurer that comes out with that product.”

David Pryce, managing partner at Fenchurch Law, hinted at the idea of an insurance product that uses regression analysis, a statistical process for estimating the relationships among variables, which could potentially look at a loss—such as share price drops—and how it is attributed to a particular event.

Emerging technologies
As the push toward digitisation continues and technology advances, businesses are faced with newer, more complex risks.

This was highlighted at a collaborative workshop hosted by Aon Risk Solutions and British Telecom, who suggested this increased reliance on digital technology is leaving businesses more exposed to cyber events.

Adam Peckman, global practice leader of cyber risk consulting at Aon Risk Solutions, said that companies are using technology to drive efficiencies and become more competitive, for example utilising big data for customer or purchasing insights, or putting their entire enterprise supply chain on to a cloud solution.

“They might be using artificial intelligence (AI) or machine learning, or maybe deploying robotics within their own production,” Peckman added.

It is the advent of newer technologies such as AI and autonomous vehicles which is impacting insurers, according to various specialists.

Paul Greensmith, underwriting director at XL Catlin, said: “From a logistics perspective, you now have forklift trucks driving around warehouses autonomously, and potentially a lot of this new technology can go into medical devices. We are looking at the broader applications of AI and what the implications are for the insurance industry.”

Kevin Warwick, an engineer and deputy vice chancellor at Coventry University, said that autonomous vehicles are already on the horizon.

“If an autonomous vehicle is aware it is going to crash, for example, it will look at various factors such as what the minimum cost will be, what speeds they’re going, how heavy the vehicle is. The vehicle would aim to minimise the cost and the insurance,” he suggested.

“The mix of multidimensionality of AI and the predictions it makes will have a huge effect on the insurance industry.”

One of the overarching themes of the Airmic conference was that tackling the evolving risk landscape will require a more collaborative approach among insurers, risk managers and technology specialists.

“Our members want support in understanding and dealing with these modern risks—in terms of innovative products, but also in terms of broader support,” said Graham. “The insurance industry must provide more than just risk transfer; this requires a shift in thinking but everyone will benefit.”

Airmic published a report, Cyber risk—Understanding your risk and purchasing insurance, which showed that less than a third of Airmic members are satisfied with their organisation’s ability to manage cyber risk, and argue that it is not just an IT issue.

Furthermore, more than 50 percent of Airmic members still don’t buy cyber insurance, the main reason quoted being that decision-makers are often persuaded by their technology and information colleagues to spend the money on controls instead.

Graham suggested that the insurance industry needs to offer more than just insurance, in the form of value-added solutions, including support for data breach, legal and media advice.

Carl Moore, partner at legal firm Lockton Companies, who contributed to the report, added: “Cyber insurance is the fastest-growing area of the market, and we are seeing a major increase in the relevance of cyber products, the capacity available, and the number of companies purchasing cover, especially in the last 12 months.”

“The insurance industry is offering more than just insurance—some really valuable risk advisory and services that will support risk managers in taking a cyber risk leadership role are available,” Graham concluded.