Changing the standards

Predicting the future is the job of a psychic, not an insurer. However, unless insurers are aware of future risks it is difficult to provide the right kind of support to their clients.

By understanding how to analyse big data effectively, and having a clear view of all the risks that currently affect clients, insurers can have a pretty good stab at predicting emerging risks – but it does mean thinking outside of the box.

Providing an established product as a solution to a problem is the traditional approach to insurance and risk management. This will not be enough in the future. Insurers will have to develop new customised solutions and support, turning risk into opportunity.

This means really getting to grips with all the headaches their clients face. Relationships will no longer be based on the buying and selling of products.

Insurers will need to grasp their role as strategic partners, creating innovative solutions for more sophisticated risks. So what does this all mean? Let’s start with some of the emerging risks that we’ve already identified, and possible non-standard solutions.

Traditional business models are being challenged by the "uberisation” of society. The internet of things, or the networked connectivity of everyday items, is moulding a new economic platform. Uncertain and unstable economic periods in recent years have pushed society into thinking of new ways to do business.

Entrepreneurs and disruptive start-ups are changing the face of commerce. Advances in technology have meant that real-time data of behavioural patterns can be combined with mobile applications, which can be overlaid with dynamic pricing, and the net impact is a business that really understands its customers.

Traditional insurance players will be left behind, as new enterprising businesses disrupt the value change and forge a way into the market, with a more specific, targeted and attractive offering. Insurers need to interpret the impact new risks will have on their clients’ cash flow, for example risks that affect more that physical assets. Then they can develop new solutions to meet these new challenges.

New evolving weather patterns have caught the media’s eye and raised the profile of climate change. Winters are warmer and summers are wetter than 20 years ago. When a weather related episode occurs, the damage to businesses is very real, from disruption to the supply chain to consumer buying patterns.

Case study: A British brewery with a chain of pubs was concerned about the impact of weather on the beer drinking volume in summer. It was discovered that people are less likely to drink beer if the temperature is above 28C, as they seek more hydrating beverages.

Cold summers were a problem too with sales dropping once the temperature dropped to below 16C, as people became less sociable. The solution was to create a customised non-standard cover to address the loss of sales. This was triggered by an agreed temperature threshold. 

The complex changes in weather patterns have also had huge ramifications on the number of NatCat occurrences, which appear to be increasing. The loss of life and crumbling buildings may initially be the main impact of tropical storms or earthquakes (which are of course not related to the weather). However, the consequences are much wider, affecting supplier production, crops and products and consumer interest.

Case study: A luxury retailer in Tokyo found their cash-flows severely affected by NatCat events. The main worry was not physical assets but rather the impact on buyers’ moods. Understandably, fewer people felt like shopping after an earthquake, even if the buildings were safe. After scrutinising the issues with the client, and talking to risk managers and marketing managers about matters that disrupted cash flow, a loss of earnings based cover was developed, triggered by the intensity of an earthquake.

Current conflicts and military action in various parts of the world, and the risks imposed by emerging markets, have led to several major issues: the threat of terror attacks, an increase in migration and an adverse reaction to immigration. 

For business this can have the knock on effect of disrupted supply chains, high turnover of staff from a mix of cultures and damage to corporate reputations when things go wrong. The impact of regulatory reforms, created to address some of the political risks, also restricts an organisation’s freedom.

Case study: A national railway system identified three non-damage risks that would have a huge impact on earnings; i) regulatory action, which could mean the government shutting the railway if they perceived a risk, such as a threat of terrorism, likely to impact health and safety, ii) The impact of a NatCat flood, avalanche or landslide, iii) cyber-attack that impacted the security and safety of the rail network. 

A customised nonstandard solution was developed to provide cover for loss of earnings. This would be triggered by specified events of a certain defined severity. Insurance is no longer just about physical loss. Understanding your clients’ pain points is the start of the journey.

Emerging risks are only threats to the insurance industry if insurers don’t rise to the challenge and take the opportunity to create innovative solutions tailored to the needs of their clients. Insurers need to become more investigative in their approach, to find their clients’ revenue risks and make them insurable.

The aim is to reduce the volatility of the underlying business. Insurers have to be close to customers and work with them as the business model changes, if they are to continue to be relevant. The ones that will survive are the ones who can develop creative solutions to help customers stay in business. However, success is not achieved by just understanding your clients’ needs. The next step is to deliver.

Note: For more in-depth information on emerging risks please visit Swiss Re Corporate Solutions SONAR research report