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Innovation: insurers are answering the call

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Insurers are not suffering from an innovation deficit, according to the latest Swiss Re Sigma report, which largely debunks the widely held perception of an industry out of step with the new economy’s needs.

If anything, commercial insurers are playing a vital role supporting the rise of the service economy.

The Sigma report says they have embraced data, analytics and other new technologies to devise novel risk solutions for non-physical assets, which are increasingly used to determine companies’ market value.

The evolution of triggers, indemnity structures and data and modelling has enabled the coverage of intangible assets such as intellectual property, patents and customer relationships.

The industry has expanded the boundary of insurability to include risks – think political instability, energy price shocks, droughts – that were once deemed difficult or impossible to underwrite.

Companies are also using innovative risk solutions to protect earnings, reduce cashflow volatility and support business strategy and growth.

“The new or expanded areas of risk transfer require modelling and underwriting, and are enabled by the expanded availability of data and the evolution of analytical capabilities,” the report says. “New covers are developed in response to the changing corporate risk landscape.

“They aim to address key concerns that companies have stated as their top business risks in recent risk surveys. These new solutions expand the boundaries of insurability and in doing so enlarge the scope of insurance in risk management.”

The industry’s willingness to adapt risk methodologies and horizons reflects profound shifts in the global economy, with services supplanting factories as the driving force.

As a result, the corporate world’s perceptions of threats have evolved, and most relate to the potential impact on intangible assets.

Intangible assets accounted for 87% of the total market valuation among S&P 500 companies in 2015. Wind the clock back to 1975, and intangible assets’ share was just 17%, with physical assets such as property, equipment and inventory making up the remainder.

Technology and service groups including Google’s parent Alphabet and Facebook occupy the top five spots for companies by market capitalisation this year. In 1980, the likes of ExxonMobil and General Electric ruled.

“Corporate risk management is becoming more sophisticated as a necessary response to the changing risk landscape from structural changes in the business environment,” the report says. “These structural changes create new opportunities, but also new risks.

“Further, the corporate sector has changed from being dominated by physical assets to deriving more value from intangible ones. To adapt to this ever-changing landscape, which includes the emergence of new risks, businesses need agile risk management processes, and also new ways to assess, mitigate and transfer risk.”

Parametric or index-based solutions are among recent offerings from commercial insurers.

Payouts are triggered if pre-set conditions are met, as opposed to meeting actual losses experienced.

“The biggest advantages of parametric triggers are their clarity and neutrality. They provide a quick, pre-agreed payout without a claims investigation, issues with sub-limits, or investigations into extent of loss. Parametric insurance removes ambiguity from the process and gives the customer certainty of liquidity.”

For example, a state-owned utility in Europe has secured cover for weather-related damage to its low-voltage grid and reduced ambiguity in the claims process.

In the US, a state government entity with sizeable property holdings across a wide area has bought a multi-year parametric earthquake cover to ensure sufficient post-event liquidity.

“By far the most common are natural catastrophe or weather-related triggers, such as earthquake intensity, wind speed, rainfall amount or temperature levels.

“Weather index-based insurance pays out once a certain trigger (for example, a certain precipitation or water level) is reached.”

Insurers are now eyeing non-physical-damage business interruption cover, which is seen as the next stage in their evolution.

Also known as named-peril earnings insurance, the insured risk is detached from traditional asset-related property risk. The cover protects earnings even when there is no physical damage to an insured’s or a third-party’s property.

Cyber attacks, strikes, electricity blackouts and product licence cancellation are among the events that could cause significant loss under this category.

For those still doubting the industry’s ability to move with the times, Swiss Re’s report makes for insightful reading.