Insurers must embrace the world as it is, not the world they would like to see

Traditional risk transfer is not addressing the risks that concern today’s executive boards and, according to Tony Buckle of Swiss Re Corporate Solutions, there are three fundamental assumptions that need to be challenged if insurers are to increase the relevance of insurance on the corporate agenda.

We live in interesting times for risk management professionals, with the risk and insurance industry witnessing fundamental change. On the one side, the world is becoming a riskier place: Lord Rothschild recently asserted that the world is more dangerous today than at any point since the Second World War. On the other side, the cost of risk transfer as defined by the insurance market is falling.

How do we reconcile these seemingly contradictory facts?

From one perspective, the answer is simple: supply and demand. Successive bouts of quantitative easing combined with recently benign insured losses result in an insurance market which is abundantly capitalised.

This analysis, however, masks a more unpleasant reality. Simply put, traditional risk transfer is not addressing the risks that concern today's boards of directors. As a result, we are witnessing a strong divergence: traditional insurance products being increasingly commoditised while corporations bemoan the lack of relevant solutions to their real world problems.

So far, so logical. Everyone talks about the need to innovate. But I would argue that we need to do more than innovate. We really need to re-think risk transfer from the ground up, assessing its basic principles.

Challenging assumptions

Let me take aim at three fundamental assumptions that need to be challenged if we are to increase the relevance of insurance on the corporate agenda:

• The first assumption is that the insured's physical assets should be the main risk management focus of the board.
• The second assumption is that insurance cannot indemnify financial losses without there being physical damage to assets.
• The third assumption is that broader economic risks are by definition non-insurable.

I'd like to challenge each of these in turn.

First, the need for physical assets, let alone ownership of such assets, is constantly shrinking. For example, an airline maintains physical infrastructure – planes, offices, etc. – but its business performance is essentially driven by the number of people choosing to fly with it. Consequently, corporate boards are less and less focused on risks to physical assets and increasingly focused on risks to income streams and cash flows. Thus, it is on these two last considerations – income and cash flows – where insurers should put their focus.

Second, companies are increasingly sophisticated not only in terms of their risk management but also in terms of their supply chains. While companies can model what can happen, they are still impacted by events out of their control but still have to bear the consequences. This is not painless – despite all the statistical modelling and preparations, the business is still interrupted when an event of a certain type affects their supply chain, so costs are incurred even if the companies' own assets are not directly affected.

Third, whilst it is true that insurers have not traditionally provided indemnification against key economic risks, e.g. the spot price of electricity, it is also the case that many companies are interested in having such protections because of concerns which are specific to them. Let's take the example of an independent power producer (IPP) which may be committed to supply contracts. Such commitments may give rise to an exposure where a combination of a high spot price and an unplanned outage, would leave the IPP with a sizeable bill as it sources the electricity it requires to fulfil its contractual obligations from third parties. A customised insurance cover, incorporating traditional insurance triggers in conjunction with economic triggers, would be of value to the IPP in the above example. A similar mix of conditions would be beneficial to many other businesses in a variety of sectors.

Embrace the world as it is

In each of the above scenarios, insurers need to act to serve the often unmatched needs of corporations. We at Swiss Re Corporate Solutions have been early developers and promoters of new perspectives that address this challenge.

In fact, there are already products designed with those new perspectives in mind. For example, parametric covers that provide immediate financial assistance to clients should a loss trigger be tripped are available, in recognition of the importance of cash flows for today’s businesses. Meanwhile, non-damage business interruption products, which support clients when third party losses impact their businesses, address the fact that companies can be affected by forces well beyond their control and physical footprint. Alternatively, non-standard coverages, which incorporate economic triggers across multiple exposures, recognise that businesses are unique and require bespoke protection.

These are just some examples of innovative products already available, but clearly more needs to be done.

In conclusion, it is hardly a surprise that the value of corporate insurance is not held high if the coverages the industry offers do not meet the real risk transfer needs of its target clients. To be more relevant – locally and specifically to clients on a case-by-case basis – we need to re-think our value proposition from the ground up and embrace the world as it is, rather than as we would like it to be.

Tony Buckle is Head Europe, Middle East & Africa, Swiss Re Corporate Solutions

Tony Buckle