Our industry has entered the era of the protection gap. Which is, at face value, not a great place to be. We are the insurance industry and people are not buying insurance. It was probably ever thus. I am sure Adam could have been better covered for his forbidden fruit risk. But we are now in a place where there are specific challenges we are failing to meet. And the challenges themselves are pretty high profile.
In our report – Innovation Imperative: why brokers matter more than ever – published last autumn, we set out how the changing nature of risk has led to a difference between insured and economic losses in the region of $2.5 trillion. As we are seeing currently in the middle east, the geopolitical environment has become increasingly volatile. We are seeing the increased regularity of extreme weather events. Firms and individuals are more and more digitally dependent which is driving cyber exposure. And over 90% of S&P 500 assets are now intangible things such as IP and brand. For a business that grew by protecting physical stuff, this is new to us. And, thus far, we have failed to innovate at the same rate as these exposures have grown.
Now let me get a bugbear off my chest. I don’t believe in the concept of “uninsurable risk”. There may be risks that we have not yet worked out how to insure – but we need to develop the data sets and the analysis that will allow for that. There may also be risks that we can insure but not at a price people are willing to pay – and we need to invest in resilience to bring those prices down. But nothing is truly uninsurable.
Unsurprisingly, the concept of protection gaps is high on the agenda. I am spending quite a lot of time currently in roundtables on cyber insurance with the likes of FCA and HM Treasury. In my role as a Director of the European Federation of Insurance Intermediaries – BIPAR – I am part of a working party on natural catastrophe risk that is engaged in constructive discussions with European Commission and EIOPA. And these two pieces of work highlight that there is not a one size fits all solution to all of this.
Cyber insurance is available and it is not that expensive. And yet the data shows us that firms, particularly SME businesses, are not buying it. Why is that? Well, let me run you through a case study I carried out on one specific small business – LIIBA. We have cyber cover. But that came at the end of a discussion with our broker where we identified that all of our IT is in the cloud and so is protected by the security of our excellent service provider. Whilst this doesn’t absolve us from responsibility, it does mean the risk is significantly lower. Also, we don’t really have anything worth nicking. And, by keeping a regular back up of our membership contacts, we could probably carry on functioning reasonably well even if we couldn’t access our CRM system. So, our conclusion was that we probably didn’t really need insurance. But we are an insurance trade association and it would be embarrassing if we didn’t have it in an emergency. And it was quite cheap. So we bought it. But if you were an SME without our proclivities, and faced with rising energy bills, and business rates, and the minimum wage and a whole lot of other cost pressures, you can see how you might give it a miss.
Which means the challenge is a marketing one rather than directly insurance. That probably requires a combination of government, regulators and the industry to get better at explaining the risk so that clients understand why it offers value. But it might require a more novel approach. During one of our discussions with FCA, I found myself suggesting that, given the way people make decisions over what to buy these days, the regulator ought to have considered a plea bargain deal with those influencers it prosecuted for promoting crypto investments. Were Scotty T off Geordie Shore to become the UK’s Cyber Insurance Czar, it might attract a whole new generation to the product.
Nat Cat is something different. Given the size of potential losses and the unpredictability of events, capacity can be scarce and the ability to deliver affordable products difficult. So we need to develop better data and better modelling. In Innovation Imperative we look at a case study of a wind farm operator who wanted to protect themselves against the risk of it not being very windy – and therefore them losing revenue. Their broker went away and developed what is basically the world’s first catastrophe model for off shore wind and a product was designed. But as well as designing new products, we need to find ways to reduce the risk and make affordable insurance more achievable. That means resilience; and resilience needs standards. The house that “miraculously survived” the Californian wildfires last year was no miracle. It was built by a fire safety expert. He had made sure there was not vegetation close to the property and had closed off the eaves and many other precautions and his house did not burn down. We need those precautions enshrined as the only way to build houses in areas threatened by fire. As we need to continue to build standards to make sure houses can resist severe windstorms; and survive floods. Bodies such as Insurance Institute for Buildings and Home Safety in US are critical for this. We should develop a similar partnership between the industry and academia in UK.
And if building to these standards is a bit more expensive than not? Then maybe a better use of public money is to incentivise resilience rather than providing reinsurance back stops that are not always that effective.
We stand at a crossroads. Protection gaps are the challenge of our times. We can either draw on our expertise and innovation and be a part of society meeting its biggest issues. Or we can fail our clients and leave them exposed to the emerging risks our developing world is producing. Relevance or redundancy? It is not much of a choice.
