Evolving enterprise risks bring opportunities and challenges for insurers.
Constantly evolving enterprise risks have two sides. One is their potential for storing up losses; the other is creating growth opportunities for insurers.
For example, cyber risk is a big growth area but there are increasing worries about ‘silent’ cover and aggregation generally, while the changing face of terrorism is presenting new challenges such as non-physical damage business interruption (NDBI) and Loss of Access (LoA), but also stimulating a demand for cover.
Cyber risk is a particularly good example of the two faces of risk.
There is much excitement from insurers about the potential of this area, and clearly there is significant demand from businesses for protection against cyber risks.
But at the same time, there is concern about the potential for large losses and aggregation.
This year should see original premiums in the region of US$4 billion with the potential for this to reach US$10 billion by 2025.
Although the US has been the main driver for business there is still huge potential for more growth, not only there but also in many other regions, mainly driven by GDPR in Europe.
“Insurers absolutely see this class as a growth area and each year sees new entrants to the market,” says Chris Bennett, Partner, London Market and International Non Marine Treaty at JLT Re.
“Reinsurers are equally excited by the potential growth and currently there seems to be sufficient capacity to support the primary market.
“It has already become more than a niche product and has the potential to become a huge class of business in its own right.”
Differing views about cyber
There are, however, concerns about cyber in the market. Jamie Pocock, Actuarial Analyst at JLT Re, says reinsurers can have a very different view of the risk to the primary carriers.
He notes that the generally benign loss experience is of little comfort to a reinsurer who is struggling to understand their exposures (for which they may have even less data than the carrier), and also understand the perils that they are exposed to.
While there are clearly concerns over systemic risk/aggregation, Pocock says it is worth noting that not all have the same view on this.
“Some feel that the ability to diversify in cyber is understated, and would point to a number of the targeted attacks on an individual institution, or a specific industry, area of the world, or software service type.
“This may not be a common view, but there are definitely differing levels of confidence in an ability to manage a diverse range of cyber risks.”
He thinks that there is some disconnect between what informed buyers want and what they are able to attain, but it appears that the gap is closing in many areas.
“An important part of the maturing process needed is to affirmatively cover cyber risk in appropriate places.
There is a lot of discussion around silent cyber risk and exclusions in other classes and, as an industry, in order to provide the best service, we need to adapt to the new threat and ensure that risk is assimilated to the areas with the most relevant expertise.
It is uncertain where the balance will lie between the stand-alone cyber product and more traditional classes of business,” he says.
The nature of the terrorist threat has continued to evolve, which means that now, more than ever, businesses are looking to the terrorism insurance market to mitigate the broad range of threats they face, which go beyond property damage.
This represents both an opportunity and a challenge for the insurance industry. It has responded with specialty insurers developing new, broader coverages that include loss of attraction, active shooter and cyber.
“The progress made to date by the primary market represents a major step forward in narrowing terrorism protection gaps,” says Stephen Hudson, Senior Terrorism Consultant at JLT Re.
Pressure on reinsurance market
As the ground swell for such cover grows, pressure is building on the terrorism reinsurance market to provide new solutions for the more dynamic primary carriers.
This is compelling reinsurers to broaden risk appetites and adopt new approaches to account for the complexities that the new threat landscape brings.
According to [one of] JLT Re’s latest Viewpoint report[s], Terrorism (re)insurance: achieving resilience, new approaches will need to be adopted to account for the complexities that the new threat landscape brings.
“Stasis is not an option for reinsurers. A definitive response to the complex needs of primary carriers is now required. While contingency aggregations are likely to be challenging, this could be offset by higher pricing.
“And significant progress is being made in the modelling and analytics space to help carriers assess and mitigate the new terrorism landscape,” the report states.
But more needs to be done. For example, there is a need for greater capacity for new forms of cover in the private market, and there needs to be greater awareness of these products beyond large corporations.
“The role risk advisers play in developing sophisticated modelling and analytics tools, and communicating their results to risk carriers, will be crucial in bringing about this change,” says Stephen Hudson.
“Broad cohesive cover supported in depth by the market will achieve greater resilience for insureds, the market and the wider economy.”
And as JLT Re’s report concludes: “The terrorism market is at an important juncture as carriers seek to differentiate offerings and secure long-term relevance.”
Please contact Stephen Hudson on +44 (0)20 7886 5537 or firstname.lastname@example.org