Insurance industry must get on top of connected risks to better deliver for clients

The insurance market is facing an existential threat from changing and connected risks and must rapidly change its approach in order to deliver relevant cover for risk managers before losing relevance, according to a high level meeting of industry executives.

Speaking at the Lloyd’s of London Old Library, experts from the world of risk transfer warned that its inability to track growing accumulation of business risk in an increasingly interconnected world is threatening the insurance market’s success.

They urged the risk transfer industry to improve data flow, transparency of risk on its balance sheet and break down silos to better manage capital and ultimately deliver for clients.

Suki Basi, CEO of Russell Group, the risk management software and services company that hosted the event, warned that corporates are becoming more connected, more diversified and carrying more risk.

When this risk is transferred to the insurance market it causes potential accumulation issues that the industry needs to better manage, experts at the meeting agreed.

“The events highlighted today will tend to be more multi-class, which will place strains on exposure management and pricing through the siloed insurance classes which are not set up to analyse beyond all-risk, therefore balance sheets will be exposed to this connected risk as it has not been mitigated,” Mr Basi explained.

According to Dr Adriano Bastiani, head of casualty facultative for global clients North America at Munich Re, the degree of effort needed to understand correlation of residual risks and maintain transparency is increasingly difficult for the risk transfer industry.

“The key challenge for the insurance and reinsurance industry is we are losing transparency in our portfolios and it is becoming more and more difficult to understand correlation of residual risks,” said Dr Bastiani.

“The insurance industry will need to adapt if we want to stay relevant. We have to understand what is going on, how these companies are changing and what their needs are. We need to understand how companies are interconnected and what it means for our risks. We also have to ask the question: do we have the right skills to do that in the insurance industry? The world is changing and we need to stay on board,” he added.

Mr Basi said clean data is key to managing interconnected risks and the ability of companies to manage their exposures and insurers to get on top of theirs to develop more suitable solutions. Clean data will lead to accurate, up-to-date risk profiles and requires work at both insureds and insurers, he said.

“Once organisations, their connections, locations and risk profiles are known, we can begin to analyse with more confidence, be more consistent in knowing exposure, pricing the business and modelling scenarios. Consequently, we begin to optimise capital, have the financial resource to create new products and deliver better return on equity,” he said.

Mr Basi added: “On the back of clean information there is then greater ability to create new products. I think that is also what the insurance industry needs to look at. We need to look at the new risks that are emerging and address the underlying concerns of risk managers with new products.”

Jamie Bouloux, CEO of EmergIn Risk, agreed, and said risk managers and insurers need to work more closely to solve this conundrum.

“There needs to be a better relationship between insureds and insurers and a high degree of transparency. This helps us get a better sense of how we should be deploying the capital we receive via premium,” said Mr Bouloux.

He feels this is being back held by market pressures, whereby those insurers that ask the right questions of insureds can be easily replaced.

He also said the insurance market is trying to help companies and itself get on top of the new risk landscape, but feels more can be done.

“Insurers need to do a better a job at understanding our macro exposures, and look at understanding what our cross-class exposures are. Not just within our own specialties but understanding the implications for cyber, property, casualty, product recall etc,” he said.

“Everybody has got budget, but ultimately in a lot of organisations, including Lloyd’s, capital analysis is based on P&C insurance. We should be thinking a bit more holistically across the organisation and making sure we are charging the right premium for a specific risk, rather than by class. That is massively important for the sustainability of the insurance market,” added Mr Bouloux.