Underwriting Emerging Insurance Risks offers insurers avenues for innovation.
Insurers opting to take up these opportunities need to ensure policy wordings are sufficiently dear to avoid having to pay out on risks they never intended to cover.
That warning comes from Trevor Maynard, head of exposure management and reinsurance at Lloyd’s of London. “The key thing is contract certainty” he says. “If you didn’t expect your policy to be triggered by certain events, you need to be clearer on your wording.”
London-based Maynard visited the Gold Coast last year to speak about emerging risks at the biennial Hazards Conference. While in Australia, he spoke about some of the research in which Lloyd’s has been engaged in 2015 in its efforts to better understand the global emerging risks landscape.
Lets take a look at some 2016 and beyond Emerging Insurance Risks
Food System Shock
Earlier this year, Lloyd’s released “Food system shock – The insurance impacts of acute disruption to global food supply.” The report highlighted the extent of the global food system’s vulnerability to sudden shocks, and the widespread repercussions such events could have for communities, businesses and governments around the world.
“Our food shock report suggests a major El Nino lending to multiple global effects,” Maynard explains. He says weather catastrophes and plant pandemics, caused by both El Nino and climate change, could lead to reductions in yields of maize, soy, wheat and rice.
The report suggests that in the event of such a catastrophe, the prices of those commodities could climb four to five times higher than pre event prices.
“Because the food system is quite fragile at the moment, the reserves are not very large, and because of population growth and changes in consumption patterns, people are demanding more and more from the food system,” he says. He adds that poorer countries may not be able to afford the predicted inflated prices of those commodities. “That can lead to political tensions, maybe terrorism, violence, war, instability in the banking system in those countries.
He estimates European stock markets could fall by about 10% and the US by 5%. “This affects insurers’ balance sheets from both sides. The asset side of the balance sheet …could well fall in value, but equally, on the liability side of the balance sheet, we think that po1itical risk, business interruption, marine and aviation, agriculture, product 1iability and recall, and environmental liability …policies could end up with claims against them.”
So what can the industry do to better prepare to address food system risks?
“The more we can help government policymakers take that risk seriously, the better protected society will be,” Maynard advises. “Ultimately, the insurance industry will benefit as well, because those unexpected claims are less likely to arise.”
Lloyd’s also released research this year on risks posed by solar storms. The report details how large geomagnetic storms, while rare,, can create massive current surges, which can overload electric grid systems and damage critical transformers. “We have to be capitalised to withstand this, “Maynard says.
He mentions the Carrington Event, one of the largest recorded geomagnetic storms, which occurred in September 1959. “It’s estimated that if a solar storm of similar scale occurred today, between 20 and 40 million people in the US would be affected. The power outage could last from 16 days to one to two years” he says. And while he admits the one- to two year figure is ‘clearly an Armageddon-type scenario’ it cannot be ruled out.
“It could take quite a long time to rebuild the infrastructure. The economic cost is estimated at between US$0.6 and $2.6trn [A$3.67trn], with only a portion of that cost insured under business interruption or property damage policies. But my feeling is that, for an event of that magnitude, there is a risk that lawyers could be very creative in interpreting policy terms and conditions, and the implications on the cost to the public could be significant.”
The report concludes that, given the potential costs and consequences of a major power outage, the power industry policymakers and insurers need to evaluate their preparatory and mitigation measures.
Maynard also mentions the emerging cyber risk. He describes cyber as a rapidly growing market that’s still relatively small.
In July, Lloyd’s and the University of Cambridge’s Centre for Risk Studies launched Business Blackout, a joint report that becmne the first to analyse the insurance implications of a major cyberattack, again using the US power grid for its scenario.
That scenario involved hackers shutting down parts of the US power grid, affecting 15 states and Washington, DC and leaving 93 million people without power. The total estimated impact of the scenario was US$243bn (A$342.96bn), rising to over $1tm in the most extreme version. Discussing the logistics ofthe attack, Maynard says: “The gas turbines that make electricity have lots of safety technology built in to protect the grid, but the ability to access these systems remotely means there is a potentiaI that the very systems that protect the grid could be hacked into.
“A simulated attack to test the system has been done, so they know they can do it, and are working to build resiliency.
“Clearly, I ought to stress that there’s an industry on the other side of this trying to make sure this doesn’t happen. So it’s not a certainty, but the point is it can’t be ruled out, and the cyber experts that we’ve worked with suggest that it’s doable.”
Elsewhere on the cyber front, Maynard expresses concern about insurance policies unintentionally providing clients with cyber coverage. “We can see many lines of business that could be incidentally covering cyber perhaps through being silent on wordings or not being clear.” Again, he stresses the importance of insurance companies adopting dear and careful wording in their policies to ensure they provide only the coverage originally anticipated.
How well does our local general insurance market fit when it comes to responding to new and emerging risks?
Chris Mackinnon, Lloyd’s general representative in Australia. tells Insurance Business: “Historically the general insurance industry in Australia has responded to emerging risks by adapting and launching products locally that already exist in overseas markets. In particular, the Australian-based US insurers have tended to react to local demand by adapting their overseas product such as directors and officers liability, to suit the Australian market, and these products were often then replicated, and sometimes enhanced, by the local domestic insurance market.”
“However, in recent times we have seen a significant increase in the speed of new risk emergence, with issues such as cyber liability, autonomous vehicles, the sharing economy and drones all gaining prominence …The speed with which insurers react to these emerging risks is now becoming more critical in order to meet the immediacy of demand, and some of the Australian general insurance industry seem to now be focusing their thinking on proactive new product development.”