As insurers, we are mandated to study and evaluate risk in order to protect our policyholders and mitigate the impact of adverse circumstances. However, recent transformational realities like the COVID-19 global pandemic, catastrophic climate change, emerging technology and widespread economic instability have revealed significant protection gaps, generating much uncertainty for the industry as it tries to adjust to a rapidly changing risk landscape.
Risks that occur on a massive scale can push a company or even an industry to its limits. The COVID-19 pandemic gave us a very poignant illustration of the kind of disruptive and chaotic impact a major risk event can hold. Of course, pandemics are not new. Nor are other major risk events like droughts, power outages, or wildfires. Still, as globalization and technological innovations have made our economies, supply chains and lifestyles more complex and interdependent, the scope of those risks has changed. Additionally, an uptick in either the severity or frequency of such risks can limit the availability of insurance coverage and lead to skyrocketing premiums.
As a result, today the industry is grappling with the role of the insurer when it comes to many of these major and emerging risks.
Global warming and climate change consistently rank as the top emerging risk for the industry, escalating costs and driving some insurers out of risky markets entirely. From devastating storm surges and flooding to severe droughts and elevated fire risk, environmental changes are leading to catastrophic losses. In addition, inadequate natural resource management (food, water and energy), especially in the face of climate change and global population growth, has created many other niches of hard to insure risk.
Advances in artificial intelligence and AI-driven tech (including automated systems, robotics and connected objects) and other new technologies like big data and blockchain have raised a multitude of issues for the insurance industry, particularly around transparency, reliability, security and regulation.
Connected to these advances in emerging technology is the increased risk for cyber crimes and data breaches, including everything from ransomware attacks to total network disruption. For insurers, evaluating cyber risk remains quite complicated, contributing to an ongoing debate between industry leaders on whether or not cyber risk is even insurable.
Vulnerabilities in economies become more apparent when markets are volatile and under stress. Fragile and unstable financial systems represent another sizable risk for insurers, with major implications for global financial markets – from growth and productivity to monetary policy. In order to mitigate risk in this area, both oversight and effective financial policies remain essential.
The more insurers deepen their knowledge, the more risks can be made insurable. Currently, innovations in modeling technologies are giving some insurers and their customers better, more tailored products and coverages. Parametric insurance offers another method for difficult-to-insure situations, with smart contracts that pay out when predefined conditions have been satisfied (for example, a flood, an earthquake or even a flight delay). Startup reinsurance platform Kettle is also innovating in pricing risk by building novel models which promise better protections for people and more stable returns for the insurance industry.
The risk landscape is sure to continue its rapid evolution, keeping the sector under intense pressure, and all but guaranteeing some top risks will remain hard to insure. As an industry, insurers should be taking steps wherever possible to use their troves of data and other technology innovations to monitor, mitigate and price all kinds of risk more efficiently – helping narrow the protection gap for customers while reducing its own losses.