Emerging risks are risky business says EC3 Legal solicitor Brooke Titley
“Change is the law of life, and those who look only to the past or present are certain to miss the future” said John. F Kennedy, and that definitely seems to be true for the insurance industry where it always pays to be dynamic and develop new products, and it can mean focusing on new and emerging risks.
Over time, product needs and requirements change: natural catastrophes now pose much less risk for (re)insurers because there is now pretty good and realistic disaster scenario modeling; in much the same way rate reductions make traditional classes of business, like property and employers liability insurance, less attractive, in what seems to be a permanently soft market.
The nature of an emerging risk, although seen as tempting to write, can often be problematic. An emerging risk can be captured unwittingly by a (re)insurer, who forgets to exclude such risk in the policy wording.
An emerging risk can bring with it an unforeseen and detrimental effect on balance sheets, income statements and shareholder value for (re)insurers.
Current emerging risks include cyber, drones, pandemic and airborne contagion cover. The growing threat of cyber attacks has led to rapid growth in both the demand for cyber cover. However, the actual protection afforded under such cover is often questionable.
The cover varies greatly by provider and many of those selling cyber products do not fully understand the terminology or the circumstances which trigger a policy response. Fortunately, true product experts are coming to the forefront of the market. Over time cyber insurance will be established as a class of cover in its own right, and no longer will be seen as an emerging risk.
The market’s progression is also often characterized by territory. For example, cyber insurance is far more established in the US than it is in Europe, although changes to EU data protection rules due in 2018, are expected to accelerate the already growing demand.
The intangible nature of any new or emerging risk does mean that if any (re)insurer wants to get a foothold in the market they will have to invest in terms of resources, money, data and analytics before fully immersing themselves. It is only with all of this information that they can start to understand the nature of the exposure that comes with a new product profile and protect themselves and their balance sheet.
The infrastructural costs incurred in order to support the writing of an emerging risk perhaps mean they ought to remain the domain of the large players; nonetheless, it does not stop others from trying!
The prudent (re)insurer is well advised to remain cautious of writing an emerging risk, the full basis of which is still not known or understood.