High fives

What will be the top five threats to insurers over the next ten years? There are many areas that may cause great problems, and any views must, to some degree, be subjective.

Such threats need not be insurance-related. The global economy is currently giving most insurers considerable problems. Falling equity markets have seen insurers' balance sheets stretched as the value of their investments tumble.

Insurers themselves could be seen to be creating threats. The considerable pressure they have put on their service providers, particularly in the claims sector, could ultimately work against them. They may well be eroding the standards of service, which could have serious implications over the next ten years.

There are a number of obvious threats looming. Terrorism, for example. After 11 September the whole concept of risk has altered. What was previously unthinkable has become quite probable.

Also the threat of huge payments looms, with asbestos claims awaiting court hearings. But these are all existing threats.

What is out there that is not so obvious, but that may have major implications?

Toxic mould - the new asbestos
aToxic mould has been causing health problems to humans for hundreds of years. In the Old Testament, Leviticus 14:39-47 describes mildew contamination in a building in what is possibly one of the first recorded cases of sick building syndrome. But the last 10 years have seen a dramatic increase in reports of serious and fatal health problems associated with this.

What is mould? A microscopic fungus that produce spores, which are air-, water- or insect-borne. Only specific types trouble humans. If you want to get rid of granny, it is of little use feeding her mouldy stilton hoping it will do the trick. Toxic mould is Strachybotrys chartarum, a greenish-black mould. This produces mycotoxins, which affect the immune system and cause all sorts of nasty things to happen to you when inhaled or ingested.

Normally damp conditions in buildings give rise to their development. Some 15 different species grow when humidity levels exceed 50%. They thrive on materials such as carpets, wallpaper, and gypsum board.

The claims potential is great.

A California court awarded $18m (£111.5m), of which $17.5m (£11m) was punitive, to a houseowner against an insurer who declined cover for mould damage, although this was subsequently reduced to $3m (£1.9m) on appeal (Anderson v Allstate Insurance Company). A Texas court awarded $32m (£20.4m), of which $12m (£7.6m) was punitive, stating that the insurer had "fraudulently and intentionally" withheld vital information from the insured after discovery of Strachybotrys, and that the adjuster had a duty to inform the insured of its presence (Ballard v Fire Insurance Exchange).

Insurers are on a steep learning curve and it appears that toxic mould has become known as the new asbestos with good reason.

Reputational risk
Increasingly, organisations are citing among their most pressing concerns a risk referred to variously as "shareholder value", "corporate image" or "reputation". While similar to corporate social responsibility (CSR) this is a separate risk and must be addressed accordingly.

Consciously or otherwise, a great deal of attention is given to creating, maintaining, protecting and repairing corporate reputations. The value of a good public image is immense, as is the detriment of a bad one.

Throughout the life of an organisation, reputation is formed, nurtured, maintained and repaired, both actively and passively, internally and externally. As the importance of reputation is recognised, the organistion takes more control and management of its image is programmed into strategy and day to day activity.

Specialist companies offer to detect and rectify adverse presence on the internet and there are a variety of insurance covers available to cover the cost of pursuing or defending legal actions for issues like copyright infringement. But it has been difficult to obtain insurance to deal with reputation damage, not least because an insurable risk must be measurable. An organisation's reputation can be measured or estimated, but it is difficult to quantify losses.

It seems likely that contingent cover will grow to provide a response in much the same way as product recall management expense and additional increase in cost of working cover under business interruption (BI) policies. Insurers will be asked to provide cover and fund public relations advice and fund the expense of measures taken to avoid loss of market share in much the same way as they respond to a BI claim.

In the current hard market the provision of such cover may not be immediate, but an insurance funded response to a sudden drop in share price or other impact on stakeholder value seems a real possibility.

Social and ethical issues
Public opinion, growing awareness of environmental and social responsibility allied with extremist pressure groups have created a risk area with considerable implications for insurers.

Core environmental risks form a major part of such exposure. The growing profusion of environmental legislation continually increases the possibility of major claims. The doctrine of "the polluter pays" is with us and the cost of clean up and longer-term liabilities continue to grow.

Corporate responsibility is on the rise. Companies have a greater responsibility, both to people (the growing demand for some form of corporate killing legislation illustrates this) and property.

The concept of corporate social responsibility (CSR) may be new, but its impact could be enormous. Many currently view CSR as confined to maximising shareholder value through generating an overall positive impact on society through social, economic and ecological issues. But there is a great risk exposure underlying this, for both corporates and their insurers.

The problems faced by Shell a few years ago arising from their exploration in Nigeria are well known. Extensive protests occurred all over Europe, which generated adverse publicity.

Today we see more and more extreme forms of protests, as with animal rights protesters. With the Shell example, the next step for extreme environmental protesters would be blowing up a few refineries.

Natural disasters/flooding
Every person in the world will find their lives affected by at least one natural hazard. In 2001 natural disasters killed over 25,000 people and caused over $35bn (£22bn) damage worldwide... and based upon recent years' averages that was a good year. The cost of natural disasters has increased dramatically. In the US in the 1990s the average cost of natural hazards doubled from $25bn (£16bn) to $50bn (£32bn) per year.

It appears that the natural hazard with the largest potential is flooding. A recent UK survey by ISL identified that 30% of all commercial property is located within 250m of a flood plain.

UK insurers are possibly at greater risk than others. During the 1960s the UK government took the view that flood disaster relief was not sustainable, and cover for such damage should come from insurers. The result is that the UK insurance market is unusual in the global marketplace in offering flood cover as standard on policies.

The UK Climate Change Impacts Programme estimates that over the next 80 years this will increase up to twenty times more frequently on east coast locations where extreme sea levels currently occur with a 2% annual probability. Problems are not confined to coastal and river flooding. There is a growing frequency of overland flow, sewers and main drainage flooding, along with an increase in groundwater levels.

Intellectual property
You can't see or touch it, but it may be a company's single most important asset.

It underpins technological development, controls and encourages communication and attracts investment from external sources. In the case of some of the developing e-businesses it can represent a company's sole asset and is highly valued.

Not surprisingly it is jealously guarded with vast sums expended in pursuing and defending actions for alleged infringements. Insurers are trying to limit their exposures by a widening in the exclusion wordings that they seek to apply.

Liability coverage may be restricted to defence costs only, which brings affordable protection to smaller organisations. Larger concerns may take defence cost and damages cover at greater cost and with stricter underwriting requirements.

It is perhaps with first party coverage where demand will increase most. Often the data comprising the property is held on computer servers far beyond the control of the owners.

Insurance-backed programmes to pursue infringements of copyright, patent and trademark can serve as a deterrent to potential perpetrators who might otherwise find themselves in a stronger financial position.

If the extent of damage caused by an infringement could be quantified, there is scope to provide cost reimbursement similar to a loss of profits basis.

Underwriters may have difficulty in calculating accurate premiums but perhaps the onset of softer market conditions will see imaginative developments in this area.

So are these the greatest future potential threats to insurers?

Only time will tell, but they are all areas that undoubtedly are going to grow in demand for coverage, taxing underwriters' ingenuity.

We live in changing times, both with regards to the concept of physical risk and the public's concept of liability.

What response would have been given to this question on 10 September 2001?