sigma 5/2017: Commercial insurance: innovating to expand the scope of insurability
There is a growing range of innovative risk transfer solutions to cover the ever-evolving range of exposures facing business today. Product development and innovation around data and data analytics have expanded the scope of insurance solutions to a wider range of threats and perils.
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Structural changes resulting from technological, economic, demographic, societal and geopolitical macro trends are driving deep transformations in the business environment. At the same time, the corporate sector has evolved from being dominated by physical assets to deriving more value from intangible assets, such as intellectual property, networks, platforms, data and customer relationships. New risk transfer solutions provide protection against the new types of risk borne out of these structural changes.
Making risk transfer more efficient
For example, holistic covers combine multiple risks and/or interdependent triggers, and allow better alignment to the specific risk transfer needs of an insurance buyer. Holistic solutions offer efficient risk transfer given their focus on the joint distribution of all risks. Parametric solutions based on indices rather than actual losses also offer efficiency benefits. Their main advantage is clarity and neutrality: an insurance pay-out is triggered if pre-set conditions are met, providing a quick, pre-agreed pay-out without a lengthy claims investigation. For this reason, parametric solutions are particularly useful in managing earnings volatility or for business interruption type coverage, with or without physical damage to property.
Mitigating earnings and cash flow volatility
Insurance solutions are also increasingly being used to protect earnings and cash flow risks. Some previously uninsurable non-core business risks can now be covered to some degree, due to the evolution of triggers, indemnity structures, and data and modelling advances. Examples of perils that can be covered in more innovative ways include non-physical damage business interruption, cyber and product recall insurance, and protection for weather and energy price risks. Another area of expanding utilisation of risk transfer are novel solutions that enable the operation of new types of business models such as sharing economy start-ups, and where firms use risk transfer for marketing support and product differentiation.
New covers expand the scope of insurability and role of insurance in corporate risk management
Corporate risk management is becoming more sophisticated as a necessary response to the changing risk landscape in the business environment. Firms are transferring risk through insurance and financial instruments in order to reduce costs associated with financial distress, and to safeguard cash flow and thereby investment projects. They also use risk transfer to create value by lowering the cost of capital and to reduce earnings volatility. New covers will expand the scope of protection products by enlarging the boundaries of insurability and also the role of insurance in corporate risk management.
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