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Coverage innovations tackle evolving risks: Swiss Re report

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Business interruption risks remain top of mind for risk experts and cyber is quickly climbing up the list, but innovative product and data solutions are providing protection against a wider range of threats and perils and extending insurance coverage from tangible to intangible assets, according to a new report by Swiss Re Institute.

Business interruption has been considered the top peril in the Allianz Risk Barometer survey of risk experts for the past five years while cyber has risen from not being on the top 10 list in 2013 to become the third most concerning risk in 2017, according to the Swiss Re Institute’s “Commercial insurance: innovating to expand the scope of insurability” sigma report published on Wednesday.

“Natural catastrophes and fires remain at the core of BI risk scenarios, but other disruptions to operations and the supply chain are increasingly important drivers,” the report stated. “For instance, cyber incidents or the indirect impacts of terrorism or political violence can result in BI and large losses without causing physical damage to a firm’s assets. In the future, more interruptions are expected to be driven by technology, globalization and social changes.”

Non-physical damage business interruption — also known as named-peril earnings insurance — is the next stage in the evolution of coverage, according to the report. The insured risk is completely detached from traditional asset-related property risk as the coverage protects earnings even when there is no physical damage at an insured’s own or a third-party’s property. Some examples of these types of potential events are electricity blackouts and political events such as strikes, organized blockades or government actions.

“Events that cause NDBI can result in significant economic damages to business, but have traditionally been difficult to insure, mitigate or hedge through other products,” the report said. “Traditional perils such as earthquakes and hurricanes can also cause NDBI losses, for instance if the insured’s own property does not suffer damage but the surrounding area does, and this leads to loss of access to the facilities or a decline in customer traffic at a retail location (aka loss of attraction).”

Product developments and innovation around data and data analytics are expanding the scope of insurance, according to the report. For example, parametric solutions, which are based on indices rather than actual losses, have been gaining traction because they can close gaps in coverage that conventional insurance policies create with policy exclusions or sub-limited exposures and can provide protection for loss events which have previously been deemed uninsurable and almost immediate liquidity to the buyer.

Technological innovations can provide new ways to mitigate risk, but also can create new risks, the report noted. The increased use of data and data analytics, particularly sensor technologies and the interconnection of factories, buildings, machines and other physical objects — known as the Internet of Things or IoT — can be helpful in improving risk management and reducing the frequency and severity of accidents.

“On the other hand, the IoT can create data privacy issues and cause cyber risks while also compounding the exposure to BI risk,” the report said.