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RIO DE JANEIRO—Insurers are struggling to maintain their relevance for policyholders as new risks emerge for businesses and the businesses themselves grow more comfortable with retaining risks, Michael McGavick, CEO of XL Group P.L.C., said Monday.
By adjusting their approach, however, insurers will be able to provide valuable services and coverage that businesses need as they expand in the changing world economy, Mr. McGavick said during the 2012 International Insurance Society Seminar in Rio de Janeiro.
With the insurance premium share of worldwide gross domestic product shrinking from 3.4% to 2.8% over the past 10 years, “we've been losing relevance,” Mr. McGavick said.
In the three most important areas of evolving risks—technology, energy and supply chain—insurers are not providing businesses with the services they need, he said.
“If you look at the role of insurance in technology, we are practically not present,” Mr. McGavick said during a panel session. While insurers do offer some cyber liability coverage, they are failing to offer coverage for risks such as privacy, intellectual property and business interruption related to technology problems, he said.
For energy risks, the 2010 Deepwater Horizon disaster in the Gulf of Mexico illustrated how insurance has decreased in value for energy companies because the well's operator, BP P.L.C., was largely uninsured. Insurers were not large enough to match BP's own balance sheet and did not offer enough insight into the risk to provide risk management assistance, Mr. McGavick said.
“The good news is that what happened to BP exposed the flaw in the thinking” of energy companies. When companies are so confident in their own risk management that they fail to have anyone “looking over their shoulder,” it sets up an inherent risk, he said.
Regarding supply chain risks, the Thai floods and Japanese earthquake last year showed the huge contingent business interruption exposure that businesses face, Mr. McGavick said.
Insurers were surprised by the size of the losses even though “we've been talking about just-in-time inventory for a full decade,” he said.
Insurers responded to the losses by inserting exclusions into policies to limit their exposure to future supply chain losses—a response that will push businesses to find solutions outside of insurance and push themselves further away from the industry, he said.
To overcome these challenges, insurers need to ensure that their best people are addressing emerging risks rather than using them for the most profitable lines of business.
Also, they must develop new tools to mine data by focusing on the horizontal volume of data rather than the length time data is available, because for emerging risks historical data often is unavailable.
In addition, they must face up to regulatory challenges that require insurers to maintain capital levels that will dilute their ability to generate an attractive return on equity, he said.
However, he said, “I absolutely believe that these challenges will be met.”