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Business insurance must adapt to stay relevant to policyholders

Business insurance must adapt to stay relevant to policyholders

RIO DE JANEIRO—Insurers are fading in relevance for many corporate policyholders as they fail to offer solutions for their emerging risks, according to one insurer executive.

And as they seek to expand their own businesses, insurers need to readjust their view of emerging markets, the insurer executive said.

Insurers should adopt different strategies for the various markets they want to enter rather than treating emerging markets as a homogeneous group, a reinsurer executive added.

Both were speaking during the 2012 International Insurance Society Seminar, held last week in Rio de Janeiro.

Michael McGavick, CEO of XL Group P.L.C., said that with the insurance premium share of worldwide gross domestic product shrinking over the past 10 years, “we've been losing relevance.”

And only by adjusting their approach will insurers be able to offer the services and coverage businesses need in the changing global economy, he 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, he said.

But “what happened to BP exposed the flaw in the thinking” of energy companies, he said. 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.

Regarding supply chain risks, the Thai floods and the 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 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, Mr. McGavick said.

Another challenge that insurers face as they seek to expand their businesses is how to address emerging markets, Mr. McGavick said. Several speakers at the seminar noted that many insurers are aggressively seeking to expand in emerging markets as organic growth opportunities stall in their home markets.


“To use the term "emerging markets' is to admit to ignorance. These are the markets of opportunity and growth,” Mr. McGavick said.

As insurers expand into new markets, they should be aware of the often-significant differences between the countries they are moving into and not treat them as generic emerging markets, said Denis Kessler, chairman and CEO of Paris-based SCOR S.E.

Closer examination of the exposures insurers face in emerging markets will reveal the differences between the markets and the level of catastrophe risk they are taking on, which often is greater than insurers may think, he said.

“Emerging markets are not clones,” and each market requires a different strategy and approach, Mr. Kessler said during the panel session. Different legal systems, different family sizes, different religious beliefs and different attitudes to risk create specific characteristics for each market, he added.

Insurers often find it difficult to assess their exposures in emerging markets because data is not always available and underwriting models usually cover only developed regions, Mr. Kessler said.

An overview of the catastrophe exposures of the so-called BRIC countries—Brazil, Russia, India and China—illustrates the difficulty of assessing natural catastrophe exposures.

Brazil traditionally has been viewed as a country with few catastrophe exposures because it has not been exposed to hurricanes and it is not in an earthquake zone, he said. However, in the past several years, flooding in Brazil has led to significant landslides.


In addition, Tropical Storm Catarina made landfall in Brazil in 2004. While Atlantic hurricanes and tropical storms traditionally occur in the North Atlantic, climate change may lead to hurricane exposures for the South Atlantic, Mr. Kessler said.

Russia also has been viewed as being largely unexposed to catastrophe risks, he said. But in 2010, it experienced a severe heat wave that had far-reaching consequences, including an increase in the death rate during the summer and an outbreak of wildfires. The heat wave also led to lower crop yields, which affected countries that rely on Russia's cereal production.

In India, the catastrophe exposure has long been recognized, with insurers experiencing 21 catastrophes in India since 1999. But as the Indian economy has grown so rapidly in the past several years, insurers need to be aware that the catastrophe exposure is growing at a similar rate, he said.

The catastrophe exposure also is large in China, with four Chinese earthquakes being among the most deadly since 1900, Mr. Kessler said. As the Chinese economy grows, so do the catastrophe and business interruption exposures. “There are 250 industrial parks in China that are like those affected by the Thai floods,” he said.

For insurance growth to be sustainable, insurers need to invest in training and education and carefully analyze the risks they are exposed to as they expand globally, Mr. Kessler said.

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