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PHILADELPHIA – Technological innovation is forcing the insurance industry to rethink its approach to covering emerging and evolving exposures, according to experts.
The latest innovation is coming in the cyber space, Martin South, North American CEO of Marsh, said at the Philly I-Day conference in Philadelphia on Thursday.
“Back a few years ago, people were thinking about this as a privacy issue almost exclusively,” he said. “Now people understand that cyber is almost a proxy for business interruption. Supply chains are different and more interconnected. Anything that can hit your supply chain, cyber issues, are a real risk and for the first time, insurance is straddling the sacred barriers between first-party and third-party risk and inventing a new asset class, a new risk class. I think that’s moving in a positive direction.”
Generally, innovation has not occurred as quickly in the business interruption sector as it has had in other insurance areas, Mr. South said.
“If you look at current business interruption policies, contingent on physical damage, you’re really talking about a product that was designed for the 19th century,” he said, adding that it can still take 580 days to get a claim paid. “It’s unacceptable when there are triggers available, parametric solutions that are available and different ways of quantifying the risk. Business interruption … has to be reinvented and I think the evolution in cyber, particularly into business interruption, is going to be a starting point and maybe change the triggers.”
A similar evolution must occur when the industry considers the exposures presented by autonomous vehicles, Mr. South said.
“We’re still thinking about that you need auto insurance – the reality is when you have an autonomous vehicle, it’s probably not going to be auto insurance, which is still 30% to 40% of the premium,” he said. “It’s a product liability exposure or it’s a societal issue.”
Regulation is also a barrier to change and innovation, experts say.
“We’ve kind of sent a message to lawmakers that we want a risk-free society, so more and more regulation (is) coming, which is actually a counter to some of the innovation we have,” Mr. South said. “One of the things that I think is going to be a challenge over the next few years is thinking about how we can change regulation from filing rates and arguing with people about how things can be done so we can move into a faster world, develop and innovate in a different way.”
“I think in large part communication is going to be key because regulation will always follow innovation and it will not be at the same pace,” said Sean Kevelighan, president and CEO of the Insurance Information Institute in New York. “It’s going to be imperative for our industry, and any industry that’s going to innovate in a way that could be uncomfortable, to make sure we’re communicating. We don’t get the benefit of the doubt.”
“I think the regulatory community … is open to this change, open to this innovation,” he continued. “Regulators are a byproduct of politics. If something happens that makes people feel very uncomfortable with how we’re innovating ourselves as an industry, how we’re using big data, artificial intelligence, politics can get uncomfortable. When the politics get uncomfortable, the regulators get uncomfortable. We need to make sure that we’re communicating and demonstrating the societal value of the technology with the regulatory community, deal with them, be transparent. That’s the only way we will make sure we don’t get pulled back from the innovation.”
When one of the major regulators such as California or New York takes the lead on these issues, you will see other states follow, which is “a positive thing,” Andrew Robinson, executive in residence for venture capital firm Oak HC/FT based in Greenwich, Connecticut. But regulators have been “pretty clear” in their dislike for predictive models.
“The thing I’m personally most concerned about is that we as an industry … we’re not exactly the bastion for best talent,” he continued. “It tends to go to banking or consulting. Within our industry, if you’re a talented individual, likely you’re an underwriter or a technical claims person or a broker or an agent or an actuary. The best and the brightest don’t tend to go into the regulatory world.”
Regulators “don’t do insurance,” said Kathleen Locklear, risk management and insurance professional and former senior director of global insurance for Teva Pharmaceuticals. “They don’t understand it the way we do.”
The federal government’s role in insurance regulation will likely be unchanged despite technological innovations, Mr. Robinson said.
“We’re waiting for them to step in and correct a broken (National Flood Insurance Program),” he said.
Mr. Robinson does see the insurance industry changing amid interest from capital investors.
“I think the notion of carriers is going away,” he said. “The world of capital is so different. I grew up in an era where you had an event and then capital would come into the market in a very expensive way. We just had a $140-$150 billion cat year by Swiss Re’s estimates – the biggest cat year in the history of the world – and rates are barely moving, which tells you that capital comes through the system very efficiently now.”
“I think what you’re going to see is far few carriers and a lot more risk-taking vehicles,” he said, adding that sovereign wealth funds and pension funds are looking at available insurance companies to acquire. “It’s a very interesting backdrop of where capital is coming from because the world is awash with capital and people are looking at insurance as a new asset class that they can realize some investment benefits from.”
As communication links multiply around the world, companies that provide much of the infrastructure for that growth face some huge security and liability issues, insurance experts say.