Insurance model needs transformation not evolution

Insurance industry must move away from traditional transaction-driven models if it is to meet the changing needs of today’s businesses.

John Ludlow, Airmic CEO

Insurers are waking up to the fact that what business leaders value most has changed in fundamental ways. In the past, business valuations were largely dependent on physical assets – property, machinery or stock, for example. But today, business value is built around harder-to-define, intangible concepts such as brand, data capability and intellectual property.

These are complex assets, far harder to define, value and manage. The size and value of these assets has grown to a point that was unimaginable ten years ago. Indeed, over 80% of our largest business’ market value is now held in intangible assets, up from 20% a few decades ago. What’s more, as all business leaders are aware, these assets are extremely vulnerable in the face of modern threats such as cyber attack, reputational crises or technological disruption.

This is creating a headache for the insurance market, which in the main is designed to help businesses protect themselves from threats to their traditional, physical assets and liabilities. They do this extremely effectively, based on 300 years of historical data and gradually evolved practices.

“Intangible assets today make up the bulk of the valuation of our businesses, so we need to understand how to manage them better, and we need to understand how to protect them better.”

But insurance has struggled to keep pace with these changes to business models – most business insurance programmes look the same as they did twenty years ago. The insurance industry is aware that it needs to do more to ensure it is supporting the needs of the modern business, but designing effective and affordable insurance products is proving extremely difficult.

To some extent the industry is hamstrung by the regulators who want to see at least 10 years of loss data before insurance is allowed. Meanwhile, in certain areas, good progress is being made. We have seen, for example, genuinely innovative new cyber products come into the market in the last few years.

But to take it further, a change in approach is required. The changes we are witnessing to business models are not incremental, they are fundamental – and the response from the insurance industry must be equally so. A radical change in approach is needed: one that takes the industry to a new place with a new business model and business philosophy.

Some insurers are set on making evolutionary changes to current practices, on the basis that that’s where their biggest returns are going to be for the foreseeable future and taking comfort from doing things the way their competitors do. This might be true in the short term, but in the longer term, transformation demands an end result that doesn’t resemble the past.

Transformation does not, however, mean that everything in the past is bad. The insurance industry has 300 years of data and knowledge invested, and it shouldn’t throw this away. The key to the future is recognising that insurance can no longer be only about risk transfer. Today’s business models and today’s risks demand that insurers and the wider market, including brokers, take a broader approach to risk management. This means working together with businesses to improve the understanding, prevention and mitigation of today’s intangible assets and emerging risks.

“Business is about embracing risk, rather than just trying to mitigate it. It’s about enabling your strategy and insurance is a big part of that.”

Risk transfer will remain important, but it will be supplemented by ‘add ons’ such risk advisory and modelling services tailored to business needs before and after a threat has emerged. Businesses, insurers and brokers will need to become risk partners, through a sharing of risk and business expertise and data. This is starting to happen with some insurers offering customers extra services such as data breach recovery and crisis response in the event of a cyber attack and the bigger insurers and re-insurers are also offering to model the risks on corporate balance sheets. There is, however, a long way to go before this is accessible to smaller businesses.

The challenge is to join everyone together – boardroom directors, senior managers and risk managers need to work with brokers and insurers to pool their knowledge. Insurers need to share their expertise in risk at a macro-economic level, and businesses need to share their understanding of how these risks are materialising at a micro-economic level. All stakeholders in the risk and insurance equation must raise their game when it comes to embracing technological advances and most sophisticated use of data.

This type of collaboration must be at the heart of insurance industry rethinking. Businesses, risk managers and the insurance industry will all benefit if the insurance market achieves genuine transformation. Without radical change, insurers will lose their relevance to modern business models, and businesses will remain alarmingly vulnerable to tomorrow’s threats.

By John Ludlow, Airmic CEO

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