The signs were there for insurers in 2011 when, despite paying over $100 billion in claims from a series of natural disasters, they fell very well short of covering the full economic loss arising out of these events, which was over three times bigger. Insurance penetration, the proportion of commercial activity insured, is much greater in US then it was in Japan or Thailand, but even so many existing and potential customers this year will be dipping into their own pocket to meet the costs of restoring their lives and businesses following the trail of destruction left behind after super-storm Sandy. In particular commercial clients unaffected themselves by Sandy who nevertheless incur extra costs or lose sales because their supplier has been flooded out will find that their own insurance coverage might not adequately protect them.
Grappling with the complexity of a modern extended supply chain, with hidden concentrations, inter-dependencies and points of failure, is proving to be a massive challenge for the insurance market. Property underwriters are frustrated that their clients are not in a position and have limited means to provide them the physical risk information about third-party suppliers that they require. With sparse or no knowledge about location, building construction, occupancy, protections or claims record, they are effectively flying blind and that is not pleasing their management or regulators. At a time when risk managers are screaming out for broader coverage and bigger limits for their suppliers therefore, the leading insurers are in fact doing the opposite, massively reining in the amount of so-called contingent business interruption (CBI) cover they now offer.
Whilst this impasse is unlikely to be broken any time soon, new technology could be the basis upon which the interests of insurers and clients align. Writing last week in the Harvard Business Review, Carlos Alvarenga of Accenture describes a revolution emerging in supply chain risk management. The advent of cloud based computing is allowing the larger companies to store vast amounts of clean and unstructured supplier data. Some are using forms of predictive analytics to mine the data, recognise patterns and run real time simulations. Firms introducing a quantitative approach to supply chain risk management as Alvarenga advocates are organising their procurement practices more resiliently and developing stronger contingency plans to cope with extraneous shocks when they occur. As importantly, businesses willing to share that data can build a highly collaborative partnership with their insurers. With a more robust means to identify, measure and monitor risk, there is nothing to prevent underwriters tailoring trade disruption policy coverage, capacity and pricing unique to the design features of their client’s supply chain.
Inevitably when the next global catastrophe event occurs the insurance and reinsurance market will pay out in claims a total figure far lower than the overall financial impact to the economy. Whilst this divergence persists there will be those who question the relevance of the industry. Yet hopefully over time by adopting new technology, such as in the case of supply chains, insurers may fashion a new underwriting approach that meets more fully their clients needs whilst providing a fair return on the capital they deploy. Particularly in the developed world this suggests that the industry needs to be a lot more innovative in how its products are designed and sold if the levels of insurance penetration are to significantly improve.