Prospecting for the Next Great Risk Opportunity
Underwriters need to think about how they invest time and capital in launching new products and searching for new opportunities.
- Tom Davis
- November 2022
Insurers are working hard to move beyond the economic challenges of recent years—and they're finding opportunities in emerging risks. As they've been dealing with the continuing challenges of COVID-19 and the growing threat of cyberattacks, they're prospecting for ideas and opportunities that can be brought to market.
Hank Watkins, regional director and president, Lloyd's Americas; Matthew Power, president, One80 Intermediaries; and Heidi Strommen, senior vice president, Distinguished Programs, took part in an AM Best panel entitled “Prospecting for the Next Great Risk Opportunity.” Following is an edited transcript of their discussion.
People in the industry are making a living on developing new ideas. Who are they?
Strommen: I would argue that it's everyone. We all need to be involved in developing new ideas in order to meet the needs of our clients and to add value. By all of us, I do mean everyone in the insurance supply chain starting with retail brokers who often are closest to the policyholder, right up through insurance carriers and reinsurers.
It's a diverse group of individuals, diverse in terms of knowledge, skill sets, areas of expertise. That's what's needed to effectively engage in the process of identifying emerging risks. My own career experience is primarily as a program administrator in the hospitality space.
Watkins: I'd also add that as we get further along this chain of more and more challenging events that face the world, governments will have to become more involved with the private sector to better understand what our needs are, and be more efficient in how they deploy capital to meet them.
I also want to add that risk managers of the top companies in the world are very important elements of this risk identification, mitigation and transfer process. They're not always buying insurance. They're oftentimes self assuming the risk. That involves a wide variety of players as well, including brokers, carriers, risk managers and capital providers that aren't normally in this industry.
Power: I think about the insurance industry as very much being a derived industry—derived, meaning that our relevance is derived from the liability landscape that our customers face. I'd argue that changes in that liability landscape are accelerating in terms of business models, new industries.
I think, really, if you think about Lloyd's, you think about the excess and surplus lines industry broadly here in the United States, I think that sector is the best equipped with this freedom of written form to respond to these changes that seemingly are confronting our clients in real time.
“We all need to be involved in developing new ideas in order to meet the needs of our clients and to add value. By all of us, I do mean everyone in the insurance supply chain ... right up through insurance carriers.”
What distinguishes the good ideas from the bad ideas?
Power: In the course of my career, I've seen a number of well-intentioned, really good ideas that have been brought to market, in terms of product or approach, that ultimately weren't commercialized. There's got to be some level of acceptance and a willingness to purchase the coverage. That's something that underwriters need to think about as they invest time and capital in launching new products.
Strommen: There are no bad ideas. It doesn't mean that every idea is going to translate into a marketable insurance product.
How is the demand for new coverages being demonstrated and developed?
Watkins: I'd say it's been demonstrated every day, again, by the capital providers as well as intermediaries that are looking for ways to enhance their business. Because if there were no losses—I learned that early in my career as an underwriter that if there were no losses, we'd be doing something else. There always will be losses.
Strommen: For those of us who specialize in a particular industry segment, staying in close touch with that segment and what is happening in your segment is one of the things that drives this whole area. If we don't understand the industries that we serve, we are not going to be able to percolate ideas.
Power: Case in point: COVID hits, we are in the travel business. … That business dried up for a period of time post-COVID as cruise lines halted, etc. That team pivoted very quickly and developed a program with the government of the Bahamas because the Bahamas were concerned about their ability to maintain a healthy tourism trade.
What kind of background expertise do you need to have that creates or helps the industry develop new risk opportunities?
Strommen: I think that this also goes to the overall efforts of our industry, and certainly others, to diversify their staff and employee base in terms of their own personal backgrounds, because we all bring our personal experience to the table in these conversations. It's our professional experience, but it's also our personal experience—where we come from, how that shaped us.
Watkins: That's the reason our industry is so focused on getting even high school students now interested in what we do and certainly the universities that have RMI [risk management and insurance] programs—there are over 75 in the country, last time I looked.
Can we specifically identify the risk opportunities? The new ones, the ones that are emerging, the ones that have emerged in recent years.
Watkins: Geopolitical conflict was toward the bottom as an emerging risk threat before the war in Ukraine. I would argue that's probably one or two right now, especially as other parts of the world come into view following the Ukraine invasion. Climate change, and perhaps the inability of mankind to adapt to it, has always been a major concern.
You mentioned health care issues. Ten years ago, Lloyd's published a thought leadership report on what happens in the next pandemic. It was the least downloaded of our thought leadership reports. No one thought about it. … cyber interestingly is not in that top 10 list. I'm not sure if it's become an embedded risk on everybody's mind or perhaps has been overshadowed by the many other threats facing the world today.
Strommen: Take the pandemic, for example: It hit the hospitality industry hard and in particular ways that it didn't necessarily hit other industries. It's unclear how much restaurants or hotels had it on their radar that a pandemic might hit and shut them down for months. Some were probably more aware of that potential than others.
I would wager that most of them hadn't thought that that could be an outcome from a pandemic. A part of that was because of the particular type of pandemic and how COVID is spread. The airborne spread clearly had an impact on any business that relied on people being together in person much more than it did on other businesses.
Power: People that sit around and think about what the future state of our economy looks like, in terms of what's out there in 25 years. You start to hear about industries like robotics, photonics, pharma, biotech. All of these industries are evolving. With each and every one of them comes a changing and emerging liability landscape.
The challenge for our industry is that the vast majority of insurers today are very well equipped to handle the risks associated with those old economy business models. Very few have the requisite product and talent to understand emerging risk. This, again, is the great benefit that Lloyd's and the U.S. E&S market bring to bear on emerging risk.
Deloitte said that insurers should consider adopting strategic risk management as a holistic framework to not only help them manage the potential downside of disruptive risks, but also perhaps achieve faster growth by better preparing them to capitalize on the resulting opportunities. Would you agree?
Power: At the end, it goes back to this notion of innovation being a deliberate process on the part of the underwriting community. It's not a part-time job. We all contribute to it, as Hank and Heidi have alluded, but to have a very deliberate process in place, incubators in place, there's not enough of it.
Where you see it done well, it leads to a lot of success, development of new approaches, and changes to our industry. I agree with the Deloitte analysis that the approach has to be delivered. You have to have dedicated resources that are constantly thinking about the evolution of business models for our clients, as well as some of the individual risk factors that we talk about, whether it is climate change, whether it's geopolitical risk, and so many others.
Strommen: The dedicated resources are key here. I believe that it's probably a bit of an internal battle and a lot of organizations are budgeting for those resources. Having it makes sense and making the case within that organization that it's going to pay off is a smart deployment of those resources.