Only the disciplined will survive the emerging risks from a brave new world, says Torquil McLusky
We are living in rapidly changing times - perhaps to an extent that even Aldous Huxley would be amazed to witness. And, of course, our brave new world goes hand in hand with new risks.
Iraq, the Middle East, China, increasing litigation, a rising gun crime culture, oil price hikes, globalisation, super-sonic news coverage, terrorism, technology, so-called cyber-crime and changes in our economy and society in general, all pose major future risks to insurers - and who knows what else lies round the corner? But, despite the rapidly changing environment in which we now operate, the biggest future risks to players in the market may well actually come from within the industry.
With emerging risks comes increased opportunity, but it will only be those who have the right business practices and who sensibly strike the balance between risk and reward that will flourish or, in some cases, continue to exist. Calculated risk is our business and insurance, by definition, is usually there to protect individuals and companies from the unexpected and unpredictable. It is just that a traditional approach to all risks is no longer a viable way forward.
We now have to operate in a truly global marketplace with a McDonalds or Starbucks on practically every corner from Times Square to Leicester Square, from Moscow to Manchester and most cities and motorway pit-stops in between. Technology, too, has played its role in making the world feel a much smaller place. As underwriters we are expected to follow our clients - sometimes into the relatively unknown - and respond to their coverage requirements. But many of these markets are already proving challenging.
September 11, 2001 was the single most cataclysmic terrorist event to occur in the world and our industry. The threat of terrorism plays a pivotal part in the fears of companies today. Since 9/11, major institutions and businesses are keenly aware of possible terror attacks. For example, in recent weeks we have seen the UK Houses of Parliament surrounded by electric fences to fend off attacks from both land and the Thames.
However, it is not only those based in or owning properties which are obvious targets who need to ensure they have adequate coverage. The same requirement applies for those who just happen to be based in the vicinity of such structures. All businesses need to consider what impact a terrorist event might have on them.
There is a perception that this type of cover is expensive but many insurers, like ourselves, are able to measure the merits of each case on an individual basis. The industry, as a whole, needs to move further towards a simplified, case-by-case approach to underwriting these less predictable risks, perhaps designing their own specific software tailored to their own lines and methods of business. For example, we have developed an online system, ATAQ, which allows us to offer basic terrorism cover at a price which is affordable for smaller businesses while, at the same time, allowing us to track and manage risk exposure on a street by street basis.
President Bush has talked about the need to develop a viable economy in Iraq through attracting enhanced investments. However, situations change. For example, my own company was the lead underwriter for a significant amount of the cargo going into Iraq, insuring everything from beer for allied forces to plastic knives and forks. Today, we see even the import of toothbrushes as too risky in this now extremely unstable country.
In the future, insurers will need to react ever more quickly to changing levels of threat. We do not even have to look so far from home as Iraq for emerging and future risks to insurers. For instance, the perceived increasing gun crime culture in the UK is causing heightening concern and major insurers of fine art, jewellery and cash in transit will need to give this greater consideration in the coming years.
As the risk changes we need to react quickly in our underwriting approach and be flexible enough to adapt our business propositions. For example, while Lloyd's may have had an image of being slightly old-fashioned, it now has the ability to react quickly to the need for different and new types of cover through its specialist syndicates.
Reputation and brand
Brand and brand perception have become more important than ever before. News now circulates around the world at super-sonic speed. Increased access to information and a burgeoning litigation culture can cause significant reputational damage to both individual companies and the industry as a whole. We need only to look at recent incidents in the US to see the immediate and devastating impact of the effects of legal action.
Given what we have seen, the re/insurance industry needs to ensure complete transparency in its practices and policies. As businesses we rely on the trust of our customers and it is vital we have an image of complete professionalism.
Ultimately, it does not matter that the risks we face today and tomorrow are different from those we faced yesterday. We are in the business of insuring risk and managing our exposure to it. However, what is important is that companies realise that the biggest risks are from within.
The businesses that will succeed will be those that are able to cope with ever-changing risks and have excellent ratings and security. They will need to demonstrate creativity when newly perceived risks emerge and show the flexibility to adapt cover quickly. In the light of negative press concerning some existing business practices, absolute integrity will become even more important for companies seeking to attract and retain business.
Discipline and leadership
A key factor here is that we, as risk carriers, cannot seize the opportunities ahead, which go hand in hand with emerging risks, without the backing of both human and business attributes. A good rating or long experience is not enough on its own. We will need strength across the board. Discipline and leadership are key to the future of our industry as we cannot allow ourselves to be dragged downwards into a spiral of significant price cuts and long-term losses.
As the hard market developed there was a lot of talk about maintaining underwriting profitability and not relying on investment income. Was this just talk? It appeared we had recognised, as an industry, that we had historically underestimated the huge potential cost of long-tail losses. But, now, there are some markets, which believe that they can write through the cycle either by arbitraging and using cheap facultative protection or by speculating in new classes. These are not long-term options and the difficulties faced by some major reinsurers have surely shown just how dangerous over-reliance on net underwriting can be. So when it comes to risk, whatever the hue of the day, we need to be disciplined in writing business at rates that are sustainable.
We also need to show real leadership and be prepared to back our own judgement rather than simply being in thrall to statistically driven pricing models. The world in which we, as insurers, operate is significantly more complex than the banking model towards which so much of what we do seems to be heading. In practice, what this means is that risk carriers like ourselves will continue to differentiate between clients. Businesses with good loss records and excellent risk management can expect renewal quotes at prices below last year while those clients who do not manage their businesses must expect rate rises or we will come off the risk.
In essence, then, the current and future environment requires risk carriers to actively differentiate between risks. It means being prepared to take strong positions on good risks while, at the same time, refusing to offer reductions to sub-standard business.
This is a difficult approach to take because it can be hard to understand what a business is doing at a macro level - the statistics do not show what is really going on. It requires a level of micro-management that is demanding, time-consuming and difficult - but necessary.
We are now at a crucial time. If we are disciplined and show determination we can target those risks that we want to see and ensure adequate ratings on less well-managed business. It is not the emerging risks that pose a threat to insurers, but how that business is written.
Torquil McLusky is business development manager, Ascot Underwriting Ltd.