Why insurers should partially block out the past and why forward-looking companies should take charge of their future – because one thing is certain: Nowadays, risk management is more in demand than ever. 

Whenever insurers decide whether to provide coverage for specific risks, they turn towards the client’s past claims experience. That is how the first insurance came into being hundreds of years ago, and the same principle is still applied today.

When negotiating annual renewals insurers turn towards the client’s claims history and include it in their new offer. If an insurer backs out of a contract with a particular sector or an insurance line, it’s because negative experiences with claims in the past have earned him no money. Similarly, any required risk improvement measures also derive from past claims experience.

In times when risks develop gradually at a slow pace, this principle of assessing the past claims history works quite well. Insurers know what to expect, they consider and calculate appropriate provisions, set prices accordingly and include these in their conditions.

What happens if the risk landscape changes in a snap or new risks seem to appear out of nowhere? 

The steps insurers then take are best explained by looking at the recent cyber insurance examples. The pandemic boosted digitisation and in turn, changed the cyber risk landscape. In response, prices skyrocketed, capacities were reduced, levels of excess increased, risk dialogues became even more laborious and new demands were made. Some businesses received no offer at all for their cyber insurance, and some insurers publicly questioned the future of the product. Many reacted in an almost panic-stricken manner.

Would such radical measures also have been taken if there were no pandemic? We doubt it. Cyber risks were on the rise even before the pandemic and were treated as an accumulation risk.

But why should insurers block out some of the past in such cases? 

It’s quite simple: insurers react as quickly as risks change, but so do businesses. If you ask the management of a company whether it would prefer ”no damage” over “full damage cover”, the reply would be “no damage” in 99% of the cases. That is why investments in cyber security have been stepped up in many companies over the past months. At least now all management levels are highly aware of the topic. The quality of risk has improved considerably as a result.

Unfortunately, some international insurance groups struggle with a moderate approach as loss events affect them globally. The countermeasures they take (in their panic) often tend to be overkill for the individual company. But it is precisely the responsibility of industrial insurance to balance this volatility. Insurers should rather stay calm, work hand in hand with their business clients and moderately shape and make the changes needed to manage the risk landscape. This builds trust – and customer loyalty.

There’s a need for Risk Management 4.0 

Businesses are cautioned to not only rely on industrial insurers as some, to date insurable risks, could suffer the same fate as cyber insurance. Just think about climate change or coverage against natural disasters. Besides, there are many – often new – risks which cannot be insured and which change just as rapidly.

Industrial companies must increasingly come to grips with future risks, strengthen their risk management in the process and place it at the top of their agenda. This, however, means more than just implementing the risk improvement measures which insurers impose upon them – something which almost all market players have propagated at an inflationary level, and which only addresses the past. It is rather a matter of defining future risk changes, determining their possible consequences for one’s company and preparing accordingly – a forward-looking risk management 4.0, so to speak.

A partner who not only focuses on mere risk transfers but acts as a risk adviser, who sends out the right signals and provides expertise through a know-how pool can create real added value for industrial companies. By working in tandem with clients the insurance partner can help to meaningfully shape the future in an ever more complex, interconnected, and fast-moving world.

Andreas Schmitt

Vorstand Risiko- und Versicherungstechnik

T +43 664 962 40 11

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