Product innovation around data and data analytics have expanded the scope of commercial insurance solutions to a wider range of threats and perils, and made risk transfer more efficient, according to the latest Swiss Re sigma
The study “Commercial insurance: innovation to expand the scope of insurability”
analyses innovative risk transfer solutions available to cover the ever-evolving range of exposures that companies face.
Technological, economic, demographic, societal and geopolitical macro trends are driving deep changes in the business environment. The corporate sector has changed from being dominated by manufacturing, with physical assets, to services with mostly intangible assets, such as intellectual property, networks, platforms, data and customer relationships. This transition is creating substantial opportunities alongside new risks.
“New types of solutions are providing protection against a wider range of perils, and extending insurance cover from tangible to intangible assets,” said Kurt Karl
, Swiss Re
’s chief economist. “In addition to offering coverage for multiple risks, holistic solutions offer efficient risk transfer given their focus on the joint distribution of all risks.”
Parametric solutions based on indices rather than actual losses also offer efficiency benefits. The biggest advantage of parametric triggers are their clarity and neutrality: an insurance pay-out is triggered if pre-set conditions are met, providing a quick, pre-agreed pay-out without a lengthy claim investigation. This makes parametric solutions particularly useful in managing earnings volatility or for business interruption type coverage, with or without physical damage to property.
Insurance solutions are also increasingly being used to protect earnings and cashflow risks. Some previously uninsurable non-core business risks can now be insured to some degree, due to the evolution of triggers, indemnity structures, and data and modelling advances. Examples of perils that can be covered in more innovative ways include non-physical damage business interruption, cyber, product recall, as well as weather and energy price risks.
According to Swiss Re
, there have been cases where novel solutions have enabled the operation of new types of business models such as sharing economy start-ups, and even allowed companies to utilize risk transfer for marketing support and product differentiation.
For instance, in China a company wanted to promote a client loyalty programme that would allow local farmers to benefit from free-of-charge replacement for already purchased pesticides if their crops were damaged by a severe storm. The manufacturer’s objective was to transfer this risk exposure to the insurance market. In addition to boosting sales, the pesticide manufacturer can increase client loyalty by offering an insurance add-on to its product, and also justify a small price increase for the product. The benefit to farmers is that the free-of-charge replacement features provide financial relief when they need it most.
report describes how corporate risk management is becoming more sophisticated as a necessary response to the changing risk landscape from structural changes in the business environment. Firms are transferring risk through financial instruments in order to reduce costs associated with financial distress, and to safeguard cashflow and therefore investment projects.
They are also using novel risk transfer solutions to create value by lowering the cost of capital and to reduce earnings volatility. New covers will expand the scope of protection products by enlarging the boundaries of insurability and also the role of insurance in corporate risk management.
, Munich Re
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