At their core, insurance contracts have traditionally been quite simple in terms of how they approach coverage. You can either have a ‘named perils’ policy, in which the contract designates exactly what is covered and what is excluded, or you can have an ‘all risks’ policy, which assumes that every peril is covered, with the exception of specific exclusions.
Those approaches work for known perils … but what about emerging risks? Are these traditional coverage methods suitable for an ever-increasing spectrum of unknowns?
The insurance industry is facing times of unprecedented change. Rapid advances in technology, a changing climate with increasingly volatile weather patterns, the odd juxtaposition of globalization in business with widespread trade protectionism – these are all emerging risks that insurers are having grapple with on a daily basis.
Aon’s 2019 Global Risk Management Survey, which collated insights from several hundred corporate risk managers around the world, identified 15 top risks that keep risk managers (and therefore their insurers) up at night:
- Economic slowdown / slow recovery
- Damage to reputation / brand
- Accelerated rates of change in market factors
- Business interruption
- Increasing competition
- Cyberattacks / data breaches
- Commodity price risk
- Cash flow / liquidity risk
- Failure to innovate / meet customer needs
- Regulatory / legislative changes
- Failure to attract / retain top talent
- Distribution or supply chain failure
- Capital availability / credit risk
- Disruptive technologies
- Political risk / uncertainties
Property / casualty insurance consultant, Phil Cook, who is chairman of Omega Insurance Holdings Inc, said that there’s one key positive and one key negative to come out of the Aon report.
“If you were to go back 25 or 30 years and ask that same question to corporate risk managers, they would be referring to things like fire, flood, earthquake, theft, obsolescence, product failure, and various legal exposures. None of those things are in the top 15 at the moment,” he commented. “The positive I take from that is that we’ve done a phenomenal job in the insurance industry in addressing those concerns. Rightly or wrongly, the risk managers don’t have those concerns [to the same degree] any longer because they know that they’re covered for them, in general.
“What they are concerned about [at present] are things that we don’t provide much coverage for – and that’s the negative side of this. If you think about each of the 15 perils on the list, many will conclude, as I did, that we may be covering four or five of them, but the others we’re not providing coverage for. That’s not to say that we can’t provide coverage for these other things. I think the challenge for our industry is to take care of these sleep deprivation perils for risk managers over the next few years and come up with products that let them sleep better. That’s what we did with the previous lot of concerns.”
This is where the issue of ‘named perils’ and ‘all risks’ policies comes back into play. Would an ‘all risks’ policy provide adequate protection for the corporate risk managers’ top concerns? According to Cook, that wouldn’t address the situation at all.
“What we’re really saying is ‘all risks’ except for 10 or 12 of the perils on the top 15 list,” said Cook. “And that’s not the best way to move forward as an industry. I don’t have the answers, but we have to be able to find a way to address some of those lack of sleep issues for risk managers.
“Perhaps we don’t call it ‘all risks’ anymore. Perhaps we go back to more of a ‘named perils’ approach. Once you’ve got more excluded perils under ‘all risks’ than you have under the list of things that you are covering, it seems to be counterintuitive. You’re better off to say what you are covering, rather than saying we’re covering everything except the following 30 things.”