It is really only recently that mentions of a post-COVID environment are being voiced with some degree of confidence, allowing the repercussion of decisions made in the heart of the storm to be more objectively assessed.
The rapid move to a digital-first way of doing business is a topic particularly high on that agenda and, as evaluations continue, it is becoming ever-clearer that few if any sectors have bypassed the wave of digitalisation accelerated by COVID. This fast-tracked digitalisation has brought with it a lot of benefits, noted Sundeep Khera (pictured), AXA XL’s global head of hull and UK & Lloyd’s head of marine, but it also comes with increased risks – which people are becoming more attuned to now the dust is settling.
“It has changed the risk landscape for us as marine insurers,” he said. “And we need to understand the risks of digitalization because it’s very new to us. This is coming at a very fast pace… For us, as marine insurers, we rely a lot on government and non-government third parties to ensure our insurance cover has a certain level of checks and balances in place.
“These checks and balances include a physical check of either the ship or the cargo we’re insuring. We do put in conditions within our coverage that somebody has to physically verify this - as that’s the basis of us authenticating that the commodity even exists. What happened during the pandemic is the [industry came up] with the idea of ‘remote surveys’ where instead of flying to a country and being physically present in a location, certain ways of checking were used instead.”
These remote tools - which include images, videos, and checklists that covered required angles and specifications - are one of the key ways in which the marine industry adapted to the pandemic. Remote surveys offered insurers the assurance they required while preventing breakdowns in cover. However, he said, despite the problems solved by this innovation, the risks incurred by these solutions are becoming more visible.
Looking at the cargo insurance world, for example, Khera said, in more normal times, misappropriation or fraud could be authenticated by sending somebody out to investigate a loss. In a remote survey environment, how can you check that? How can you overcome that challenge? It’s a concern that is being further compounded by the question of whether a return to the traditional way of doing business is even on the cards.
“With that cost-benefit analysis in place. clients say ‘OK, now you’re happy with a photograph, why should I incur a cost for sending somebody out?’,” he said. “But there are now increased risks in the industry around misappropriation… That’s one risk of digitalisation or remote surveys which we’ve seen in the cargo insurance world.”
Looking at the shipping side of the equation – the hull and machinery side – something similar happened. Here, insurers rely on a non-governmental agency called the International Association of Classification Societies (IACS) and port states which have a Memoranda of Understanding (MOU). Each country inspects ships coming into their ports, Khera said, and if they feel they’re not safe they input this into a database. Insurers can then pull this information into their own underwriting systems to create a more accurate risk profile of a shipowner.
“The same thing happened,” he said. “And now, as you can still see with what’s happening with China and its zero-COVID policy, ports were closed so you couldn’t have port state control inspectors going on board. So what do you do with ships which are uninspected? Again, there’s a higher risk for us when you agree to a digital survey. We have adapted to digital surveys but, even now, there is still work to be done to get physical inspections of vessels back to the levels they were at before the pandemic.”
Take for example the Tokyo MOU – which is the biggest MOU on a port state or government level – pre-pandemic it conducted around 31,000 ships going into the Asian region a year while, in 2020, it only conducted 19,415, an almost 40% drop. This has a significant knock-on effect on insurers’ risk profiles, he said, and the latest figures reveal that this region is still 5-6% short of being at pre-pandemic levels for physical inspections.
“That’s where I think it’s increased the risk profile for us as underwriters, as insurance companies,” he said. “So there’s a [requirement] for us to make sure we understand that fully.”
The implications of remote surveys go beyond fraud to safety considerations too, Khera said, which is another important consideration for insurers going forward. Exploring how AXA XL has worked to offset the risks posed by remote-access protocols, he noted that the insurer has implemented certain risk transfer measures including with regards to pricing – so the way it prices risk is a bit different to its standard approach.
“We also give that benefit back to the client,” he said. “We tell the client, ‘look, if you have 10 countries you were planning on doing operations in and you want to go digital in those 10 countries – this is the price. If you want to go digital in five countries and manual in five countries – this is the risk transfer price.’ That dialogue is very important for the stakeholders.”
With an eye to the future, Khera highlighted that AXA XL has no intention of simply stepping back into the more archaic way of doing business but rather in finding the right blended approach that will allow clients to take advantage of new technologies without impacting the coverage required. A risk profile needs to be continually adapted to the specific requirements of each client, he said, and a one-size-fits-all approach is not the solution.
“An example would be that if you’re insuring something with me for a $10 million limit, you might not want to do a digital survey,” he said. “Whereas if you’re insuring something with me that has a $1 million limit, you’re probably happy because the cost-benefit analysis is right…
“You cannot have that broad-brush approach where you say ‘I’m the most innovative digital insurer, and I’ll do everything digitally’ in commercial marine insurance. It’s more suited to personal lines insurance, often because the value at stake or the risk transfer is very low - but we need to remain flexible according to the needs of the insured and cannot afford the complacency of too narrow an approach.”