Swiss Re's latest sigma study "Strategic reinsurance and insurance: the increasing trend of customised solutions" focuses on the growing use of non-traditional re/insurance solutions. But what are the implications for corporate risk managers?
Twenty years ago 85% of the companies listed on the Standard and Poor’s 500 index were asset based. Today, it’s only 15%.
Twenty years ago most companies were looking for insurance to protect physical assets. Today, they are also looking for relevant customised solutions, to support the wider business issues they face. Insurance isn’t always at the top of the board of directors’ agenda, based on the assumption that insurance cannot indemnify financial losses without there being physical damage, and that broader economic risks are non-insurable.
However, regulatory reforms, the globalisation of risks and technological advances have changed the very make-up of our business landscape. The paramount need for efficiency and cost cutting, and the ability to innovate, has added to this evolving trading platform. This means the way we do business has changed. It only follows that the role of insurance has to change, and with it, the role of risk managers.
To keep a competitive edge, insurance now has two jobs. Of course, assets need to be protected. However, more sophisticated, interactive and tailored solutions to protect cash flow and profit are required too. Risk managers, therefore, are increasingly aware of the full spectrum of business risks, not just those that are commodity based. They are in a great position to be an integral part of the solution to reach their organisation’s business goals. Non-standard insurance offers them the tools to do this, as well as other benefits.
By the very nature of customisation, there are as many solutions as there are problems. Non-standard solutions could mean understanding the risks caused by Non-Damage Business Interruption (NDBI), which is a growing trend. It could also mean parametric cover, incorporating traditional, economic or even new insurance triggers, which when activated provide immediate financial assistance.
The first advantage of non-standard insurance solutions is the protection offered to bottom line and income streams, an intangible concept, which until now, has been difficult to protect. Businesses face financial losses even though there may be no damage to their assets. For example, floods could easily interrupt the supply chain for a construction site, creating cash flow issues as well as putting the completion date at risk. There may not, however, be any damage to the building site itself.
The second advantage is that they are customised to an organisation’s specific set of circumstances. This means they only pay for the protection they need. If you bought a fruit basket, you might like 90% of the fruit, but 10% would go to waste. If you chose your own fruit, you’re guaranteed to like 100% of it.
The third advantage is efficiency - risk managers deal with fewer, but more strategic, long-term insurance partners. This not only streamlines business processes, but also means they have strategic understanding from their suppliers, rather than an off-the-shelf solution. Insurers become more like business partners providing innovative risk solutions, insight, advice and support. Insurance becomes a business tool, rather than a tick in the box exercise
From an insurance perspective, businesses are unique and require bespoke protection to meet today’s challenges and risk transfer needs. Non-integrated, modular policies, along separate business lines, can no-longer meet the demands of a changing world, and the changing needs of business. Insurance used to be about protecting assets. Today, it’s also about protecting revenues as well and risk managers are the enablers.
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