Insuring What's Important
Allianz posted an article in January 2022 based on a survey of 2,650 businesses listing cyber, followed by business interruption, and natural catastrophes, as the three highest rated perils that businesses face.
Let me work backwards. The prior week, MunichRe provided a report showing that 31% of catastrophes in 2021 were covered by insurance (in claims dollars). This is in line with a prior long-term study by SwissRe concluding that only about 30% of catastrophes, in dollars, are covered by insurance.
Business Interruption coverage claims related to the pandemic, at least in this country, were denied almost 100% of time in 2020-2022 for arguably the largest business interruption event in history.
Cyber coverage can be purchased. However, it is questionable just how useful it is as a lot of cyber policies provide minimal coverage. Good coverage depends on many variables being met. Does the client actually meet the warranties they are signing for on the application? Do the adjusters have a clue relative to how to adjust cyber claims? Not to mention, is the cyber policy affordable or does it cover ransomware. All of these circumstances, create a giant hole.
The three biggest perils to business have, at best, maybe 30% coverage. Do businesses really need insurance, especially in the traditional marketplace, if insurance companies are not going to cover what is most important? Or is it akin to the adage that the only time a banker wants to lend you money is when you don’t need it?
I have analyzed A.M. Best claims data and the traditional insurance world is simply becoming less important because the claims activity, relative to the overall economy as measured by GDP, is shrinking. Either people and businesses are having far fewer claims or the claims they have are less likely to be covered (which makes sense given higher deductibles and carriers' continued focus on tangible property rather than intangible property).
I know some carrier people will be thinking, "But we paid a lot of claims, so we still matter!" That is pretty much a moot point because small stuff can be self-insured and a lot of quality business is moving to alternative risk transfer mechanisms. The traditional marketplace is increasingly the residue of adverse selection based on accounts and agents who do not know better options exist for quality accounts.
What to do? At the agency level the place to begin is to become educated, highly educated, on alternative markets. Next, begin getting to know the people who run quality (because there is no room for sloppy) alternative markets. Quality is everything because this market is not regulated in as many ways as traditional carriers. So many solutions exist making knowledge imperative at the agency level. An agent must know coverages inside and out to design a plan that provides the security his/her clients need.
At the carrier level you can continue dealing with adverse selection. Agents who do not know what they are doing and agents who are years behind the times relative to market solutions are writing accounts that otherwise have nowhere to go. You can continue to compete for this segment of the market. In commercial, all the estimates I have read already show a majority of premiums are in the alternative marketplace, so this residual business is likely to continue shrinking relative to the economy.
Or you can decide that policies written for 1970 manufacturing America might not be as important as the policies written for the 2022 data driven America. You might decide to broaden coverage for catastrophes, for a price, especially using alternative risk transfer methods specifically designed for catastrophes.
You might decide that, for a price, insuring business interruption for the most important business interruption events such as supply chain and civil authority makes sense. Otherwise, let's call it what it is, business interruption coverage for highly unlikely, limited perils that insureds will probably never face while ignoring the ones businesses are more likely to face.
You might decide that cyber is simply uninsurable. Or that a straight DIC type cyber policy makes sense. Or, perhaps the creation of a full cyber risk management program backed by cyber insurance, rather than putting cyber insurance at the forefront, makes the most sense.
Or, you may decide to do nothing, which I bet will be the case. Most insurance companies are not prepared for these times and this economy. But, for the ones willing to think things through and offer solutions rather than silence and denials, the potential success is tangible.
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand Insurance Education, Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.
None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.