As Benjamin Franklin once cautioned: “By failing to prepare, you are preparing to fail.” That said, insurers must plan today for the emerging risks of tomorrow.
Executive SummaryEmerging issues are not just risks. They’re also opportunities, notes Verisk’s Mark Anquillare, who advises on some steps carriers can use to stay on top of emerging issues to eliminate claim surprises and to position themselves to better respond to the changing needs of their policyholders.
Emerging issues have become ubiquitous in the insurance industry, as carriers of all sizes try to learn as much as they can about the risks of tomorrow. Take, for example, emerging issues related to nanotechnology and the “Internet of Things.”
Nanotechnology is the study and use of tiny matter—roughly 1-100 nanometers in size (one nanometer is a billionth of a meter)—to produce new materials, devices and structures. Since 1981, the use of such tiny matter has contributed to a wide range of innovative products, including iron-free and spill-resistant clothes, antireflective lenses and flash memory for mobile devices.
But nanotechnology also has drawn attention from government agencies around the world concerned about the possible effects of exposure related to this technology. The U.S. Occupational Safety and Health Administration (OSHA) sums up the state of current research on its website: “Although the potential health effects of such exposure are not fully understood at this time, scientific studies indicate that at least some of these materials are biologically active, may readily penetrate intact human skin and have produced toxicologic reactions in the lungs of exposed experimental animals.”
As it continues to study nanotech’s effects, the U.S. Centers for Disease Control and Prevention (CDC) has published guidelines to help protect workers from any potential harm. Among the agency’s suggestions are to ventilate nanotech production facilities, provide protective gear to employees and institute job rotations that limit employee exposure.
The Internet of Things is a term used to describe a world where everyday objects—from parking meters to home heating systems—are connected to the Internet and can be controlled by computers and mobile devices. If you haven’t heard the term, you’re not alone. According to a survey last year by ISACA (previously known as the Information Systems Audit and Control Association, a global association of IT security, assurance, risk and governance professionals), only 6 percent of Americans are aware of the term. But many Americans report using Internet-connected devices, including a GPS system (62 percent), electronic toll devices on their cars (28 percent) and smart TVs (20 percent).
The Internet of Things continues to grow every day. According to Cisco, more than 12.5 billion devices were connected to the Internet in 2010. That number is expected to rise to 25 billion next year and to 50 billion by 2020.
Four Steps to Managing Emerging Issues
Nanotechnology and the Internet of Things are just two of many emerging issues that insurers are trying to get their arms around. Four guideposts for their multifaceted risk strategies include the following:
1. Identify risks through employees, customer input.
An insurer can’t plan for risks without knowing what they are. That’s why the first step in developing a successful strategy is to create a process to identify emerging issues. The specifics of that process should include reaching out to appropriate staff and monitoring published reports, technical reports and scientific studies in the marketplace.
The effort is easier than it sounds. Many insurance company employees are reading industry newspapers, business periodicals, and various journals and magazines, all of which may report on potential emerging risks.
In addition, some employees interact with customers who are in a unique position to share their own emerging risk perspectives. Those customers are likely to monitor developments in the business world around them and are in the best position to recognize external factors that have the potential to affect their unique risks in the future.
Tapping such resources, optimally across the entire enterprise, and making that effort an important part of an organization’s culture are key to integrating emerging risk management into a strategic plan.
There are different ways carriers can make that type of approach a part of their culture. For example, carriers can assemble a team of staff members solely devoted to identifying and monitoring emerging risks for the organization, or they can develop internal tools or applications (such as a database) that allow their employees to report on (and track) emerging issues as employees come across such issues in their interactions. The next section highlights one type of approach.
2. Create multidisciplinary teams to evaluate exposures.
Beyond identifying the risks, a thorough evaluation of the potential exposures of those emerging risks is needed. Some insurers currently are developing multidisciplinary teams to assess the insurance implications of emerging issues that draw from a wide spectrum of individuals and disciplines, helping to address the full scope of risk. Such internal teams as finance, engineering, underwriting, claims, legal and technology all can offer a unique perspective when deconstructing the potential risk that an emerging issue may present.
Keep in mind when evaluating emerging risks that there is a basis of knowledge from which to draw. For example, when evaluating the potential exposures of nanotechnology, here are some questions that can be asked:
- Are nanotechnology risks similar to other liability hazards of the past (for instance, release of chemicals)?
- If so, could historical claims data of past liability hazards help predict future claims for the emerging issue (perhaps workers compensation claims data of chemical manufacturers as predictive of future nanotechnology workers comp claims)?
When evaluating the potential exposures of the Internet of Things, you may want to consider what effect the continued growth of smart appliances and systems in homes will have on homeowners insurance perils. For example, what are the potential security concerns if smart systems are hacked?
Earlier this year, more than 100,000 home devices (including routers, TVs and even a refrigerator) were infected by a botnet and used to send spam emails. Imagine if a similar attack was used to disable security systems in a particular neighborhood.
3. Take Action.
Once a carrier has identified and evaluated the potential exposures, it will need to decide what actions, if any, it should take to address them. It’s important to consider all options and involve various disciplines (such as underwriting, claims, risk management and legal) in the decision-making process to ensure that the potential effects of those options are assessed comprehensively across the organization.
But recognize there may be challenges, specifically with respect to traditional risk quantification. In many cases, losses haven’t yet occurred or the effects of certain issues haven’t been fully determined. A forward-thinking approach will be necessary, as will methods that go beyond the use of historical data.
While carrier executives will naturally ask whether an emerging issue can be addressed by an approach used in the past, insurers must also ask the following questions for each issue when considering coverage and pricing actions:
- Is the emerging issue an ongoing or broad-based risk? Or is the risk more limited? Nanotechnology, for example, can affect many industries worldwide. In contrast, drywall issues affect homes and buildings mainly in the eastern and southeastern United States.
- Are the insurer’s existing coverages, classifications and pricing structure adequate to address the exposure?
- Can the carrier handle the emerging issue through underwriting guidelines or increased reserving?
- Are the exposures well developed, or is the issue so new that it will take time for its loss characteristics to become evident?
For some of the newly emerging issues, the best answer may be to monitor the situation. But when those issues do mature, any advanced planning will likely have the insurer in a better position to respond appropriately.
4. Monitor Results.
The work doesn’t stop with identifying, evaluating and addressing an emerging issue. Continued monitoring is imperative, especially for issues that were still emerging when they were first addressed. If new or different variations of exposures have evolved since, an insurer may need to refine its strategy to appropriately handle them.
Monitoring claims activity related to an emerging issue can offer a quick snapshot of whether the wording in policies is working as intended and whether policies are adequately priced.
Put Theory Into Action
How does an insurer begin?
One way might involve distinctly classifying those risks containing new exposures. For example, with nanotechnology, an insurer may separately classify those risks that involve the manufacture or distribution of nanomaterials.
Where to Find Help
Insurers that want to learn more about specific emerging issues can find a wealth of research online provided by nonprofit organizations, governmental agencies and private companies.
Another available resource is the emerging issues portal on ISOnet, a subscriber service that provides customers access to the insurance reference information and data products of ISO and Verisk Analytics.
Some emerging issues have spurred ISO to develop insurance product enhancements, including enhancements to the ISO cyber liability insurance program, the green building coverage option, general liability classifications for nanotechnology and alternative energy production, and low-speed vehicle coverage options for auto coverage. For more information, visit the ISO Emerging Issues website (or visit iso.com/ils and select Emerging Issues).
As for the Internet of Things, a carrier might want to collect information via its insurance applications or other means (such as questionnaires), which allow the company to differentiate homeowners risks that may include, or may not include, smart systems. That information may allow an insurer to begin collecting detailed loss data to help price those risks down the road.
A carrier also may want to evaluate whether its existing coverages and pricing sufficiently address those exposures. With respect to smart homes, does current pricing reflect the potential replacement cost of smart systems? Can coverage options be enhanced to include smart system upgrades or green building upgrades subsequent to a loss?
As for nanotechnology, do existing policies adequately address the exposures that may emerge in the use of nanomaterials in the insured’s products? Likewise, does the insurer have underwriting guidelines in place to help determine what types of nanotechnology risks are acceptable for its book of business and risk appetite?
Insurers must remember, too, that emerging issues are not just risks—they’re opportunities. When considering emerging issues, it’s human nature to evaluate them from a negative perspective—to focus too intently on the downside. After all, environmental and asbestos hazards, increasing natural catastrophe losses and terrorism have all challenged the insurance industry over the years. Still, it’s important for emerging risk teams to approach their job with a broader perspective, hunting not only for potential risk but also potential reward.
By asking the right questions and making an emerging issues strategy an integral part of the corporate culture, an insurer will not only help protect itself from potential losses but also position itself to better meet the needs of today’s policyholder and the changing marketplace for years to come.