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Power of Partner Ecosystems

To the max. As much as possible. To the utmost extreme.

All of these define the term “nth degree.” As a math major, I know the term has roots in mathematics, where “nth degree” equations and roots have been around for decades. How does this apply to insurance?

The digital era of insurance is accelerating and shifting the business landscape. The digital era has put new technologies, data and capabilities in the hands of business leaders – offering them the opportunity to transform their business and customer experiences.

But an even more powerful transformation is in insurers’ market reach with the power of multi- and digi-channel partner ecosystems!

Buying vs. Selling

Generally, today’s insurance process is difficult, lacks transparency and is complex and often time-consuming. In contrast, many insurtechs and existing insurer innovations are refocusing to a “buying” over “selling” approach — through a multi-channel strategy that meets customers where and when they want to buy.

If distribution channels are easy to use with products that are easy to understand, then insurance has the opportunity to grow through friction-free, multi-channel distribution.

With the increasing competitive challenges to attract and retain customers, insurers must develop and use a broader distribution ecosystem that engages customers when and how they want … putting them first. A distribution ecosystem can rapidly reach more markets, potential customers and current customers with more purchase and service options by tapping into a growing array of channels beyond the traditional agent/broker channel. Distribution ecosystems provide new access avenues, capabilities and services that create the nth-degree impact – both for customers and insurers.

Simply put, this range of channels includes direct-to-customer, agent/broker, other insurers (for products you want to offer your customers), marketplace exchange or platform and embedded — provided across a range of soft, hard or invisible embedded partnerships as depicted below.

Together, this spectrum of channels represents the new multi- and digi-channel ecosystem for the digital era of insurance.

Multi- and Digi-Channel Ecosystems — Foundation of the Nth Degree

To compete for the next generation of buyers – millennials and Gen Z — let alone retain today’s Gen X and Boomers, insurers must be a part of and offer a range of distribution channels with which they interact, transact and integrate, to offer customers innovative, optimized solutions.

In our 2020 customer research on auto and life insurance, we found younger generations are open to buying insurance from a wide array of channel options, including:

  • For life insurance, they are 33% more open to new channels than older generations.
  • The preference gap between new and traditional channels is large for older generations – nearly 50% – as compared with only 21% for Gen Z and millennials. So, customers are much more open to different, new channels – creating an opportunity for growth.
  • The younger generation is twice as likely to buy auto insurance from a car shopping website or a vehicle manufacturer website or have it included in the purchase or lease of a vehicle.
  • Millennials and Gen Z are open to buying insurance from Big Tech like Amazon, Apple and Google.

Insurers looking to compete are ill-equipped to do it alone. They must create an ecosystem of connected channels, using a range of digital capabilities to connect with customers when and how they want.

Let’s face it…. we all interact with a wide array of different entities, businesses and individuals on a regular basis. Many of these entities have earned our loyalty and trust, providing a platform for future engagement. Many of these are now becoming channels for insurance — GM, SoFi, Ford, Petco, Airbnb, Uber, Intuit and more. At the same time, we are seeing partnerships form within the insurance industry — insurers selling each other’s products, leveraging new marketplaces to expand reach and strengthening the traditional agent/broker channel with new digital capabilities.

Together, the partnerships represent a powerful distribution ecosystem that places insurance directly in the path of a customer’s life journey events, where insurance is relevant and needed. Ecosystems provide a greater impact on sales because they are an “outside” customer approach instead of an “inside” product/process approach. This is the shift from selling to buying that is so crucial to today’s insurer growth. It’s an approach that naturally reduces infrastructure, operational and capital expenditures at the same time that it brings in more business with less effort.

However, in our joint research with PIMA last year, we found that of the wide array of 34 channel options, only 18% (or 6 of the 34) are being planned — reflecting a very narrow view of channels that significantly limit reach and revenue opportunities and create a wide-open field for those who dare to be creative in establishing a multi- and digi-channel partner ecosystem.

Next-Gen-Multi- and Digi-Channel-Gen Leaders

Who is taking advantage of this wide-open field, becoming next-gen multi- and digi-channel leaders? Some are starting in other financial services areas first (which provides insights to broader opportunities) while others are directly entering insurance. But they are all vying for the next-generation customer!

Outdoorsy + Roamly — Online recreational vehicle rental and outdoor travel business Outdoorsy said it is partnering with insurtech Roamly to provide insurance for RVs, travel trailers or campervans. With Roamly, commercial and personal policy owners can safely rent their RV, trailer or camper on marketplaces like Outdoorsy without losing coverage or worrying about loopholes.

SoFi, Ladder Life, Lemonade and Gabi — One of the best examples of a company looking at the customer across life, health, wealth and wellness is SoFi, a fintech organization – under SoFi Protect. SoFi started out as a student loan consolidator and provider and has rapidly expanded to owning the entire customer financial services relationship – life, wealth, health and wellness. The original focus on student loans has been capturing the next generation of customers – millennials, Gen Z and eventually Gen Y. SoFi now has over one million members and 7.5 million contacts, where members may represent family units. The company created “vaults” for customers to use for saving and spending, for categories like insurance, taxes, travel, house, emergency fund, etc. and offer insurance through an ecosystem of partners, including Ladder Life for life insurance, Lemonade for renters or homeowners insurance and Gabi for auto insurance.

State Farm and Ford — State Farm announced a partnership with Ford for usage-based insurance (UBI) using the auto telematics and connected data from eligible, connected Ford vehicles. Ford vehicle owners will be able to opt in to State Farm’s Drive Safe & Save program, which aligns premium to miles driven while also rewarding safe and good driving behavior with potential discounts.

John Hancock and Amazon — John Hancock announced the integration of its Vitality Program with Amazon Halo, allowing Hancock’s Vitality customers to use the Amazon Halo Band to earn Vitality points based on their daily efforts for a healthier lifestyle that should mean a longer life. The Amazon Halo Band, a wearable health and wellness device, will measure and analyze users’ activity, heart rate, sleep and tone of voice to provide individual health insights and help encourage healthier habits – thereby earning Vitality points.

Google, Allianz and Munich Re — Google is partnering with these two global insurers to cover cyber breaches and related risks for client businesses that use Google’s cloud services.

The Guarantors and Property Management Companies — The Guarantors is a fintech company providing innovative insurance products and financial solutions for residential and commercial real estate professionals as well as their residents and tenants. The goal is to be the most trusted “go-to” brand for insurance and financial solutions throughout the real estate industry.

Chubb — Launched Chubb Studio “digital insurance in a box.” Partners can access their products, services and claims digitally and integrate what they do into what the partner does – embedded insurance. Initial products offered include: health and well-being, home contents, gadgets, travel and small businesses.

And on the horizon are more companies whose first focus is financial services (such as banking) but that will be well-positioned to offer and provide insurance. The companies also have the motivation. With low interest rates and increased competition from digital leaders, banks need to grow their service portfolios. Consider their customer bases and the impact if they move into insurance.

Verizon — While fintechs globally have been vying for the next generation of banking customers by offering them custom accounts when they turn 18, Verizon has jumped into the game by offering mobile banking with a checking account for the younger generation. The new tool, called Family Money, has two options — monitorable checking for parents to observe and track what their children are paying for and a “savings vault” account with real-time alerts, rules, spending limits and locks. Verizon uses Galileo for the application programming interface (API) and payment processing platform and are offering bank accounts and a prepaid Visa card through Metropolitan Commercial Bank.

Google — Similar to Verizon, the company is vying for the customer relationship. Google’s “Plex” accounts are a mobile-first checking and savings account directly integrated into the Google Pay app. The company is partnering with about 10 financial institutions, ranging from big national banks to regional banks and credit unions, and customers will be able to choose which one they want.

Walgreens — Walgreens is launching a bank account in partnership with MetaBank, inclusive of a debit card, as a way to complement its current services and enhance its loyalty program and customer personalization.

H&R Block — H&R Block, in partnership with MetaBank, is offering an Emerald Prepaid Mastercard account that will do more than accept tax refunds loaded onto it, including allowing customers to withdraw cash, pay bills and perform other money management tasks.

Each of these have been dabbling in insurance, and these efforts are further evidence of their customer strategies.

Distribution Partner Ecosystems — Go to the Nth Degree

Market leaders and competitive market position in the future will be how insurers create distribution partner ecosystems that leverage their strengths and embrace partners to fill gaps and expand market reach. It’s all about the multiples!

In our 2021 Strategic Priorities research, we found that insurers with new products are blowing away their traditional product counterparts in leveraging partnerships and ecosystems across many different areas of the distribution spectrum noted previously. Unfortunately, too many insurers seem stuck in their traditional channels rather than expanding channel choice and reach, meeting the customer where and when they want.

We see big bets being made in new business models, products and services from fintech, insurtech and incumbent insurers that are focused on capturing customers when and where they want through a broader market network of partners. But the challenge for those not embracing a distribution partner ecosystem is that they will have decreasing opportunities for partnerships the longer they wait, limiting their market reach and growth opportunities as a new generation of buyers increasingly turns to alternative channels.

The question is… are you ready and willing to take your distribution strategy to the max… to the nth degree? Your customers are waiting.

How Do You Sell if No One Answers a Phone?

If you’re anything like the average person, you probably receive several calls every day from unknown callers or vague 1-800 numbers. And if you’re like most, you probably block those calls or send them straight to voicemail. Americans received close to 46 billion unwanted robocall last year, so this distrustful reaction to incoming calls is forgivable – but the erosion of trust in the phone experience is hampering insurance providers’ ability to reach customers. This has hurt bottom lines – increasing operational costs as companies spend more time on customer outreach, while hampering revenue-producing opportunities – all of which is making it harder for agents to generate sales.

To better understand the impact on insurers, our company partnered with research firm Omdia to survey decision makers in the insurance industry. We used the survey to gauge how these negative call experiences are affecting sales, as well as to ascertain what strategies insurers are adopting to restore trust in the phone experience. What we found is an industry in flux, eager to adopt new digital channels while still reliant on traditional ones like the phone to connect and engage their customers. 

A Perfect Storm of Distrust

While insurance providers have embraced the spectrum of digital communications channels such as email and texting to communicate with their customers, studies have shown that consumers prefer the phone channel for sensitive or urgent communications. This is especially true for healthcare insurers, which often are under time pressure to enroll members into tailored care management programs following the identification of a high-risk health issue.

Unfortunately for consumers, few industries have been targeted as heavily by scammers as the insurance industry. Because so much misinformation and confusion exists around insurance, scammers have found great success impersonating representatives from the government-run health insurance marketplace, threatening consumers with fines or imprisonment unless they hand over personal information or pay bogus fees. 

Naturally, the uncertainty triggered by the COVID-19 pandemic has only accelerated these schemes. More than half (54%) of respondents in our survey said that, while outbound call volume increased significantly over the past six months, answer rates have remained largely stagnant, requiring insurance providers to spend even more cycles trying to connect with their customers. 

Because of the high prevalence of fraud in the insurance industry, it’s little wonder that the respondents in our survey said that the phone has been relegated to the third most important communications channel (45%), trailing mobile apps (55%) and email (73%). Despite this, insurers recognize that the phone is an essential channel for certain types of critical communications, with 82% of respondents saying that the phone was their primary vehicle for delivering payment reminders, while almost two-thirds (64%) rely on the phone to notify customers about potential fraudulent activity and cancellation alerts.

Further compounding these challenges is that, because of the confusion around complying with new regulations, an alarming percentage of outbound calls are simply not getting through: More than a third of respondents (36%) reported that over 30% of their calls were being erroneously blocked, with over half (54%) of respondents estimating that they’ve lost 10% of revenue due to call blocking and mislabeling.

See also: Why Open Insurance Is the Future

Five Strategies to Rebuild Trust

Phone calls still play a vital role in the customer journey and offer valuable opportunities to connect with customers. Forward-thinking insurers are using a host of strategies to make outbound voice calls more effective. Here are five of the best practices that we have identified that insurers can leverage to rebuild trust in voice communications:

#1: Call customers when they are most likely to answer.

A surprising number of enterprises don’t take basic consumer behavioral intelligence into account when structuring their outbound campaigns. Modern consumer data insight solutions integrate strategies such as a “contactability score” for each contact and apply phone behavioral intelligence to determine key preferences such as the best time of the day, best day of the week and the best phone number to use when reaching out to each individual in your database.

#2: Apply caller name optimization to boost customer pick-up rates.

Even legitimate calls can be mistakenly blocked by new rules designed to protect consumers. Insurers should invest in solutions such as caller name optimization, which allows them to display accurate and consistent caller ID on their outbound calls. This provides a secondary level of assurance that calls are not inadvertently blocked or marked as spam by network carriers or third-party providers of call screening software. Enterprises can also manage their caller ID through a centralized online portal, protecting verified phone numbers from attempts at ID spoofing

#3: Ensure calls aren’t mistakenly blocked by carriers.

According to our survey, over 90% of respondents said they were familiar with the mandate for Communications Service Providers to implement STIR/SHAKEN call authentication. As more service providers deploy STIR/SHAKEN to protect enterprises and consumers from call spoofing and scams, legitimate calls may be blocked or marked as spam. It’s up to enterprises to authenticate the caller identity for outbound calls and digitally sign calls by integrating STIR/SHAKEN protocols in their calling networks. This provides a way to influence the level of trust calls are given by voice service providers.

#4: Adopt branded call displays to establish trust for outbound calls.

The first step to improving trust in voice channels is to assure customers that the call they are receiving is legitimate. A simple way to achieve this is by implementing branded calling solutions that enable insurers to display their company name, their logo, reason for the call and a verification of the caller identity. When we asked respondents if they thought they would find this solution valuable, 82% of respondents said they would. Branded calling not only makes claims resolution more efficient but can materially reduce inbound calls, which is one of the highest costs to a claims division.

See also: 7 ‘Laws of Zero’ Will Shape Future

#5: Prioritize a layered omnichannel approach.

In today’s multi-channel reality, the most trusted brands are the ones that can deliver a consistent and seamless experience to their customers across channels. A robust omnichannel strategy doesn’t just mean offering consumers a variety of ways to interact with a business – it means that each one should be intelligently weighted to fully realize its respective advantages. For instance, our research has found that consumers are much more likely to answer a call if they receive an email-to-text notification in advance of the call. 

The insurance industry as a whole is predicated on the ability of adjusters to quantify and predict risk. And insurance professionals are better than most at making accurate predictions. While not everything is foreseeable, this much is: The ability of insurers to survive and thrive in the uncertain future will require the ability to adapt and to optimize their voice channel practices.

Policy Admin Systems Are Evolving

Core system replacement rates for property/casualty insurers have fallen from their early 2010s peak, but that doesn’t mean modern systems aren’t in demand. Newer trends for policy administration systems (PAS) include cloud-based options and lower-cost implementations. While these platforms remain vital for stakeholders across the entire insurance life cycle, modern solutions are redefining what constitutes a policy administration system. 

Time to market is a key driver. Insurers are looking for systems that can help them develop new products and enhance existing products quickly, improve the flexibility of product development so they can enter new market niches, reduce the overhead costs of system maintenance and legacy platforms, improve data access and analysis capabilities and make third-party integrations seamless. 

In addition, the industry has moved toward general acceptance of cloud-based and SaaS subscription core systems — in fact, most insurers prefer cloud options to on-premises deployments now. Cloud systems are just one element of a more digital-focused experience for employees and policyholders alike. Other aspects of this digital-first mindset include direct-to-consumer quotes (and sometimes policies) through digital portals and mobile devices. 

Customer Expectations Around Self-Service

Expectations for online self-service capabilities have been steadily on the rise thanks to direct sellers of insurance and the influence of other industries (e.g., retail, banking). In both personal and commercial lines, insurers are having to focus more on the customer-facing technology they offer as well as when consumers can access that technology. Failing to meet this demand can lose customers, even in lines of business insurers might not anticipate. The same can be said for employees; attracting IT talent is difficult when the systems involved are older than the job candidates themselves. 

Agent and customer portals are a common component of PAS offerings. If a portal is not built in, the solution likely offers APIs that enable insurers to integrate a high-quality front-end experience with the back end. 

A number of vendors have moved beyond the traditional portal in favor of a digital platform. These low-code platforms allow insurers to deploy highly differentiated customer experiences while retaining good integration with the core PAS solution. 

M&A Activity

Insurers looking into a new PAS should be aware that M&A activity is common in this space. While the rate of activity has declined from its peak, acquisitions are not unusual. Larger vendors like Insurity, Guidewire and Sapiens have all grown their portfolios by acquiring smaller companies with interesting capabilities or customers. This trend continued this year, with some vendors investing in virtual assistants, systems focused on MGAs and surety-specific platforms, among others. 

Larger vendors were also focused on building out their integrated suites, which can be appealing to insurers looking to work with fewer vendor partners. In addition, private equity firms invested in PAS providers this year; for example, Thoma Bravo acquired Majesco last fall, taking the company private again. 

See also: Designing a Digital Insurance Ecosystem

Cloud

Cloud deployment is no longer considered an emerging trend. In fact, some vendors now only offer a cloud-based solution. The potential for lower total cost of ownership and enhancements to performance, scalability and security have made the option more appealing to insurers. Cloud-based PAS platforms also promise to simplify the update process for vendors and insurers alike. While cloud has gained traction in recent years, maturity levels vary widely across vendors and insurers alike. 

Insurers should ensure that their vendor has the right level of cloud experience for their organization’s needs. When choosing a vendor partner, insurers should examine what cloud options vendors can support, whether cloud-native capabilities are leveraged and if the vendor can offer the  automation needed to take full advantage of cloud. Also of note is a slow shift toward multi-tenancy; vendors are likely to continue supporting single-tenant deployments for the time being, but multi-tenant installations and services are gaining traction.

Evolving Platforms

Low-code and no-code platforms are another area gaining focus as they decrease the expertise required to build applications. Low-code techniques have been present in the PAS world for a few decades now, but these capabilities are advancing to meet insurers’ customization needs. In fact, a number of vendors, such as Unqork, Jarus and Salesforce, have built or are building policy administration capabilities on top of their original low-code platform offerings. 

To learn more about the current state of the PAS vendor market as well as learn about prominent solution providers in the space, read Aite-Novarica’s recent report Property/Casualty Policy Administration Systems.

The Talent Crisis — and Opportunity

A recent survey by PwC found that nearly two-thirds of employees in the U.S., including executives, are looking for a new job. That number is stunning.

It suggests that insurers need to play some serious defense, to keep employees happy and on board and to keep competitors from poaching talent. But it also illuminates an opportunity to play offense. If lots of employees are looking for a new position, then, by all means, let’s go get the best we can.

As someone who chose to get involved with insurance eight years ago because of what I saw as a huge opportunity for digital innovation, I’ve always been struck by the industry’s inferiority complex. People talk about how they fell into insurance, rather than choosing it. Many talk about the industry as slow-moving and boring.

In fact, it seems to me that insurance combines a noble purpose with a great opportunity — a chance to use digital technology to “put a dent in the universe,” as Steve Jobs once memorably put it. As we’ve seen over the past several years, insurers are not just using technology to be more efficient but to make life easier for customers, whether buying a policy, requesting information or service or filing a claim. And we’re barely past the starting line. In time, I believe, the industry will be able to focus on preventing losses, rather than (the already important role of ) making people whole following losses. I also think insurance can play a key role in mitigating climate change by translating future risks into dollars-and-cents calculations today that will steer clients in the right direction.

So, why not take advantage of people’s current itch to reconsider their career choices? Why not make a pitch for people to enter the insurance field, where they can play a role in reinventing a multitrillion-dollar industry that provides the bedrock for all others by handling their risks?

As I said, we’ll all have to play defense, too. The PwC survey of 1,007 U.S. based employees and 752 executives found that many were in search of better salaries and benefits — benefits being a blind spot for many executives, who underestimated their importance to employees. The key ones cited in the report are: expanded flexibility, career growth, well-being and upskilling.

I’d underline the role of expanded flexibility, at least over the next year or so. I think many people will be swayed by what the work environment will be like once the pandemic finally recedes far enough for the vast majority of offices to reopen — with, I imagine, at least some flexibility to work remotely being a key desire.

And these concerns aren’t idle. Not only did 64% of those surveyed in August say they were looking for employment, up from 36% in May, but nine out of 10 executives said they were seeing abnormally high turnover in their organizations.

But I think insurance is already making bigger strides than most industries to become a more attractive place to work, in particular by continuously automating more and more of the entering (and reentering and checking and fixing and…) of the information that insurers require. And the trend is accelerating. So much more of the mundane work processing documents will be taken over by computers, freeing us humans to tackle far-more-fulfilling problems.

As an ITL thought leader wrote not long ago, it’s one thing to pitch prospects on a career of checking the fine print in a legal contract. It’s a whole other thing to tell them that we’ll equip them with the most advanced tools available to reinvent one of the world’s core industries.

Now is a great time to make that pitch.

Cheers,

Paul

Growing Number of Uninsurable Risks

A few weeks ago, I saw a LinkedIn post from Dr. Robert Hartwig that discussed his testimony to one of the U.S. Senate’s subcommittees about the uninsurability of business income from the COVID-19 pandemic. Seeing that LinkedIn post, and reading his testimony, triggered my continuing belief that uninsurability of certain risks has been happening more frequently over the decades.

More specifically, I believe that as we, as a society, become increasingly more dependent on web-connected devices, uninsurability will become more of an issue for both the insurance market and for corporations (and individuals, as well).

I want to thank Dr. Hartwig for giving me permission to use some of his content from his July 21, 2021 testimony to the U.S. Senate subcommittee.

His testimony is titled: “Examining Frameworks to Address Future Pandemic Risk,” and he presented it to the U.S. Senate Committee on Banking, Housing and Urban Affairs, Subcommittee on Securities, Insurance and Investment.

My three key messages

My three key messages for the readers of this blog post:

  1. There has been, and continues to be, an inexorable shift to (potentially uninsurable) severity from a small but expanding number of risks.
  2. Not all of the risks that fall into the uninsurable severity category are technology-related or technology-driven. Terrorism and global pandemics fall into the uninsurable severity category (in my opinion), as does, or will, certain ramifications of climate change. None of those three are technology-related or -driven. However, technology specifically in the form of web-enabled devices will push more risks – cyber risks – into the uninsurable category.
  3. Regardless of the insurability or uninsurability of a risk, the risk itself doesn’t disappear from a corporation’s (or individual’s) need to manage the impact of the risk in some manner. (Neither denial nor hope is a risk management strategy.)

Frequency and severity

Almost all, if not all, P&C insurance professionals would tell any person who asked that the two connected concepts of frequency and severity are critical to analyzing and pricing each risk that happens in their target markets or throughout society more generally. (Frequency and severity are also needed to perform claims analysis – before, during and after a claim event – as well as needed for target marketing, product development, setting reserves and surplus and a host of other operational and financial functions.)

These two concepts were at the forefront of my mind when I decided to write this blog post.

The “frequency of severity” is increasing

However, the continual expansion of technology applications is leading society and the insurance industry into more instances of uninsurable severity. Specifically, I believe that what I call the “frequency of severity” of risks is increasing as our society becomes more digitally dependent on the web throughout its operations, home life, transportation, entertainment, shopping, communication and collaboration, and within other personal and corporate activities.

Simultaneously, as web-connected digital capabilities become the lifeblood of society, insurance firms will find fewer opportunities to generate profitable premium because the risk costs will become too large to profitably underwrite.

From a societal and insurance industry viewpoint, we have lived in a situation of “uninsurable severity” before, following the terrorist acts of war of 9/11. Now, society and the insurance industry are living with another situation of “uninsurable severity” risk: the impact of COVID-19 on business income/interruption.

I identify both of these risk situations (terrorism and global pandemics) as sign posts on the path to a “shift to (uninsurable) severity”: a shift that effectively shrinks the market segments that are insurable.

Before discussing why I believe that cyber is yet another instance of a shift to uninsurable severity risk, I want to take a few steps back to consider the P&C insurance industry. The people who have read my blog posts or have read my analyst reports through the years know that I like to discuss context before delving into the heart of an issue. So, …

A macro insurance industry overview of risk

The societal value-added of the insurance industry is to profitably manage or mitigate risk for people, corporations, non-profit organizations and actually businesses of every flavor. One of the critically important words in this first sentence is: “profitably.” Insurance firms strive to operate profitably through their ever-changing risk appetite.

Risks emerge on their own (e.g., lightning strikes) through interaction with nature, through interaction with the actions and behaviors of members of society (alone or among members of society), through the applications of technology or through some hybrid combination of any of these elements. (See visual below.)

Insurance professionals, including risk managers, think of a risk landscape. I’ve written reports about the risk landscape (or landscape of risk) through my decades as an insurance industry analyst. But the term “land” has outlived its usefulness for many years.

True, we can, and do, think of risks beyond those occurring on a terrestrial terrain to include risks happening in (or under) the oceans or in air or space. However, with the advent of the web and web-enabled applications and their concomitant risks, “land” is too mentally limiting. The web is a bridge from our historical world of analogue risks to a hybrid world encompassing an ever-changing mixture of analogue and digital risks. The bridge is a host of cyber risks that will affect both the digital applications as well as the analogue applications infused with or connected to the web-connected digital applications.

I propose using “risk radar” instead of “risk landscape” to encompass all past, current and emerging risks regardless of where they exist or appear, including in the application of web technologies. I’ll try to use it in this and forthcoming blog posts. However, I know that I used “risk landscape” in my book, which is going through an initial edit by Wells Media. We’re targeting 2Q22 or 3Q22 for the book to be published as an ebook, audio book and paperback. (I had to put in a plug for my own book, didn’t I?)

See also: The Spectre of Uninsurable Risk?

Shift of impact of risk to an uninsurable level of severity

I am not stating that every risk that society has experienced, is experiencing or will experience will have an uninsurable level of severity. I am stating that there will be a growing number of risks, particularly those associated with web-connected digital artifacts (or analogue artifacts infused with or connected to web-connected digital artifacts), will have uninsurable levels of severity.

The table below shows a 2 X 2, but we all know there is actually a gradient from low to high frequency as well as a gradient from low to high severity. Pandemics, terrorism and, in my opinion, cyber attacks sit in the “high severity” row (or end of the severity gradient).

Most of us trust the companies we conduct commerce with, but there will be more questions like these:

  • “How did thieves break into my digitally locked car?”
  • “What do you mean I can’t get into my house because the ‘key’ has been hacked and I have to pay ransomware to get into my own home?”
  • “How could some person hack into our web-connected devices that we use in our homes to know we were gone and rob us?”
  • “Why are all of our corporate systems shut down?”
  • “What do you mean that my company’s servers have been used for a dedicated denial of service attack and my company is liable for the damages done to other companies and their clients?”
  • “Why is my EV car stopping in the middle of the highway?
  • “Why has our company stopped providing petroleum products throughout the U.S. East Coast?

In reality, the trust – between each of us and the web-connected devices we use in our homes, vehicles or corporations – should have been completely vaporized as soon as the first device (home appliance, corporate appliance, personal vehicle, company fleet vehicle,…) was connected to the web.

Web-connected devices have an impact of and level of losses that is no longer local or regional: The impact of the risk is global. To repeat what is in the red outlined box in the visual above for better readability:

I hypothesize that as society – governments, businesses, people – use increasingly more digital technologies (of which increasingly more will be connected to the web), that the scope of cyber attacks will represent a financial scale that represents a level of severity that the insurance industry is not financially able to provide sufficient coverage for.

Pogo is definitely at play here: “We have met the enemy, and he is us.”

Revisiting the CP&C broker commerce conversation

My remarks in this section are based on the areas of focus in the visual of the last section: low frequency and high severity as well as high frequency and high severity of risks.

The first visual I show below illustrates what I call the “conversation and acceptance” of commercial P&C insurance commerce. I have a question mark next to “acceptance” to indicate the changing risk appetite of carriers.

(In case there is any doubt about my use of “changing risk appetite,” I am from the insurance carrier business side of the insurance industry. I absolutely believe that carriers have the right – and responsibility – to change their risk appetites whenever they think it is best to do so for their companies.)

I’m using the curved arrows to reflect that large/jumbo CPC clients will have a hybrid stack of self-insurance, use of primary insurance and use of reinsurance. There will not necessarily be a stacked column of the three elements one after the other. Moreover, I’m showing some of the elements of the CPC carrier that “greet” the broker and the client as they look for cover for the specific risk. Please don’t overlook the “small” potential role of the federal government (depending on the risk being considered for coverage.)

I want to repeat what I wrote in the green box under the CPC client for emphasis: Regardless of the market solution the broker identifies to mitigate the client’s risk(s), the legal onus is on the client to manage the risk in some manner. This always holds (for every risk) and will hold in dramatic fashion for cyber risks. And for the cyber risks in the areas of focus, I believe the role of the federal government will have to explode in a similar dramatic fashion.

Actually, I could foresee when (and it should be when and not if) the federal government plays a major role “covering” cyber risks that are uninsurable. At that time, the federal government will take a very large stick (perhaps through laws, regulations and executive orders) to hammer corporations to better secure their cyber operations to protect their company, their clients and prospects, their subcontractors and others (people and companies) they conduct commerce with.

This will expand the market for technology firms that create and sell cyber security and privacy solutions. It will also expand the market of people with “white hat” cyber hacking skills to work for companies (or technology firms or consulting firms). The technology firms offering cyber security and privacy solutions should also find themselves under the harsh glare of the government cyber laws and regulations.

I want to make another point clear: Brokers involved in the cyber commerce conversations will have to have some minimal level of knowledge of the (changing) nature and implications of cyber security and privacy as well as the cyber solutions available to mitigate their damage to the broker’s clients (and their clients).

I believe there will be a role for CPC insurers to generate non-risk-based fees from the provision of cyber services (e.g., auditing, monitoring, remediation). The CPC insurers participating in the cyber services market would obviously have to determine the resources needed to offer the cyber services.

Not every risk is insurable

The crux of this post is the point that there are some risks (and I believe a growing number of risks) that are (and will be) uninsurable.

See also: Why Open Insurance Is the Future

Criteria for insurability

This raises the question: How can an insurance/risk management professional identify risks that are insurable? Here I introduce some of Dr. Hartwig’s July 2021 testimony. I’ll let the table below speak for itself, but I will repeat his point that “The inability of a risk to meet one or more of these criteria reduces or eliminates its insurability.”

Consideration of a pandemic through the lens of the six criteria

Here – in the table below – is how Dr. Hartwig viewed the current pandemic through the six criteria: You can see there is a relentless parade of “no,” with his logic given for the requirement of each criteria not being met.

Cyber risk will increasingly become uninsurable

Turning now to cyber risk (which encompasses various risk segments), I use the same six points of insurability (or uninsurability, depending on your point of view) to conclude that cyber risk is uninsurable.

Remember, the risk is not insurable if only one of the six criteria is not met.

By my analysis, I come up with: two criteria of insurability met, two criteria not met and two criteria assigned a “quasi” rating, meaning maybe yes or maybe no. I answer no to the criteria: 3) determinable and measurable loss and 5) calculable chance of loss.

I suggest you select a specific cyber risk and do your own analysis. I may be too skeptical. I may be looking at the cyber risks too harshly. However, whoever does the analysis should lose whatever levels of trust they have about any of their web-connected devices being safe, secure and private.

Remember, there are only two types of web-connected devices: those that have been hacked … and those that have been hacked but you don’t realize it.