Will insurance ever offer more than risk transfer?

This is the first of a series of pieces I will try to post over the coming weeks on digital risk and its implications for the insurance industry.

1.       Be afraid, be very afraid…

I have just finished reading a report from the Lloyd’s 360° Risk Insight team – Managing Digital Risk, trends, issues and implications for business.  It was produced by Lloyd’s but written by a couple of guys at HP and if you want to know about ‘Managing Digital Risk, trends, issues and implications for business,’ it does exactly what it says on the tin. 

Interesting and well-written though the report is, I wondered why Lloyd’s commissioned it because, for example, if you are already reasonably knowledgeable about digital risk, the report will tell you little you don’t already know.  If you want help picking between different insurance products, it won’t help either because these aren’t discussed.  Even if you just want to know where to go to talk about the coverage, it’s not very helpful here either; a couple of brokers and syndicates are quoted – presumably having sponsored the report - but competitors are naturally ignored and Lloyd’s is promoted but really only by association.

I think this leaves three possible reasons for producing the report;

1.       Someone thought Lloyd’s should be saying something on the subject

I’ll discount this reason as being too cynical – probably… 

2.       To educate Lloyd’s insiders

A few syndicates specialise in digital risks but many individuals are steadfastly unfamiliar with the topic and maybe Lloyd’s recognises the need for greater knowledge across the market.

3.       Lloyd’s is expanding its target market

Noting the ubiquity of digital risk and bearing in mind that encouraging buyers into the digital/technology insurance market is currently a bigger priority for insurers than trying to get buyers to switch from one insurer to another, this may be an attempt by Lloyd’s to add to its target market smaller and less sophisticated customers than it has traditionally dealt with.  This makes sense if Lloyd’s believes that digital risk – by its nature - will always require specialist treatment, not so much if this is a response to the soft market.

And I am posting about this why?  Because I am afraid, very afraid…

The report makes it clear that the nature of digital risk is very different from any risk that insurers, Lloyd’s included, have hitherto dealt with.  For example, the report discusses how digital risk operates on a scale and scope unlike any other risk, with associated systemic implications.  At the same time, the report does a good job describing how digital risk is more dynamic than other risks. The report therefore also discusses how the law and risk management are struggling to keep up, making it clear that playing catch up will be a permanent challenge. 

So, Lloyd’s is looking to expand into potentially the biggest new market of its 300+ year history – nothing unreasonable in that.  The nature of the market into which it is seeking to expand ensures however, that ignorance on the part of both buyer and seller is inevitable and will be ongoing. 

There is probably a term to describe where asymmetries of information are symmetrical only in so far as both parties are differently but equally ignorant...  Does anyone know it? 

Whatever the term, it is good reason to be very afraid but a better reason to think that in such a scenario, traditional approaches to risk transfer will serve buyers and sellers increasingly less well and so must change.

Provisionally, my next post will be about the industry's core underpinning - uberrima fides - and how changes to the nature and context of disclosure, which is the key to uberrima fides, will pose challenges to how the industry moves forward to better serve its customers and all their risks, including the digital ones.  The one after that will be about the wider environment in which digital risk, disclosure and insurers will be interacting and will suggest that solutions will be found in the very digital (and) social technology that we are now beginning to deal with.  The last in the series will suggest a potential new approach.   


This running order is very likely to change because this is work in progress...