EDITOR’S LETTER

At a crossroads: the industry must innovate or become irrelevant

“Companies are clamouring for solutions that would help them cover the risks associated with 90 percent of their businesses’ value.”

Do the CEOs of the biggest companies really care about insurance? I suggest they do not and here’s why.

Consider this. Ninety percent of the value of the S&P 500 companies now comprises intangible assets—intellectual property, data, and the associated innovation that is possible using technology.

All this is stuff that the industry does not, or at least struggles to, offer relevant risk transfer solutions around. If your building burns down or your equipment breaks, you will be very grateful for the prompt response of your insurer. But those risks, associated with tangible assets, represent just 10 percent of what a typical CEO worries about on a day-to-day basis.

The great irony around this is that the insurance industry has for some time bemoaned the fact it has too much supply—too much capital. That, it complains, keeps prices down and depresses its return on equity.

Yet clearly, it has too much demand as well. Companies are clamouring for solutions that would help them cover the risks associated with 90 percent of their businesses’ value—yet the industry does not like these risks. They are too hard to understand, to price, to cover. So it continues to focus on the 10 percent it does understand.

The way back to relevance

Yesterday (Tuesday September 14), I said the industry needed to play a leadership role in helping the world find ways of managing the truly global risks—those with the capacity to shut down entire economies; that threaten our very way of life. These include terrorism, pandemic risk and cyber risks.

This is true, but the industry’s challenge is actually even bigger than that. To even begin to play that role in a meaningful way, the industry must also remain relevant to its main clients. And as the stats around intangible assets show, it is rapidly becoming irrelevant.

In a world so heavily regulated and, perhaps ironically, so risk-averse, it can be easy to complain that true innovation and risk taking are hard to do in the industry now. Yet it must again find a way of doing this.

Lloyd’s, the birthplace of insurance, was born and shaped by this ethos. The industry must rekindle this spirit. It must find ways to innovate and solve problems and become relevant to its clients again—and to reclaim its status as a key partner to businesses, individuals and with a wider role to play in making the world a safer place.

The insurance industry is at a crossroads. It has spent centuries getting really good at managing risks—but these risks are increasingly irrelevant to its customers and the real world, such has been the pace of change in the past few decades.

It needs quickly to get back up to speed. Just as new technology makes old technology redundant, the same will increasingly be true in the world of risk transfer. Its leaders must take a step back and consider what clients truly need—and innovate around that.

Wyn Jenkins, managing editor, Intelligent Insurer

Image: shutterstock.com / Keith Burke