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Meeting The Challenges Of The Changing Landscape Of Risk

Characteristics of the risk landscape have not changed radically. The major insurance hazards are still earthquake, windstorm, and flood. However, recent experiences suggest a change in profile from a few major losses to more frequent, less severe impacts, at least in terms of insurance costs. Insured values at risk are increasingly located in hazard-prone areas, and modern business practices mean that impact can be more economically severe as company operations become increasingly interdependent. At the same time, business interruption, as a class of insurance, has not been one of the insurance industry's strengths, although increasing dependence on technology and networks heightens risk exposure. Nevertheless, in the midst of this, our perspective of the risk landscape is changing. The willingness and ability of companies to retain more of their own risk is increasing; and holders of risk are increasingly seeing less reason to differentiate between insurable risks, financial risks, and operational risks. Instead, they are looking to harmonise their treatment of risk: 'Risk is risk'. Thus, corporations are combining insurance risks into multi-line or integrated programs. Similarly, insurance companies are increasingly taking a balance sheet view of their risks, managing underwriting and investment exposures in tandem rather than separately. As financial and underwriting risks come closer together, capital markets are more willing to underwrite risk directly. At the same time, capital has become mobile to the point of being global and over plentiful, as low interest rates show. This availability of capital has changed the nature of insurance, precipitating merger and acquisition activity. Hence, the main challenges to the insurance industry are determined by this combination of risk and capital.

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