One of the many challenges currently facing the Lloyd’s market is the fast-evolving risk landscape and the demand it generates for new insurance products. Innovation has always been one of the market’s key strengths but today its ability to innovate is being tested as perhaps never before.
Two risks, in particular, show how the market is responding to this innovation challenge – and how hard it is to do so.
Active aggressor attacks and terrorism have both seen changes both in terms of frequency and the ways in which they are being carried out. FBI data shows that active aggressor incidents are on the rise - 160 incidents took place between 2000 and 2013, with the number of attacks in the second half of this period twice as high as the first half. Last year was a terrible reminder of the destruction these sorts of attacks can bring with 49 dead and 50 injured at the Orlando nightclub shooting.
Terrorists seem to have switched from property to human targets. Recent attacks in Paris, Nice, Berlin, Istanbul and California show how this threat is evolving.
These changes pose a number of challenges for businesses and other organisations, which tend not to have the in-house expertise to mitigate the risks and manage the consequences of these sorts of attacks. And as these attacks are varied in nature, the cover offered by traditional insurance products is not always clear.
So how has the Lloyd’s market responded to these changing threats? The biggest shift has been its change in approach to these risks. The products it has developed, and is developing, focus not only on risk transfer but also on the delivery of services to prevent negligence claims. In practice, this involves identifying the problem, quantifying the risk and adding suitable auxiliary services. This approach is likely to resonate with buyers and similar logic could be applied to different areas.
Two recent examples highlight the value of this way of working.
The first example involves the creation of a new third-party product.
For example, a liability-led Beazley consortium has created a policy that provides general liability insurance, which covers negligence claims after an active-shooter incident. As well as covering the insurance claim, the policy also covers on the delivery of non-negligence services and support in the aftermath of an attack. The cover can also be extended to include property damage and business interruption if required.
The policy also provides for access to local seminars and support, and in the unfortunate event there is an incident, several value-added services are offered, including crisis management, public-relations and counselling support, as well as funeral costs.
One of the key features of this policy is a risk-management review, which is carried out with the customer at the beginning of the process. This looks at the behavioural and physical security at insured locations; the existing policies and procedures in place that ensure good risk management practices; how to improve risk management; and where to go to get further support.
What’s different about this product is that it shifts focus away from just paying the claim towards improving resilience, risk mitigation and risk management, as well as paying for professional support and crisis management after an incident.
General liability coverage can provide a ring-fenced limit with certainty of protection; terrorist events are also not excluded, something that addresses the issue of cover certainty. Coverage can also complement a broader program that may have a high deductible and be part of a broader risk-management strategy.
In that sense this policy is designed primarily to reduce risk and the impacts of any event should it take place.
The second example concerns the development of a new first-party product.
XL Catlin is taking a first-party led approach to active assailant coverage, offering risk management advice at the beginning of the policy and a suite of crisis management services, supported by a specialist security consultancy, in the event of a loss. These are packaged with indemnity, which covers first-party costs and expenses for a range of specific triggers. These include:
- A physical attack by an active assailant – costs of property damage, business interruption or bodily injury at an insured location will be paid: business interruption; closure of premises; denial of access; property damage; expenses related to bodily injury or extra expense incurred in management; and recovery
- Loss of attraction if an attack occurs within a defined distance of the insured’s premises (or at a specific named third-party location) – costs relating to business interruption and extra expense incurred in management and recovery can be paid
- Threat of a malicious act that will damage the property of the insured or cause injury to people at an insured location – if there is a threat of an attack then business interruption and security costs can be paid
The difference between this policy and traditional first-party policies covering business interruption, where physical damage to insured property is a key part of the trigger, is that the triggers here are broader. Many of the recent terrorist attacks would have disrupted customers’ businesses with little or no property damage and they would have incurred uninsured costs.
The product can be sold standalone or packaged with property and/or terrorism coverages. Again, it does not have a terrorism exclusion and thus provides greater certainty over the type of events that will be covered.
So what does the development of these two products show us?
First, that the demands on the Lloyd’s market (and insurers in general are changing). Gone are the days when customers only wanted to transfer risk; now they expect insurers to provide pre and post loss expertise and risk management services.
Second, that there is a focus on the customer in new product development. The packaging up of risk-management services upfront, along with post-incident services, such as crisis management, public relationship management and counselling, looks at the end-to-end risk from the customer’s standpoint. No-fault services are a way of adding value to products aside from the pure indemnity provided, and can aide customer loyalty and move discussions away from pure price.
Third, that syndicates in the Lloyd’s market are responding in interesting ways to meet customer needs. In other words, innovation is alive and kicking in the Lloyd’s market.
The question is, can innovation keep up with demand?