Re/insurance product development and innovation around data and data analytics have expanded the scope of solutions from tangible to intangible assets, to cover a wider range of threats and improve corporate risk management, according to Swiss Re’s latest sigma study.
Companies are increasingly using novel insurance solutions to protect earnings, reduce cash flow volatility and support business strategy and growth, as structural changes in the economy mean the corporate sector is shifting from physical assets to services with mostly intangible assets, and firms are vulnerable to a new and different set of risks.
The Sigma study found the key corporate risk concern is business interruption due to cyber and supply-chain risks, with intangible assets such as intellectual property, networks, platforms, data and customer relationships among the most valued corporate property.
The re/insurance industry is innovating to meet these shifting corporate needs, Swiss Re’s Chief Economist, Kurt Karl, said; “Holistic covers combine multiple risks and/or interdependent triggers, and allow better alignment to the specific risk transfer needs of an insurance buyer.
“In addition to offering coverage for multiple risks, holistic solutions offer efficient risk transfer given their focus on the joint distribution of all risks.”
The study highlighted parametric solutions as being particularly useful in managing earnings volatility or for business interruption type coverage, with or without physical damage to property.
Parametric triggers based on indices instead of losses offer efficiency benefits, according to Swiss Re, their biggest advantage to clients are “their clarity and neutrality,” the automatic pay-out process where payment is triggered when pre-set conditions are met, preempts lengthy claims investigation.
“The utility of such solutions is demonstrated by a recently developed multi-year parametric cover for earthquake events of minimum magnitude bought by a U.S. state government entity with property assets spanning a wide area.
“The main objective of the buyer was to secure sufficient post-event liquidity to manage the initial cash flow needs after an earthquake event, such as for emergency evacuations and to facilitate access for repair work,” Swiss Re explained.
The evolution of triggers, indemnity structures, and data and modelling advances has led to some previously uninsurable non-core business risks, such as non-physical business interruption, cyber, product recall, and weather and energy price risks, now being at least in part insurable.
Insurance solutions are also increasingly being used to protect earnings and cash flow risks.
Brazil, which is recovering from its worst drought in 40 years, is one such case in point; a customised derivative solution based on an index that measures a river’s natural flow was developed to hedge an energy trading company’s exposure against future drought risk.
Swiss Re explained that the index is calculated daily “by an independent body responsible for coordinating and controlling electricity generation and transmission facilities in Brazil.
“If the index falls below a defined threshold, the derivative pays financial compensation. The index-based deal hedges the trading company’s position against drought risk – its most important weather-related risk – and will help stabilise its expected earnings in the future.”
As a necessary response to the changing risk landscape, corporate risk management is becoming more sophisticated, and firms are increasingly relying on novel risk transfer solutions to reduce earnings volatility and safeguard cash flow and investment projects.
The Swiss Re study said that in some cases innovations in the insurance space have been key drivers and enablers of new types of business models such as sharing economy start-ups, allowing companies to utilize risk transfer for marketing support and product differentiation.