Senior associates at international law firm Hogan Lovells, Jamie Rogers and Dan Screene, gaze into their crystal ball to identify some challenges insurers will need to grapple with in coming years
The world is ever changing. Change creates opportunity, but with opportunity comes risk. With this, underwriters, brokers, risk analysts and others face new challenges. Some new risks, like cyber security, receive a huge amount of attention. Others, such as the following, still lurk in the shadows.
Arctic Exploration – the cold comfort of global warming
As the effects of global warming continue to bite, increasing temperatures in the Arctic region have seen a rapid acceleration in the rate of the overall loss of ice and, in particular, sea ice. While governments, NGOs and lobbyists continue to debate the causes, extent and implications of global warming, the commercial world is already adapting to the changing planet in its own protean pursuit of new opportunity.
The retreat of sea ice is an open invitation to the oil and gas industries to explore the untapped offshore hydrocarbon reserves under the Arctic seabed. This in turn will require an increased number of support ships and supply vessels. More generally, the melting ice potentially opens up northern seaways along the Russian and Canadian coastlines to cargo operators and commercial shipping companies, offering shorter more efficient voyages to Asian and European markets.
But opportunity comes hand in hand with risk. Sea ice may be melting but the Arctic is still a hazardous environment. Currently, the Arctic is usually excluded from the territorial scope of annual hull and machinery property insurance policies and liability (pollution) policies taken out by shipping companies. The remoteness of the region and the lack of infrastructure offer huge challenges. How could an oil spill, for example, be tackled in cold Arctic waters with broken sea ice? How do ships reliably navigate what are, in essence, uncharted waters, still studded with moving icebergs? And how do underwriters price the risk at this early stage and with such little claims data?
Drone technology – Jack’s back for one day only but drones are here to stay
Anyone who has been watching the latest series of ‘24’ will have seen Jack Bauer charging around London fighting the flying terror of unmanned drones. Although Jack has no doubt saved the day by now, the future of these unmanned aircraft (operated either by pilots on the ground or autonomously through pre-programing) and their use in everyday commercial life looks bright.
Drone technology offers a huge range of potential commercial applications. Amazon, for example, has declared its ambitions to use ‘octocopter’ drones to deliver packages to customers and is already testing the aircraft in the US.
What risks would this new wave of unmanned aircraft pose and how will they be insured? Clearly, there is the risk of collision. Air safety concerns are paramount. A near collision between a passenger jet and a remote control aircraft in Florida was reported in May 2014. Coverage for bodily injury and property damage will be required. But what if an octocopter delivers its package to the wrong address? Who pays for that? Concerns have also been raised about drones invading privacy by taking photos or filming people whilst flying overhead.
Bitcoin - “Concealed risk: the dark world of crypto-currencies”
In the surveillance age, de-centralised peer-to-peer currencies are flourishing. With pseudonymity comes liberation. Concealment is king. But the emergence of electronic currencies (or commodities) presents turbulent horizons. These risks need managing in the covers for which these currencies drive appetite. How can insurers manage exposure whilst meeting dynamic demand?
Crypto-currencies are designed to be easy to transfer, secure and authenticate. They rely on unique encrypted transactional data and are exceptionally difficult to hack. But being cash-like and quasi-anonymous, they are vulnerable to accidental loss, fraud and theft. Transactions are irreversible, which exacerbates exposure to user error. Understanding of the crypto-currency market-place (including payment processors, currency exchanges, e-wallet services and investment platforms) is nascent and its vulnerability is not fully understood – controversy surrounds Mt Gox’s loss of $375m of bitcoin. This makes risk difficult to price and mitigate and policy wordings difficult to frame. Currently, many policies require security protections which everyday users cannot achieve.
The immaturity of currencies means they fluctuate wildly – one thing when transacting in them, another when adjusting losses. They have no inbuilt consumer protections and their murky nature attracts criminals. This presents reputational concerns and aggravates risk pricing and management.
Nonetheless, these currencies have traction and demand will increase for cover in and pertaining to them. Interested insurers must educate themselves, and fast.
Artificial Intelligence - “Tomorrow today”
Many are convinced that it is only a matter of time before machines become sentient and decide to wipe humanity out. Technical advances have set machines off on their first baby-steps towards sentience through developments of artificial intelligence tools, neural networks and fuzzy logic. Breakthroughs in deep learning have hastened this and scientists are developing robots with self-awareness.
Does this spell the end? Of course not – these developments pose huge opportunities.
Levels of automation already exist in certain underwriting and processing activities. What if this could roll out to complex underwriting or claims handling activities? What if you could use robots to detect insurance fraud? This is not so far-fetched – the technology for deep learning enabling computers to spot suspicious patterns or inferences from volumes of data already exists. There is no reason why this could not have application for certain underwriting and claims. Costs savings would be enormous.
The technology has risks, and insurers must be sure that their clients adopt this technology prudently. Self-driving cars are imminent and will drive demand for appropriate liability cover. Manufacturing processes will be revolutionised and risk landscapes will be re-written.
What if one day your lawyer was a robot? Or perhaps you already thought they were…