Future risk

Marine insurers rise to new risk paradigm

Jack Falvey, Chief Operating Officer, Falvey Insurance Group, has an optimistic view of the potential for the commercial marine insurance sector as it finally grasps the potential offered by technology

The commercial and marine insurance industry isn’t exactly known for being at the forefront of innovation and change. It has maintained a bit of a “why fix it if it’s not broken” attitude that has allowed the industry to thrive for years. However, the trade environment and insurance realm no longer look the way they did 50 years ago. This means that it is high time for the industry to begin adapting to keep up with the ever-changing marketplace.

Today, because of globalization, the trade network covers nearly every corner of the world. The internet, online platforms and other new trade patterns have only aided this expansion, creating economies of scale and opportunities for businesses of all sizes to join the market. And, as the trade environment continues to adapt and change, so must the insurance industry.

As we look toward the future of commercial and marine insurance, we predict that the industry will tap into several growth opportunities.

The insurance sphere will find different ways of

addressing and attracting potential clients in an increasingly decentralized market. We assume this will involve implementing advanced technologies and developing new approaches to identifying non-modeled risks. Below, we’ll unpack some of these ideas to better understand the direction the insurance industry is moving toward in the coming years.

IMPACTS OF DECENTRALIZED TRADE

If we look back on the history of global trade, the majority of imports and exports are funneled through a few big players with large capital investments.

Smaller businesses and more remote countries could not get in on a piece of the pie because they were limited in the ways they could show up, connect with customers and expand their business.

That is, until the onset of the internet. The internet has made it increasingly possible for those smaller players to have a bigger stake in the market.

Further, with the increase in online marketplaces and platforms, from Amazon to Frieghtos, the world seems to have gotten a little smaller, as these aggregators are finding new ways to reach customers around the world.

This, in combination with innovative shipping and fulfillment methods like drop shipping, dark stores and micro fulfillment centers, is helping to further decentralize the current trade model and reduce logistical challenges.

So, how does this impact the insurance industry? With its new and different delivery practices, this diverse and decentralized market will bring unique risks and challenges that the insurance industry must accommodate. Not to mention, with so many new smaller operations now on the scene, insurers will need to experiment with different strategies to bring their insurance products in front of this dispersed audience of potential customers.

Essentially, the insurance industry must adapt to keep up with this rapidly changing trade environment.

DIGITAL TRANSFORMATION

While the insurance industry has been notoriously slow to adopt digitalization, it is beginning to phase out its legacy systems in favour of more advanced technology. Instead of relying on paper-based documentation, we can expect insurance companies to continue implementing technology infrastructures focused on streamlining services and processing and storing data. In fact, Deloitte’s 2022 Insurance Industry Outlook predicts that within the next year, 74% of insurance companies will expand their AI budget, 72% will increase spending on cloud computing and storage, while 67% will boost their data analytics budget.

“Deloitte’s 2022 Insurance Industry Outlook predicts that within the next year, 74% of insurance companies will expand their AI budget, 72% will increase spending on cloud computing and storage, while 67% will boost their data analytics budget.’’

Jack Falvey, Falvey Insurance Group

Allotting more money toward these technological initiatives will help make the insurance industry run more smoothly, effectively and accurately.

In fact, it’s digitizing their products that will make it easier for insurers to reach their decentralized customers and interact with them in a more personalized way.

It will certainly improve the customer service experience as automated and accessible digital products allow insurers to better tailor their solutions to their customers’ specific needs. And furthermore, these technologies will promote more flexibility and agility.

With data stored digitally, insurers will have relevant data at their fingertips, letting them oversee and process all the moving parts of the shipping journey, such as providing updates on goods and tracking the exact location of vessels.

MANAGEMENT OF NON-MODELED RISKS

Data plays a big role in underwriting as insurers rely on actuarial data to determine risks. However, as is, insurers are limited when it comes to risk assessment because they really can only accommodate for and predict those risks that are already modeled.

SO, WHAT ABOUT THE NON-MODELED RISKS?

These risks do not fit traditional models because unlike property risks, they’re constantly moving throughout the supply chain, such as trade embargos, port congestion, supply shortages, labour negotiations, factory shutdowns and war disruption. And as we know, the supply chain is complex and fragile. One event can cause a domino effect, impacting every stage, from production to distribution.

The recent Ever Given incident is just one example of a non-modeled risk that highlights the need for this kind of modeling.

When the massive cargo ship got stuck in the Suez Canal, it blocked an estimated $9.6bn worth of cargo each day and triggered delays and backlogs all around the world that took months to rebound.

Perhaps if this kind of risk was more widely modeled, its impact on the supply chain wouldn’t have been so drastic.

S U P P L Y C H A I N C H A O S

If the last few years of supply chain chaos have taught us anything, it is that the industry needs more access to data to create applicable models in this growing network of companies moving and selling goods.

This gap in risk management is something we predict the insurance industry will focus on improving and evolving in the coming years.

Essentially, insurers need models to spit out expected losses in specific locations, run scenarios, and monitor trade exposures. This global initiative needs to be a centralized system that all insurance companies can access to better identify, assess and monitor risks. “The recent Ever Given incident is just one example of a non-modeled risk that highlights the need for this kind of modeling. When the massive cargo ship got stuck in the Suez Canal, it blocked an estimated $9.6bn worth of cargo each day and triggered delays and backlogs all around the world that took months to rebound.”

Jack Falvey, Falvey Insurance Group

That way, even if the exposure hasn’t happened in one specific location, insurers should be able to track how a similar exposure impacted other regions.

We have already seen some examples of insurers making strides toward modeling these risks.

For example, the Association of British Insurers (ABI) recently set forth a best practice guide titled “Non-Modeled Risks - A guide to more complete catastrophe risk assessment for (re)insurers”.

It outlines methods for identifying exposures, quantifying non-modeled risks and representing them in a model. The more insurers can understand these risks, the better coverage they can provide. At Falvey Insurance Group, we believe the future is bright for the commercial and marine insurance industry. As long as the industry continues to place a strong emphasis on evolving with the changes in the marketplace and implementing new technologies, it will continue to grow and thrive.