Changing times call for new insurance concepts

In recent years there have been major developments in the way in which insured risks are underwritten by insurers and reinsurers

The increasing frequency of severe natural catastrophes and increasingly sophisticated artificial intelligence (AI) are playing a major role in the underwriting decisions of insurers Huge losses from catastrophic weather events and the generosity of the courts in providing Covid-19 cover for the consequences of a pandemic under an extension intended for local events have battered the industry

A good example of natural catastrophe consequences is the weather events is Florida in the US where frequent, destructive hurricanes have resulted in failed insurers, insurers who no longer offer property damage cover and the state of Florida itself offering reinsurance backing to try to preserve the available insurance capacity

Besides some major risks becoming more difficult to insure or more costly to do so, the number of general exclusions in risk policies has grown Policies now generally exclude contagious disease cover, cyber risk that is not specifically insured and, more recently in SA, electricity grid failure No prudent insurer can take on the risk of huge widespread and concentrated losses

AI has made insurers far more intelligent in regard to the risks they underwrite Good AI can accumulate climate data, health behaviour and driving patterns, for instance The more information insurers are able to gather in regard to the risks they underwrite, the more they will be able to select the good risks and reject the bad risks

These developments have cut across the basic principle of insurance The principle of insurance is that the risks of the many are pooled to cover the losses of the few When the many outnumber the few, premium income cannot sustain the consequences

Two things can be readily foreseen First, unless the insurers come up with solutions, some types of insurance, like motor insurance, will ultimately have to recognise the principle already embodied in health risk cover provided by medical schemes, namely community rating Motor insurers may be obliged to take the good with the bad albeit with exclusions for reckless behaviour Perhaps the added cost of owning a vehicle will include compulsory comprehensive or liability cover similar to the situation many years ago where each motorist bought a disc annually to provide cover for personal injury claims arising from motor accidents

Second, in the commercial world, more flexibility is needed by the tax authorities and the auditing world applying IFRIS to risk management

As it becomes more and more difficult for major enterprises to secure cover economically for a growing list of very real business risks, they are turning to what is sometimes referred to as contingency policies

These policies allow the enterprise to pay large premiums to insurers to be expertly invested and controlled by the insurers who carry a small share of the risk and held against the uncertain risk of major

TO COVER THE LOSSES OF THE FEW uninsurable losses A refund or rolling over of any unused premium follows at the end of the insurance period Tax and auditing authorities frequently label these essential risk management tools as investments rather than insurance, with adverse tax consequences That attitude needs to be revised entirely There is no reason why these risks cannot be insured with the encouragement of the authorities

Insurance concepts, which were developed from the discussions of merchants and shipowners in the late 1600s in Lloyd s Coffee House in London, need to move fast in these fastmoving times

● Patrick Bracher (@PBracher1) is a director at Norton Rose Fulbright