Rather than write notes in a file that could only be accessed in a single claims office, now anyone in the company could gather information on a claim.
Technology has changed the face of insurance in many ways. But none of these innovations arose out of the insurance industry itself.
I was not present when the computer was first created. But I am sure that those designing, building and testing it were neither underwriters nor actuaries nor insurance executives.
When looking at the insurance industry, it is difficult to find many homegrown innovations at all. Policies, while they have changed incrementally to reflect changes in the environment, would be easily recognized by any 19th century Lloyd's underwriter. New coverage forms, such as claims-made policies and employment practices liability, are variations on the risk-transfer theme. Aside from the infrequently used catastrophe bond, little has changed in the insurance industry.
In the past decade, risk management tools outside of insurance have expanded at a jaw-dropping rate. For example, according to the FDIC, derivatives in 2002 had a notional value of $56 trillion. By June 2006, that had risen to more than $370 trillion--yes, trillion with a "t." Compare that with the stable capacity of the global property/casualty markets, which is estimated to be about $400 billion.
Even things that are considered to be uncontrollable and unpredictable like the weather can be hedged with derivatives traded on an exchange floor. And yet one still cannot buy a first-party policy to cover most intellectual-property exposures.
The world is clamoring for products to assist in managing, transferring and eliminating risk. Trillions of dollars exchange hands monthly--if not weekly--in this endeavor. New positions and professions are emerging each year dedicated to just this task.
And yet one of the oldest risk management industries--insurance--remains unresponsive, happy to add better software programs when what is needed are entirely new products and processes. The methods of selling and placing insurance remain just as inefficient as they were 40 years ago. One must pay brokers fees, commissions (including back-door contingents) and high overhead. The result is that insurance is still measuring its efficiency in whole percentage points, while the financial markets measure theirs in basis points, one-hundredth of 1 percent.
When looking at the entire universe of risk, insurance covers an increasingly small area on the fringes. When contemplating the total risk faced by a global company, the relative value of the insurable exposures is actually quite small. Even when insurance will cover an exposure, it is often seen as too inefficient and too expensive to be a viable alternative.
Unless the insurance industry responds to the business world's needs, it will become nothing more than a bit player. A broker, paraphrasing Winston Churchill, once told me, "Insurance is the worst possible solution, except for all of the others."
The amount of money spent on risk management in the financial markets is proof that most disagree. Perhaps the more applicable quote is that of Franz Kafka, who said, "When it is you against the world, bet on the world." The insurance industry needs to place new bets.
BEAUMONT VANCE manages risk for Sun Microsystems Inc.
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September 15, 2007
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