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The difficulty in writing about the "toughest risks to underwrite" is that the level of toughness comes and goes with insurance cycles. Specialty lines tend to fluctuate back and forth, and even specific industries emerge with core risks that are more difficult to underwrite than others.

In 2001, there was no terrorism insurance, and now it's almost a piece of cake. In the mid '80s environmental risks were difficult to insure, and now securing the insurance is fairly standard. At one point in time, it was close to impossible to insure directors' and officers' risks and employment practices liability. But as more losses have occurred and the understanding of the risks has grown, quite a robust insurance market has emerged out there for those risks.

And then again, what makes a risk difficult to underwrite?

"The most difficult things to underwrite are the things we can't yet quantify: emerging loss exposures that may drive corporate expenditures in the future," Coughlin says.

Once a risk evolves from unquantifiable to quantifiable, it can be underwritten. Being able to wrap your head around a risk takes it from difficult to manageable. Whether it will be insurable at a price that someone is willing to pay, well, that's a whole different question.

"You can't equate manageable with cheap," says Coughlin.

The ability to underwrite a risk also evolves with science. As experts discover new diseases, new medicines, new environmental concerns--new risks arise. New or changing risks make quantification difficult. Take a look at the blockbuster pharmaceutical industry. Insurance is very difficult to come by; product liability coverage is at a premium right now.

An issue that hasn't directly reached the insurance world yet is global warming.

"There's no such thing as an off-the-shelf global warming insurance policy," says Coughlin. "This is clearly something that is not quantifiable yet."

But global warming can still impact insurance buyers and the underwriting process. Risk managers need to stay ahead of the risk. For example, if a client is located in an area that has not traditionally been prone to flooding, it might start to take a look at rising sea levels and even seek insurance for the emerging risk.

The same can be said for the risk of a pandemic. Anticipating risks associated with a concept that hasn't quite played out yet can be tough, but Coughlin says risk managers can focus on the most crucial concerns: the availability of workers and backup facilities and replicating business processes so that operations can continue despite a widespread pandemic disease.

Also, it must be said that risks exist that are difficult to underwrite yet are in fact quantifiable. Risks that are on our list of the toughest to underwrite--for example, kidnap & ransom and D&O-- are manageable.

K&R risks are closely aligned with the geographical regions where a company does business, with high-risk areas being the Middle East and Nigeria. But coverage is available.

"I wouldn't say it's a difficult market for the corporations who have exposures in these high-risk areas," says Tom Nygren, executive vice president and director of financial services at Lockton. "There's no one that I know who has been declined for the insurance. It is available. Nobody is going without it who wants it and is willing to pay for it."

As for D&O, sure, the financial services industry is taking a big hit right now. Its risks are a whole different ballgame from other industries these days.

But for other sectors, Phil Norton, managing director of Arthur J. Gallagher's Strategic Risk Services practice, says the hurdles can be leapt.

"It's a matter of knowing which underwriters to go to, knowing the appetites of these various carriers when you get a difficult risk," says Norton.

Perhaps it is a bit of a game for the brokerage firms when they get a difficult risk, looking into their network of contacts and sending a specific broker to a specific underwriter for handling the coverage because the two share a close personal relationship--especially when it comes to underwriting human behavior, as is the case with D&O.

"Personal relationships come in handy," Norton says.

ERIN GAZICA is associate editor of Risk & Insurance®.

April 15, 2008

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