Adapting to the Unknown: How Insurance Companies Navigate Emerging Risks

The world is constantly changing, bringing new risks that we might not have considered before, known as “emerging risks.” For insurance companies, these new challenges require creative solutions.

Think of your house insurance covering fire and theft but not a giant meteor! Traditional insurance is effective for many things, but these new risks need innovative approaches. From cyberattacks stealing data to self-driving cars crashing, insurance companies are working tirelessly to protect us in this ever-evolving landscape.

Predicting emerging risks is like guessing if it will rain tomorrow using past weather patterns. But if a new water park opens nearby, it complicates your prediction. Traditional insurance relies on historical data to predict future events, like house fires. These are “traditional insurable risks.”

However, the world is always changing, introducing unpredictable “emerging risks”—like that surprise water park. These risks are hard to predict and complex, such as cyberattacks or self-driving car accidents. Insurance companies need to figure out how to insure these new risks and how much to charge without much historical data to guide them.

Imagine someone breaking into your house but stealing your online personal information instead of your TV. That’s the threat posed by cyberattacks, which are growing in frequency and complexity. To combat this, insurance companies have created special cyber insurance products. These products not only cover losses from hacks but also help prevent them.

Cyber insurance can be seen as a high-tech alarm system for your digital life. Insurers may offer cybersecurity assessments to identify system vulnerabilities and provide training for employees to recognize suspicious emails. Determining the cost of this protection involves analyzing a company’s online activities and security measures.

Powerful computers analyze this data to create a cyber risk profile, indicating how likely a company is to get hacked.

Climate change is causing more frequent and severe weather events, making it difficult for insurance companies to offer traditional home insurance for flood risks. To adapt, some insurers exclude flood risks from their policies or increase deductibles for weather-related damage.

An innovative solution is “parametric insurance.” Imagine a rain gauge linked to your bank account. If it records a predetermined level of rainfall, the insurance company automatically pays you, even if there’s no visible damage. This helps you recover from storms without traditional claims.

Self-driving cars are set to transform transportation, but they also introduce new risks. If a self-driving car crashes, determining liability is complex. Insurers are working with automakers to decide responsibility and considering the car’s safety features in insurance pricing. Advanced safety technology could mean discounts.

Insurance companies might also offer “usage-based insurance” for self-driving cars, where premiums depend on the miles traveled or who’s at fault in an accident.

Creating insurance for these new scenarios is challenging. New laws and regulations may be needed, and technology keeps evolving. However, insurance companies that develop innovative solutions for emerging risks have the opportunity to lead in this exciting new world.