Protecting important commodities has always been critical when exploring the unknown. Qin-dynasty traders in China would divvy up their cargo across many boats to mitigate the risk of treacherous journeys, and seventh-century maritime law allowed crews to cover their losses on voyages.
Fast forward to today, and newer industries such as ride-sharing and cryptocurrency require a similar form of protection – one that allows business leaders and organizations to seize opportunities and take strategic risks in the face of the unknown. Risk transfer in the form of insurance has become the backbone of innovation. As consumer tastes shift and technology advances at breakneck speed, insurance continues to offer the protection – and at times, the capital – needed for companies and entire industries to build, scale and grow.
“The role that risk transfer plays in helping propel today’s innovations is similar to the role it played when ships were sailing to new worlds. Modern insurance was born out of a coffee house in London for maritime traders to protect their voyages,” says David Bowcott, global director of Growth, Innovation & Insight in Aon’s Construction & Infrastructure Group. “Risk transfer – however it evolves over time – plays a key role in giving people the confidence to move into new industries, new ways of doing business, and sometimes, entirely new worlds.”
Innovation is essential for businesses to thrive; the European Central Bank sees it as “an essential driver of economic progress that benefits consumers, businesses and the economy as a whole.” Indeed, “failure to innovate or meet customer needs” ranked as one of the top 10 risks in the 2019 Aon Global Risk Management Survey.
“In the face of consumer needs and preferences that are becoming increasingly fickle, innovation is a necessity, not an option,” says Lee Stacey, chief broking officer of South Africa’s Commercial Risk Solutions at Aon. “It also means that disruptive technologies, such as artificial intelligence, blockchain or the Internet of Things may be the key to transforming the current playing field.”
And while innovation – from digitalizing current processes, entering new markets or even disrupting entire industries – is critical to remaining relevant, it is not without risk. Whether through risk assessment or transfer, insurance can be a tool that propels innovation by offering the security to break new ground.
Enabling The Latest Innovations
Insurance has historically played a crucial role in today’s commercial world. Businesses look toward risk management to help minimize volatility and maximize their performance. Three of the more recent technological trends that highlight this important relationship are smart cities, satellites and the sharing economy.
The move to smart cities – in which digital technologies connect modes of transportation, optimize energy usage, improve public safety and enable a variety of societal benefits – still needs significant monetary investment.
Smart cities offer us “a huge opportunity and an equally large challenge at the same time,” says Kurt Cripps, head of Innovation and Solutions at Aon. “Whether it’s more digital connectivity in our everyday lives or an entirely AI-based city grid – smart cities require a level of innovation that hasn’t taken place in decades. Insurance can help enable the infrastructure required to create smart homes and smart grids.”
The same technologies, however, also create additional risks – particularly with cyber security. As people continue to connect to home systems (such as thermostats and security) and cities become more interconnected, technology and data collection is at the core. Jillian Slyfield, leader of the Digital Economy practice at Aon, warns of the degree of connectivity: “There’s so much data being collected through various points, from an individual’s personal device to city-run sensors.” Smart cities hold vast opportunities, but the potential impact of their being hacked into is just as massive.
Launching Into Space
From communications to navigation to agriculture mapping, satellites have revolutionized our lives. A far cry from the exploration in 1957 – when the first artificial satellite, Sputnik 1, was launched into space – today’s commercial space business is growing rapidly. According to Morgan Stanley, it is expected to grow to $1.1 trillion or more by 2040.
Unsurprisingly, risk transfer is an essential element of commercial space activities. Satellites and space launches are expensive ventures and carry significant risks. And while reusable rockets reduce the cost of satellite launches, each launch can still cost hundreds of millions of dollars. Space activities also pose significant consequences, including a failed launch, an improper orbit or danger to the public.
One recent trend in satellite innovation has been to move away from satellites parked in more distant geostationary orbits to networks of smaller, less expensive satellites in low-Earth orbits. While these “smallsats” or “cubesats” may be more cost effective and their volume mitigates the failure of any single satellite, their developers are increasingly insuring against launch and other failures.
Powering The On-Demand Economy And Insuring The Intangible
Whether booking a shared home or hailing a ride, the sharing economy has drastically changed how we travel. The rise of companies such as Airbnb, Uber and Lyft has often been associated with their understanding of and quick reactions to consumer behavior. Yet a business-interruption event (such as inclement weather) might look very different for those taking part in the sharing economy than for a traditional brick-and-mortar business.
“Companies in the sharing economy can be affected by non-damage business interruption by risks associated with alternative sorts of events,” says Paul Ramiz, director of Innovation and Solutions at Aon. A ride-sharing company, for example, might see business affected by an event that keeps people out of an area – such as a terrorism threat, bad weather or a flu outbreak. The potential impact of such events on the business can be difficult to quantify and insure using traditional insurance.
“Traditional business interruption is only triggered when there’s physical damage,” says Cripps. “A ride-sharing company – one that doesn’t own physical assets itself as it relies on the general public to provide the vehicle – isn’t really impacted by physical damage.”
Data and indexes are one possible solution to the challenge of how to quantify a loss that isn’t physical but affects traffic flow and business, explains Cripps. For example, using technology to track the number of people moving past a certain spot and linking coverage to that footfall rate could help smooth profit and loss. “Especially when certain types of insurance coverages require physical damage, such types of creative solutions can help organizations better hedge against events that decrease profits but don’t cause physical damages,” says Cripps.
Risk Management As The Enabler Of Innovation
Innovation will only continue. As it does, various stakeholders – from governments to regulators to the insurance industry – will have to not only adapt to new technologies and emerging business models, but also help create processes and standards for the new world.
As business leaders continue to venture into the unknown and seize the opportunities in front of them, Cripps highlights the role that the insurance industry can play to help propel innovation: “This is an opportunity for the industry to create solutions that help organizations address risk at the enterprise level and also confidently venture into unknown territories.”
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