In the wonderful jargon of the trade, the potential losses you were covering have shifted from attritional to catastrophic, or to put it bluntly, from something you could afford to something which wipes you out.
And that sums up the problem of intangibles. No insurers can afford to cover something where the claim could be so high it would destroy their balance sheet; and no client would pay a premium if it was set high enough to make the insurer take the chance.
It’s a generalisation but broadly speaking these intangible assets are not being insured, and companies think the insurance industry has little or nothing to offer.
This is a problem for companies because intangibles are already where most of the value is in modern business — witness the S&P analysis earlier — and will become even more important as business models evolve to embrace ever more tech. It is a problem for insurers because it makes them increasingly irrelevant.
The pace of change, the complexity of modern business, the fragility of global just-in-time supply chains and the transparency which comes from the presence everywhere of social media, has left underwriters gasping, or pretending it is not really happening, and hopefully won’t till after they retire.
Ironically though, even in these circles there is a diminishing amount of comfort to be had from doing things the old way.
Big data are changing the game within companies and while mostly they are used to generate insights which can be used to boost sales, they are also being developed in the more enlightened businesses to analyse where the risks are.
Then, armed with this additional knowledge, boards and risk officers can decide whether they really need to buy so much outside insurance or whether they can handle more of the stuff internally.
The result is that the number of captives, in-house insurance companies, has soared in recent years, and the more these pick up the safe stuff, the greater the relative toxicity of what they still seek to place outside. They call it adverse selection.
Airmic, the trade association for the people in companies whose job it is the buy insurance and help manage the risks, has just had its annual conference. Not surprisingly this was one of the themes.
Indeed it prompted a research report, produced by Axa Solutions and issued as one of the conference papers, which said bluntly that the insurance industry was not fit for purpose because traditional insurance could not cope with these emerging risks.
So what do we do about it? Well the Axa team say insurers have to change their business model. They have to move away from the current transactional and adversarial relationship with clients and become something more akin to consultants.
From the outside they will never know enough about the dangers lurking within intangibles; on the inside working as a consultant alongside the company’s executives and harnessing the latest technologies they could begin to work it out.
But even then the idea would not be to insure the risk in the conventional sense. Rather the insurer and client would together seek to work out in advance where the dangers lie and do something about them before they happen.
The insurer of the future will charge a consultancy fee for building a fence at the top of the cliff rather than charging a premium for providing an ambulance and paying the burial costs at the bottom.
This is a fundamentally different insurance business model. Will the clients go for it? Has the insurance industry the skills and the people it will need to fulfil its side of the deal? Will it work?
Time will tell, but meanwhile it does make you wonder whether insurance company shares should be quite so high.
