Viewpoint: Uncovered risks keep rising

Risk managers are concerned — and with good reason — about the potential rise in uninsurable risks. Fifty-three percent of respondents to a recent global risk managers survey by FERMA, the European risk management association, believe critical business risks and regions may become uninsurable. The number was up from 41% in 2022.

The findings released last month showed that risk managers’ concerns are focused not on a single or a few coverage lines but on many exposures companies have traditionally relied upon insurance markets to cover.

Of the risk managers who believe some risks will become uninsurable, nearly three-quarters cited climate change physical risks and natural disasters as the most likely area where insurance capacity will withdraw. Over half estimate that cyberattacks will become uninsurable, while digital risks — including artificial intelligence — and technological risks were both cited by about one-third. A third also expect supply chain disruption, including raw materials, to become uninsurable.

The survey findings, based on responses from over 1,000 risk managers in 77 countries, including members of the Risk & Insurance Management Society Inc. in the U.S., come after several years in which challenging market conditions have forced risk managers to adjust their insurance programs and strategies.

Higher premiums, reduced capacity and exclusions of specific risks are the insurance market trends that have had the most impact over the past year, according to the survey findings. Wording changes are also taking a toll, risk managers indicated.

The situation appears to be most challenging for natural catastrophe risks, where 42% of risk managers reported a reduction in coverage. “Natural catastrophe risks continue to be a significant concern for insurers and insureds alike, with limited progress in expanding coverage options,” FERMA said. More than two-thirds of risk managers also reported a reduction for property damage and/or business interruption coverage.

If there is a bright spot, cyber seems to be stabilizing. Some 25% of risk managers noted an increase in cyber risk coverage, up from 14% in 2022, and only 8% of respondents reported a large reduction in cyber risk coverage, compared with the 33% that reported reductions in 2022. These findings point to a stabilization or re-evaluation of cyber risk strategies, with fewer companies experiencing drastic changes in their cyber risk coverage, FERMA said.

Greater stability and buyer satisfaction were also apparent in directors and officers liability coverage, where just 1% of respondents reported a large reduction in coverage, compared with 12% in 2022.

How are risk managers handling these challenges? Some 54% have changed their buying patterns after reviewing needs such as coverage requirements, limits and sublimits. Forty-four percent indicated they strengthened loss prevention efforts, while one-third said they looked to negotiate long-term agreements or policy rollovers.

Clearly, companies and risk managers continue to need effective risk transfer strategies, and solutions like captives and parametric coverage play a crucial role. More than one-third of risk managers continue to use existing captive insurers, while the number looking to create a captive or reinsurance company has increased to 17%, and 19% are using parametric insurance. As insurance markets change and exposures evolve, risk managers will have to continue to innovate and use all the tools available to them to ensure their organizations are protected.