Tag Archives: Derek Newton

Insuring political risk

Political risk insurance can protect businesses in locations and against perils that conventional insurance policies do not cover. Issues related to increasing globalisation, political and economic instability and protectionism have made it an important line of insurance for companies seeking to safeguard their business interests abroad.

In the article “Political risk insurance: A primer,” Milliman actuaries Derek Newton and Laura Hobern discuss what types of events this insurance covers and pricing considerations. The authors also discuss the reasons its demand has increased considerably. Below is an excerpt from the article.

Political risk insurance is commercial insurance aimed to protect businesses and business ventures in locations and against perils that other conventional insurance policies would not cover. There is no standard political risk product. Instead, these policies tend to comprise cover against a variable bundle of perils that can include:

Cover can be long term or short term, depending on the event being covered. For example, cover for trade risk might last for only 30 days, but cover for a major infrastructure development might be in place for several years. In fact, contracts that are five to seven years long are normal, though very few insurers will provide cover for longer than a 10-year period. The policies, however, may not last the full term. Coverage is often one-off, especially if it is project-based.

This translates to plenty of new business in the market with a relatively high acquisition cost, but very little renewal business.

Political risk insurance is not new, but it is not yet a fully mature market. The private market started in the 1970s, and business is written primarily through the major financial centres (i.e., London, New York, Singapore and Paris). There are state players, too, such as the Overseas Private Investment Corporation (OPIC) in the United States. This government agency has been helping American business invest in emerging markets since 1971.

Increasing globalisation and the increasing willingness of commercial enterprises to operate outside their national boundaries are driving demand for political risk cover. So, too, are the rise of nationalism and political populism in addition to continuing political instability in various parts of the world. All of these factors are increasing the awareness of commercial enterprises regarding the risks they are running when operating abroad and thus increasing their appetite for cover.

Big data challenging how insurers think about business

The insurance industry has a long history of using data to make decisions around risk. However, as more and more data on risk becomes available, insurers will encounter numerous business challenges. In the Milliman Impact article “Harnessing the transformative power of big data,” consultants Neil Cantle, James Dodge, and Derek Newton offer perspective on big data and its implications for insurers’ business models, data governance, and skills moving forward.

Big data, consumers, and the FCA

Newton_DerekIn November 2015 the Financial Conduct Authority (FCA),1 a UK financial services regulator, announced that it intended to investigate the use of “big data”2 in retail general insurance in the UK. In September 2016, it announced that it was not, after all, going to pursue this investigation. Why this apparent turnaround?

The opportunities big data provides general insurers are widely acknowledged and the reason general insurers are investing heavily in this area. But with such opportunities come potential threats: big data could potentially lead to better service and outcomes for many consumers, but could it also lead to some consumers effectively being excluded from the market, or to the exploitation of consumers who are less price-sensitive than others? They are the concerns that the FCA sought to address when announcing its investigation in November 2015.

Since then, the FCA has been gathering and evaluating relevant information, mostly relating to private motor and home insurance. It has found a lot of evidence that the use of big data results in benefits to users of insurance, through products and services being better tailored for individual needs, through more focused marketing and better customer service, and through increasing feedback to consumers about the risks that they run and how to manage them effectively, most notably to those with telematics auto insurance.

While its concerns remain, the FCA concluded from this preliminary investigation that the increasing use of big data is “broadly having a positive impact on consumer outcomes, by transforming how consumers deal with retail GI firms, streamlining processes and encouraging more innovation in products and services.” As a result, it has decided that there is no immediate need either to push ahead with the full investigation that it had originally proposed or to change its regulatory framework in response to any issues raised. However, it will continue to look at big data, in particular looking for any related data protection risks and seeking to understand how big data is used in pricing.

Full details of the FCA’s views can be found in its Feedback Statement FS16/5.

1The FCA regulates the financial conduct of the financial services market within the UK and shares with the Prudential Regulation Authority the prudential regulation of the businesses within the UK financial services market.
2There is no universally accepted definition of “big data.” In the context of its investigation, the FCA considered big data very broadly, embracing data sets that are larger or more complex than have hitherto typically been used by the insurance industry, data sets derived from new sources such as social media, and the emerging technologies and techniques that are increasingly being adopted to generate, collect, and store the data sets, and then to process and analyse them.

Driving for Profit: A view of the UK private and commercial motor insurance markets 2015

In this year’s Driving for Profit report, Milliman consultants Derek Newton, Vincent Robert, and Peter Moore present the results from their analysis of the United Kingdom’s private and commercial motor market.

The overall performance of the private motor market in 2015 has resulted in a pretax net insurance ratio of -0.4%. This ratio has historically been highly distorted by material releases or strengthening of prior years’ reserves held by the Direct Line Group. Excluding the Direct Line Group, the figures indicate that the rest of the market in aggregate is operating at a more pronounced loss with a pretax net insurance ratio of -4.5% in 2015.

The UK’s commercial motor market improved in 2015 to a pretax net insurance ratio of 0.7%, the first profit seen in seven years. The better performance in 2015 is largely down to releases from prior years’ reserves.

To download the entire report, click here.

Cyber risk regulation: First line of defense

Cyber risk is destined to become a much bigger part of insurers’ business yet it also comes with challenges. Insurers are grappling with a lack of historical data and the threat of aggregation and systemic risks. At the same time, regulators and ratings agencies are becoming more aware of the potential risks that cyber presents to insurers’ balance sheets and the industry’s reputation. This Milliman Impact article provides more perspective.

Navigating the cyber security landscape

Organizations are taking their cyber exposures more seriously because of high profile data breaches and tougher privacy regulation. Growth in the cyber insurance market is also expected with increased reliance on technology, in particular as physical industrial processes become digitized. Insurers must find ways to overcome the huge systemic and aggregate exposures inherent in cyber risk. This Milliman Impact article provides more perspective.