Analysis

Risk transfer broadens in scope and application

Future of risk series: Trend five

Risk transfer instruments such as insurance and contracts are not new, but expect them to play a bigger role in the face of “mega-impact” risk events like climate change, political unrest, terrorism, and cyberattacks. In the past, few considered hedging against such risks. Soon, it may become commonplace as commercial third-party insurance, risk-sharing agreements, captive in-house insurance, and other tools continue their ascent. Financial industry innovation is also generating novel financial instruments that transfer and monetize risk.

What forces are driving this trend?


Growing instances of “mega-impact” events such as cyberattacks, political unrest, and climate change—and their growing financial and reputational impact
Increasing globalization and the rise of a networked economy leading to cascading risks
Persistent inability of organizations to completely eliminate risks through preventive controls
Rising cost pressure on organizations to look for cost-effective ways to transfer risks

 

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What are the opportunities?

  • Evaluate risk transfer instruments as an option to achieve business continuity and more predictable performance
  • Establish risk-sensing mechanisms to identify emerging risks and determine if instruments could be used effectively to transfer key risks
  • Develop clear and stringent risk-sharing clauses in all partner contracts, and consider collective insurance with partners to address shared risks

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What are potential threats and pitfalls?

  • Potential for conflict, litigation, and disputes with customers, partners, and suppliers over risk-sharing agreements
  • Inability to determine the appropriate insurance premium for various risks
  • Becoming “over-insured” or purchasing insurance in noncritical areas

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Case studies: Where is this trend already in play?

Some of the largest medical device manufacturers like Boston Scientific, Medtronic, and St. Jude Medical are negotiating experimental deals with hospitals to take on performance-based financial risk for their implants. Such risk-sharing agreements are structured in a variety of ways. Some agreements may stipulate that the manufacturer return a percentage of the device’s price if it does not meet certain performance goals or fails within a set period of time. Under other agreements, a hospital pays more for a device that fulfills a manufacturer’s quality and economic claims.1

Willis SECURENET aims to assist organizations facing terrorism risks, and those that are penalized by exorbitant rates of terrorism insurance, with the development of captive insurance entities. It can help them in every stage of captive formation, including feasibility analysis, domicile selection, development of underwriting parameters, and maintaining communication with state insurance departments.2

BitSight Security Ratings seeks to provide objective, data-driven, daily ratings of an organization’s security performance through continuous monitoring. It works to help insurers look at historical data, compare an organization against industry peers, and make informed underwriting decisions. It also helps identify and alert applicants of potential threats in their networks. This aims to enable insurers to get insight into past and current cybersecurity risk levels.3

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Explore the future of risk trends:

   

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Jaime Lee, “Devicemakers explore risk contracts with hospitals,” Modern Healthcare, December 06, 2014,
http://www.modernhealthcare.com/article/20141206/MAGAZINE/312069964.

2 “Using captives for terrorism solutions,” Willis SecureNet, April 19, 2011,
http://www.willis.com/documents/publications/Services/Political_Risk/48701_UsingCaptivesForTerrorismInsurance.pdf.

3 BitSight, “Security ratings for cyber insurance,”
https://www.bitsighttech.com/security-ratings-cyber-insurance.

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