Insurance

What are the limits of insurability?

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What are the limits of insurability? Nobody can know what the future will bring. Private individuals and companies are exposed to a variety of risks that they can protect themselves against. One hundred percent all-round protection against all risks and damage – as we all know – cannot be offered by insurance either. There are also limits to the insurability of risks. Insurance science gives us an answer to where these limits are. Accordingly, risks must be random, assessable, independent, and clear and must not exceed the insurer’s capacity. In addition, hedging the risks must also be worthwhile for the insurer from an economic point of view. So far, so good, but what does that mean in practice? Using a few examples, we want to show this and show which current developments raise new questions about insurability.

You can read the first part of the discussion below; the second part can be found next article.

Randomness: When chance becomes more and more controllable

What are the limits of insurability?

When the contract is concluded, the time, amount, and/or occurrence of the risk must be uncertain and cannot be influenced, i.e., coincidental. An event that is certain to occur or that is already known – the proverbial “burning house” – cannot be insured. If something like this is offered, such as ERGO’s additional dental insurance, which can still be taken out after the start of treatment, it is more likely to be a marketing or sales campaign. Up to now, health risks have always been considered difficult to predict, and their occurrence and time of occurrence are highly uncertain. But what does it look like in the future once you look at the progress made in terms of DNA analysis and sequencing? The costs for this are currently falling drastically: For example, anyone can have the prevalence of certain hereditary diseases determined for less than USD 100. If this development continues, a customer may be able to assess his or her likelihood of illness much better and has an information advantage over the insurer, who will have to deal with it in the future. Are we then possibly not far from compulsory genetic tests for risk assessment? The limits to be discussed here relate to insurability in this context and primarily concern ethical issues with regard to the recording of potential risk dispositions.

Estimability: Estimating without empirical values?

Risks must also be able to be estimated with regard to their probability of occurrence and height distribution. Sufficiently reliable empirical data should be available for an objective estimate. But what about risks for which there is no empirical value yet? And that applies in principle to all newly emerging risks. A current example in this context is cyber risks that arise from infection and computer systems manipulation with malware. The cases of cybercrime in the private and commercial sectors are increasing. However, insurance solutions are still rare in this area, which is certainly also due to a lack of historical claims data. There are public crime statistics, but the authors assume a high number of unreported facts. In such cases, a subjective risk assessment by experts replaces or supplements the objective assessment, although the risk of error is, of course, higher here. In order to reduce the risk for the insurer, at least in the private customer business, when designing products, one often works with limited contract periods without automatic extension and with maximum insurance sums. Some insurers have dared to offer a cyber policy and are feeling their way into this market segment. Many more will surely soon follow the courageous innovators and benefit from their previous experience. The annual premiums of the existing providers in the private customer segment start at less than 100 euros. It seems as if the prices are based more on the customer’s willingness to pay than on the specific damage potential. It remains to be seen whether prices will be adjusted in the coming years as knowledge about the amount of damage increases.

Independence: Independent Risks in a Networked World?

Cyber ​​risks are problematic for insurers because of the current lack of experience and their high accumulation risk and potential for consequential damage. Due to the increasing networking of all areas of life in the context of the Internet of Things (IoT) and Industry 4.0, damage can quickly affect countless people or companies and run into the billions. The criterion of independence, according to which the realization of the risk must be independent of the occurrence of other (similar) risks, quickly falters here. In the commercial sector, in particular, damage from cybercrime can have domino effects and consequential damage. If risks are interdependent, major damage scenarios (accumulation losses) can arise. In this case, the compensation does not work in the collective, and thus the amount of damage cannot be controlled. The insurers are already familiar with managing accumulation losses in connection with weather-related major loss events. While the damage here is at least mostly regionally limited, cyber damage from networking is even more unpredictable. The manipulation of around 120,000 IP cameras in May 2017, with which attackers took advantage of the low-security standards and turned the cameras into a bot network called “Persirai,” caused a stir. The bot network has not yet been misused for criminal activities, but the example shows the far-reaching damage scenarios that the spread of solder can lead to. Even companies that were primarily spared from IT risks, such as bakeries or steelworks, can now become the focus of cybercriminals. This can increase even further through further technological progress, for example, in the area of ​​autonomous driving. Can the corresponding risks no longer be insured in the future because a fault and / or failure of a central element in this network leads to the failure of the entire system or extensive damage to most of the networked objects?

What are the limits of insurability?

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