Opinion: Why unconventional industries require an innovative approach to risk and insurance

What do renewable energy, 3D printing, vertical farming, DNA testing, personal genomics, space mining, drone services, AI, virtual reality, cryptocurrency and blockchain all have in common?

They’re unconventional industries: unique and innovative businesses that venture outside the norm of traditional sectors.

As a risk manager, you may work within one of these industries, or have clients that fall within this realm. And if you don’t, it’s likely just a matter of time since one of the benefits of unconventional industries and businesses is rapid growth.

The growth is unsurprising, driven by global innovation, potential for traditional market disruption via technology, environmental concerns, government support, investments and global connectivity.

Consider renewable energy, the U.S.’s fastest-growing energy source in the U.S. according to the Center for Climate and Energy Solutions, as the nation aims for net-zero emissions by 2050.

”Despite the growth and enticing challenge of bringing an innovative solution to market, unique challenges and regulatory considerations exist”

3D printing and vertical farming share a sustainable growth trend, with a compound annual growth rate (CAGR) of over 24%, and are predicted to reach 83.9 billion by 2029 according to Fortune Business Insights.

Despite the growth and enticing challenge of bringing an innovative solution to market, unique challenges and regulatory considerations exist due to their groundbreaking nature.

This creates a more difficult path than that faced by traditional counterparts when it comes to risk management, overall, but more specifically when insuring against specific risks.

Why is insurance so hard for unconventional businesses?

As a risk manager, you’ve likely found it challenging to procure insurance for an unconventional business, or perhaps you can’t find insurers with the right expertise to address the industry.

Take space mining as an example. An insurer would be hesitant to provide coverage with the high level of risk associated with space mining operations due to unpredictable space conditions, untested technologies and a high potential for catastrophic events.

When exploring insurance for a cutting-edge business, you may have run into one (or several) of the following issues:

1. Lack of Historical Data: Unconventional businesses often lack historical data on their operations, or may lack established industry benchmarks, making it difficult for insurers to accurately assess risks and set appropriate premiums.
2. Unique and Evolving Risks: Their innovative nature can introduce risks that are not well understood or fall outside traditional risk categories, making it hard to quantify potential losses.
3. Regulatory Uncertainties: Rapidly evolving industries might face unclear or changing regulations, making it challenging to predict legal and compliance risks.
4. Market Volatility: Unconventional businesses might operate in volatile markets with unpredictable demand, revenue fluctuations and economic shifts, making risk assessment challenging.
5. Technological Dependencies: Reliance on cutting-edge technologies can expose unconventional businesses to higher technology-related risks, such as system failure or cyber threats, complicating risk evaluations.

If these challenges sound familiar, it doesn’t mean utilising insurance as a risk management tactic is a lost cause.

Unconventional risks require an unconventional approach to insurance

Just like unconventional businesses require a more tailored and comprehensive approach to risk management overall, the same is true for insurance, and a more innovative approach is required to address the complexities.

Alternative Risk Transfer (ART)

ART encompasses a range of innovative financial strategies and techniques that allow businesses to manage and transfer risks outside of traditional insurance.

These solutions are designed to provide customised risk management approaches that better suit the specific needs and risks of businesses.

There are different insurance solutions that fall within ART such as self-insurance, captive insurance and parametric insurance.

• Parametric insurance: Parametric insurance is a type of insurance where payouts are triggered by predefined parameters, such as specific events or measurements, rather than traditional claims investigations.
• Self-insurance: Businesses with a strong financial position may choose self-insurance for certain risks, setting aside funds to cover potential losses instead of relying on external insurers.
• Captive insurance: A captive insurance company is a subsidiary owned by the company or company owner to provide insurance. Captives can be tailored to cover specific risks, especially ones that a traditional insurance company may not insure or fully address. With a captive, the company is able to retain the premiums (minus claims) as profit. This profit accumulates and becomes helpful during downturns or crises or to cover unexpected expenses.

A hybrid approach to insurance

Unconventional businesses have unique and evolving risks that surpass the coverage of traditional policies. However, that doesn’t mean traditional insurance is completely unnecessary.

Instead, a hybrid approach allows unconventional businesses to customise their coverage for a diverse and complex risk landscape, accommodating their innovative operations and rapid industry change.

”By exploring insurance options that are also innovative, like ART and pursuing a hybrid approach, cutting-edge businesses can safeguard their uncharted ventures”

By blending traditional insurance with tailored solutions and alternative risk management strategies, unconventional businesses can effectively balance risk-taking, address regulatory uncertainties and ensure coverage aligns with their long-term vision.

As businesses continue to pursue innovation, the challenges that risk managers and professionals face are real. However, these challenges are not insurmountable.

By exploring insurance options that are also innovative, like ART and pursuing a hybrid approach, cutting-edge businesses can safeguard their uncharted ventures and strike a balance between innovation and security.