How tech will change the way you price risk

Insurance risk categories in the future will become so small they will become very difficult to price properly, a speaker predicted earlier this month at the CIP Society Symposium in Toronto.

The number of distinct risk transfer categories appears to be trending upwards exponentially, said Alex Daskalov, co-founder of Montreal-based KNØX, a company creating an Internet-native financial infrastructure. “Anytime you see an exponential curve in technology, you need to watch out because some scary things happen as far as attempting to deal with some of these challenges.”

With the increase in the number of risk categories, the size of each risk category is going to shrink. This means there will be a very small number of people who understand the particular risk category and how to price it effectively.

“Some of these risk categories will be so small that insurance companies as they exist today will be too large to take care of them,” Daskalov said during the session A new era of risk: Blockchain and the crypto ecosystem. “And if a category cannot support an insurance company, then the contemporary risk transfer value chain will not be able to support that risk category at all….

“At the limits of this, you might have a risk category that is large enough that you would want it to exist; you would want risk transfer products to exist for it; however, there may be five people in the world that know how to price it effectively.”

As an example, Daskalov said his company has been try to find a way to insure against the theft or loss of cryptocurrencies and to “produce risk transfer products around that specific use case, because it exhibited a lot of the properties of future risk categories we saw.”

Historically, risk transfer revolved around physicality, Daskalov observed. Most risk categories dealt with “things in the real world” such as vehicles, for example, as opposed to intangible assets. But while the existing risk transfer value chain based on physical assets will stay more or less the same, he also believes a parallel risk transfer ecosystem may emerge to take care of these newer risk categories associated with intangible assets.

In the past, the insurance industry had decades to get ready for a new risk category. However, for some of today’s newer risks, underwriters are “effectively producing risk transfer products blind,” Daskalov said. “As bad as it is now, it’s going to get much, much worse. This time from birth [of a risk] to the need for the product will decrease. Right now, it’s maybe a span of years, whereas it was once decades. Perhaps in the future it will come down to months, maybe days.”