As E-Commerce Expands, So Do Insurable Exposures
Commercial lines insurers have paid considerable attention to the rapid growth of "dot-coms," and the attendant risks inherent in electronic transactions, which often are referred to as e-commerce exposures. Indeed, many carriers now offer separate e-commerce policies to provide specific coverage for risks unique to electronic transactions and the computer environment.
"MarketStance" estimates that e-commerce sales by dot-coms and other "non-store retailers" such as Amazon.com reached $25 billion last year. Last years estimated 18 percent rate of growth is especially impressive given that total retail sales grew only 3 percent during that period, reflecting the U.S. economys recent recession.
The largest segment of electronic shopping is computer hardware when you rank by type of merchandise. U.S. Census Bureau data indicate that more than $6 billion in computers, parts and supplies were ordered in 2000. Indeed, the computer industry accounted for almost 30 percent of total electronic shopping last year.
"MarketStance" estimates that by 2005, the e-commerce sales of non-store retailers will have more than doubled, pushing above the $60 billion mark, with average annual growth of more than 25 percent.
Among conventional "store" retailers, e-commerce sales also have grown rapidly over the past few years, rising some 23 percent last year alone. However, store retailers e-commerce sales still amounted to only about $9 billion last year, and accounted for only about three-tenths of 1 percent of their entire annual sales. Despite continued rapid growth, "MarketStance" estimates that conventional, store-based retailers e-commerce sales still will account for less than 1 percent of this sectors total sales revenues by 2005.
The retail sector in general, and dot-coms such as Amazon in particular, account for most of our perception of e-commerce exposures. In point of fact, however, Census Bureau data indicate that less than one-quarter of e-commerce revenues are generated within the retail trade sector.
Where are the rest? Well, about 33 percent of e-commerce generated revenues arise from the service and financial sectors. Dot-coms outside the retail sector–in industries such as online securities brokerage and travel reservation–generate very sizable e-commerce revenues, as do online publishing and information services.
Indeed, even such traditional industries as truck transportation, couriers and warehousing (all included within the "services-other" sector) generate significant shares of their revenues via e-commerce.
Which industries are most dependent on e-commerce for revenue generation? Its not the non-store retailer sector and the "new economy" much heralded in the press. Surprisingly, the manufacturing sector–that bastion of the "old economy"–generated almost 20 percent of its revenues through e-commerce last year, according to "MarketStance" estimates, based on Census Bureau data.
Dot-com manufacturing? Why havent we heard about this in the press? With quiet determination but little fanfare, the manufacturing sector has been automating its processes, one of which is order taking.
In transportation equipment manufacturing, for example, almost 50 percent of orders for new goods were transmitted electronically last year, according to the Census Bureau.
Not a dot-com, you say? Well, perhaps it isnt, technically, especially because the Internet is not used for most of these orders. However, electronic data interchanges, or EDI "private networks," enable buyers to quickly place orders directly with manufacturers.
In addition to ordering, manufacturing and other industries have implemented a variety of online processes. The array of online processes includes: product descriptions, design specification, inventory management, testing and acceptance, invoice payment, and customer service. Each of these electronic activities engenders electronic risks that likely are not covered by conventional insurance coverages.
Not a dot-com, you say. Well, perhaps not, technically. However, it involves a whole lot more electronic interaction than the typical retail dot-com provides, and potentially a whole lot more e-commerce exposure.
Interestingly, the wholesale trade sector has a much higher reliance on e-commerce for orders than does the store-retailer part of the retail trade sector. "MarketStance" estimates that about 8 percent of the wholesale trade sectors revenues arose through e-commerce ordering last year–a sharp rise from 1988s 4.6 percent share.
As in manufacturing, little of this e-commerce arose from dot-com type Internet transactions. Indeed, almost 90 percent of this e-commerce was generated through private EDI connections, many of which involved automated management of retailers inventories.
Within the wholesale trade sector, the pharmaceuticals and motor vehicles industries have the highest reliance on e-commerce sales. Almost 40 percent of wholesale pharmaceutical sales arise via electronic ordering of some type, far exceeding the 20 percent portion in the motor vehicles and auto parts wholesale trade industry.
In addition to varying by industry, the use of e-commerce also varies markedly by size of firm. Almost 40 percent of manufacturing firms with more than 1,000 employees use e-commerce sales to at least some extent. In contrast, only about 15 percent of firms with fewer than 10 employees are e-commerce enabled within the manufacturing sector.
In the wholesale trade sector, e-commerce enablement is somewhat lower across the entire firm-size spectrum.
In the retail trade sector as a whole, less than 10 percent of firms report use of e-commerce for sales generation. The corresponding percentage for small retail firms is estimated to be less than 2 percent, while at the large end of the spectrum, its only about 10 percent. Of the retail trade sectors 2.7 million accounts, "MarketStance" estimates that only about 2 percent use e-commerce–about 56,000 accounts.
E-commerce sales are projected to grow rapidly in most sectors over the next four years. Indeed, "MarketStance" estimates that total e-commerce revenues will grow at an 11 percent annual average rate, or just about double the growth rate for all revenues.
Within the retail trade and service sectors, growth is forecast to average about 30 percent a year over the 2002-2005 period. In contrast, e-commerce sales in manufacturing and wholesale trade are projected to average only 5 percent and 15 percent, respectively, in part due to these sectors' much higher reliance on e-commerce.
What does this all mean for e-commerce coverages? Well, one implication is clear: Carriers must broaden their understanding of e-commerce risks to include manufacturers, wholesalers and service providers relying on electronic interactions for significant shares of their orders.
Beyond this, only time and the attendant stream of actual loss experience will provide the framework upon which the next round of coverage and pricing will be based. In the meantime, stay tuned to "MarketStance" for regular updates on these exposures.
Frederick Yohn is the developer of "MarketStance," a market analysis tool for U.S. commercial property-casualty insurers and a registered trademark of IntelliStance, LLC, in Middletown, Conn.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, April 22, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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