The role of the insurance risk manager seems to become ever harder. One of his most challenging areas is identifying and assessing emerging risks that may affect his balance sheet. This requires a monitoring of global developments and thinking the unthinkable. Even when the risk has been identified, its impact can be difficult to quantify, yet it may be significant. And then the risk manager has the tricky task of turning what may be alarming scenarios into facts and actions for his underwriters, pricing specialists and reserving actuaries.
The list of emerging environmental, technological, geo-political, economic and legal risks is large and continually growing. I outline here some of the key ones, which all insurers and regulators should be considering. More details can be found at the Evolving Insurance Risk and Regulation report.
That the climate is changing is no longer doubted. Three broad categories have emerged:
- The physical risks to insured assets from weather-related events, combined with the collateral disruption to supply chains and scarce resources, as evidenced in Switzerland by the calamitous floods of 2005
- Liability risks that arise from third party claims for losses caused by climate change
- Financial risks caused by the re-pricing of carbon-intensive assets
The sector has deep experience of mitigating climate related risks through, for example, different land use and stronger building codes. One specific emerging risk comes from ‘fracking’, although its use is controversial and banned in some countries. Three main risks have been identified: ground water contamination, the after-effects from poor handling of the waste fluid, and the potential for increased seismic activity from the process. Claims may emerge against well operators and drilling contractors.
Cyber risks have gained huge attention recently, with one of the most significant recent attacks being against Yahoo when 500 million accounts are said to have been hacked. In April 2016, the International Association of Insurance Supervisors issued a paper on cyber risk: it aims to raise awareness of the challenges presented by cyber risk, including supervisory approaches for addressing this. The paper provided supervisors and insurers with examples of risks and discussed supervisory practices and challenges.
Nanotechnology is used in medicine, electronics, food safety, and sporting equipment. Its long term effect and toxicity are not yet known. Similarly light emitting diode (LED) lights, used in mobile phones and other equipment, may be found to cause disruption to sleep patterns and damage to the retina. Currently there is no widespread move by manufacturers or product developers to minimize these risks.
The game changer in private motor insurance will be the driver-less car, which may be common in some developed markets such as Switzerland within ten years. Trials of semi-autonomous cars are already underway in many countries across the world. Over the medium term, insurers will likely face a hybrid market dominated by three overlapping areas of risk mitigation demand: traditional personal accident insurance, product liability insurance coverage and business interruption insurance needed to cover potential breaches of personal data repositories held by insurance companies. In this new world, accidents may well be less frequent, their cause however less easy to ascertain. When an accident occurs, the first question will be to determine who was operating the vehicle. Three options exist: was it the car company that owns the vehicle, the ride-sharing company that arranged the transit (and thus planned the route) or any possible third party that actually operated the navigation system? Notions of contributory negligence will also have to be expanded to include possibilities that passenger behavior interfered with the car’s controls.
Rising pandemic risk
The global population as a whole is healthier than previous generations, with access to better medicine and entities such as the World Health Organisation playing a critical role in coordinating and communicating across borders to manage dangerous outbreaks. But the increase in, and urbanization of, the global population, the low cost and speed of international travel for both goods and people, international migration and the threat of resistance to antibiotics all threaten to increase the potency of pandemics.
Although the severity of an epidemic depends on a number of variables (including its nature, the medicine available to combat it and the ease with which is it transmitted), a global pandemic requires as a condition an epidemic occurring in an urban or internationally connected location, enabling it to be easily spread. The two aspects are more likely to occur in developed countries. Contrast two recent epidemics:
- The Ebola epidemic in West Africa was largely contained due to the poor transportation connections between the region and the rest of the globe
- The ongoing Zika epidemic, which continues to spread because the carriers are not only individuals who travel, but also the disease-carrying mosquitoes
While the focus of Swiss insurers for some years has been on increased mortality, the globalized nature of pandemic risks means that epidemics cannot be ignored in this market.
Technological advance, environmental change, societal developments – they all seem to offer risks and opportunities that insurers must identify, measure and build into their core processes. I have highlighted here how technology facilitates increased interconnectivity across different risk classes as well as generating new insurable risks.
It will be key for risk managers, regulators and insurers to continue to work together to keep on top of this continually changing environment.