December 10th, 2013

Emerging Risks: Managing the Unknown, Part I

Posted at 1:00 AM ET

Having examined the three emerging risks of cyber, climate change and space in detail, it is clear they present serious threats to businesses and (re)insurers. Not only will the fallout from these risks result in losses we can currently anticipate and predict (such as increased property damage and liability vulnerability), but they also have the potential to trigger costly secondary impacts such as a breakdown in supply chains, reputational damage, disrupted power supplies and possibly others that are more difficult to foresee.

Needless to say, a number of other developing threats could be placed under the “emerging risks” banner. Risks ranging from evolving threats such as pandemics to new developments such as alternative energy sources and nanotechnology have the potential to surprise and should be closely monitored by risk managers and (re)insurers. A common trait for all such risks is a lack of understanding of the threat they pose to businesses and (re)insurers, particularly in today’s global and interconnected economy.

This interconnectivity has the potential to change and exacerbate the threat posed by some known risks. For example, there have been several instances of pandemic outbreaks in recent history. A severe outbreak in 1918 (the Spanish flu) killed up to 50 million people while the SARS and swine flu viruses are more recent reminders of the serious risk pandemics pose to society and businesses. Although scientific advancements and improved coordination would likely limit the number of fatalities should a severe pandemic event reoccur today, the globalized economy and increased movement of goods and people may result in a more rapid and widespread spread of the disease.

Insurers could see negative impacts from a pandemic on both the liability side, due to increased claims, and on the asset side, due to financial markets volatility. While insured losses stemming from such an outbreak would likely be greatest for the life and health insurance sectors, property/casualty lines could also experience considerable losses. General liability, directors & officers and medical malpractice lines are all exposed to pandemic losses. Property insurance can also be impacted if the pandemic causes quarantine and/or decontamination.

Link to Part II of EmergingĀ Risks: Managing the Unknown >>

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