October 13th, 2014

Understanding Emerging Risks: Executive Summary

Posted at 1:00 AM ET

(Re)insurers today face a degree of change and uncertainty that appears to be evolving at an ever quickening pace. Guy Carpenter has published a report, Ahead of the Curve: Understanding Emerging Risks, highlighting emerging risks facing the (re)insurance sector, including cyber-attacks, terrorism and new compensation structures for long-term bodily injuries. The report seeks to identify and categorize these risks that are now confronting the sector, as well as analyze their implications on businesses and (re)insurers.

Emerging risks can be new and unforeseen risks whose potential for harm or loss is not fully known. In looking at the universe of emerging risks it becomes increasingly clear that a significant portion are by their nature not observable by traditional methods, even though their impact will no doubt at some point be felt. The report’s goal is to contribute to a greater understanding of this insurance “dark matter.” This improved understanding should lead to a view of emerging risks as an opportunity, rather than as a threat. Ultimately, greater knowledge will mean these are, by definition, no longer emerging risks, any more than aviation risks are now.

The report examines emerging risks in a more analytical way in order to take practical steps to deal with them and create value for the (re)insurance industry. It places emerging risks in three categories: technical, crystalizing and aggravating.

Technological risks are those that are genuinely new, which emerge from new technologies and processes. This category would include genetically modified organisms, nanotechnology, E-cigarettes and driverless cars. The report takes an in depth look at the risks associated with cyber technology as an example of technological risk. Crystalizing risks are those that are not new, but whose manifestation and implications are emerging. In this context we are looking as much at emerging losses, as emerging risks. This category would include asbestos in the developing world and aluminium health risks. The report looks in depth at bodily injury compensation schemes as an example of crystalizing risk. Aggravating risks are relatively well known, but where their incidence and impact are becoming potentially more aggravated. This category would include climate change, pandemics, megacities and resistance to antibiotics. The report looks at terrorism developments as an example of an aggravating risk.

These categories are not water-tight compartments - some, if not all, emerging risks contain elements of all three categories. However, a focus on the predominant characteristic makes it possible to see that each category requires a different response.

Whatever the category of emerging risk the main challenge lies in modeling and quantifying their potential impacts. Only in this way can (re)insurers leverage their key capability, which is the creation of value by risk management.

The challenges are described in the “Modeling” section of the report.

The final section of the report looks at reinsurance responses to the threat of emerging risks and their impact on loss reserving cycles. It is clear that insurers’ risk management initiatives need to take note of the trend, identified by the World Economic Forum, “away from technical planning for individual risks and towards holistic planning for a range of unspecified risks.”

As a leading integrated solutions provider to the (re)insurance industry, Guy Carpenter offers advice and guidance to clients in these areas by delivering a powerful combination of specialized reinsurance broking expertise, strategic advisory services and industry-leading analytics.

Click here to read the full report>> 

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