October 14th, 2014

Emerging Risk Challenges And Opportunities

Posted at 1:00 AM ET

A cursory reading of just a few of the publications on the topic of emerging risks quickly resembles a crash-course in risk aversion therapy. We have been subjected to a bewildering and ever lengthening series of lists of emerging risks. Swiss Re recently identified 26 such risks (1), Hannover Re has an ongoing list of 14 while the World Economic Forum in its Global Risks 2014 (2) lists 31 global risks (3).

According to Swiss Re, emerging risks are “newly developing or changing risks that are difficult to quantify and could have a major impact on society and industry.” For Hannover Re they are “new or future risks whose hazard potential is not yet reliably known and whose implications are difficult to access.” On the basis of these definitions it would appear that emerging risks are, by their nature, not modelable and hence not susceptible to traditional risk management techniques - this appears to be a distinguishing feature of emerging risks.

The World Economic Forum observes that a key characteristic of global risks is their potential systemic nature. Its definition of systemic risks aligns global risks with emerging risks, given that “systemic risks are characterized by:

  • Modest tipping points combining indirectly to produce large failures
  • Risk-sharing or contagion, as one loss triggers a chain of others
  • “Hysteresis, or systems being unable to recover equilibrium after a shock” (4).

It is plausible that these global risks are similarly unrecognized as emerging risks. The World Economic Forum’s intention is to remedy the lack of understanding of global risks:

“To manage global risks effectively and build resilience to their impacts, better efforts are needed to understand, measure and foresee the evolution of interdependencies between risks, supplementing traditional risk-management tools with new concepts designed for uncertain environments” (5).

In broad terms the premise is that global risks, emerging risks and systemic risks are more or less synonymous.

Armed with this insight one can start to examine emerging risks (as we shall now call them) in a more analytical way. This sets up a progression from confronting lists of nightmare scenarios to taking practical steps to deal with them thereby creating value for the (re)insurance industry.

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Note:

1. Swiss Re SONAR, New Emerging Risk Insights, July 2014.

2. World Economic Forum, Global Risks 2014.

3. For a complete list of the 31 global risks surveyed by the World Economic Forum’s Global Risks 2014 report, to which Marsh & McLennan Companies was a contributor, see Appendix in Section IX of this report.

4. World Economic Forum, Global Risks 2014, Page 12.

5. World Economic Forum, Global Risks 2014, Page 9.

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