Guy Carpenter today published a new report, A Clearer View of Emerging Risks, which examines four key areas where risks continue to emerge or are largely unknown.
“The emergence of increasingly complex global risks is challenging the way the insurance industry evaluates, analyzes and manages these new exposures,” said Will Garland, US Head of Specialties at Guy Carpenter. “In this year’s report, our goal is to assess the challenges facing the industry as respects modeling and quantifying the most pressing technological risks. Establishing a path toward a more robust analytical thought process will provide insurers and reinsurers greater confidence as they anticipate, transfer and manage risk.”
The evolving nature of cyber risks poses a serious threat to governments, corporations and individuals around the world. Data breaches, for example, are very difficult to predict and the potential form and target of the next cyber-attack are largely unknown. A key function of modeling for cyber risk is trying to determine the likelihood of an event occurring, and once it happens, what the size of that loss might be.
Although progress is being made, the level of historical and scientific data needed to build probabilistic models for natural catastrophes does not yet fully exist for cyber risk. This fact, coupled with the potential for a single breach to have a wide-spread, cascading impact presents both a significant challenge and opportunity for the industry.
Risks associated with technology can be genuinely new and are constantly evolving due to new advancements and processes. For example, technology risk has become more apparent in the following areas in particular:
- Nanotechnology and chemical technology breakthroughs, such as those involved in making stronger and enhanced materials, may have unknown liability outcomes in the future.
- Growing commercial applications for drones and other technological advances that remove human input from machine operations are increasing the potential for misuse of this technology and need to be considered.
“This unique phase of technological advancement will inevitably bring new exposures that are not adequately represented in historical databases,” said David Lightfoot, Head of GC Analytics - Americas. “As a result, insurers and reinsurers will need to develop models that are based more on estimates and assumptions than on experience. Sorting through fact and fiction becomes a critical part of assessing technological risk when there is little or no historical data available.”
Life, Health and Longevity Risk
Longevity risk is also a growing concern among insurers and reinsurers alike. According to the United Nations, aggregate expenses of the elderly will double between the years 2010 and 2015, while a 2012 International Monetary Fund (IMF) study revealed that if individuals live three years longer than expected the cost of aging could increase by 50 percent.
Beyond the clear impact to global governments, longevity risk directly challenges pension fund managers and annuity writers who are assuming whole-of-life liabilities. Changes in longevity are difficult to forecast, particularly if there is a precursor to a change that is inconsistent with the long-term health patterns present in historical data. The issue for (re)insurers lies in the inability to measure this risk and, in turn, anticipate and quantify its impact.
Casualty Catastrophe and Reserving
Casualty or liability based catastrophes, in general, have become increasingly frequent and severe over the past decade, exposing (re)insurers to new risks for which they may not have made appropriate provision within their reserves. Such catastrophes can take any number of forms, including adverse reserve development or large events that impact multiple insureds across several different lines of business. A good historic example is the liability from exposure to asbestos.
“Emerging risks need to be carefully considered in a company’s reserving process and sufficient capital held to mitigate potential losses,” said Vic Jenkins, Head of Technical Innovation, EMEA. “These potentially systemic risks can result in a chain reaction that can impact several accident years’ reserves simultaneously and even expose a company to insolvency. Most commonly used reserving techniques rely on historical data, but for emerging risks, that information may not yet exist.”
“Rapid scientific advancement will only continue and the (re)insurance industry should be anticipating the risks of new technologies, developing new products in response to those threats and problem solving for how to manage these exposures,” added Ms. Jenkins. “It is that level of innovation that will translate risk into opportunity.”