October 14th, 2015

A Clearer View of Emerging Risks: Executive Summary, Part II

Posted at 1:00 AM ET

Crystalizing risks, as defined in Guy Carpenter’s 2014’s emerging risk report, are highly interrelated with the technology risks discussed in this year’s report. When we refer to crystalizing risk, the term refers to the timescale over which underwriters realize that the technology risk is manifesting itself — and how this view changes and intensifies until ultimate understanding of quantum is reached and liabilities are discharged. The risks associated with new technologies, implemented rapidly on such a global scale, by their nature operate to a large extent somewhat outside the bounds of our current knowledge. A viable response is therefore to establish business practices that aim to detect “weak signals” and monitor them in case they become “clear tendencies with a high potential for danger” (1). Most (re)insurers have groups of experts assigned to the task of building early warning systems that attempt to identify such lead indicators. Once such indicators are identified it is important that their financial and reserving implications are recognized promptly and accounted for correctly. In this respect a key task of regulators is to enforce prudent risk management and reserving methodologies that preserve a sustainable and level playing-field for responsible competition.

The modeling of emerging and casualty catastrophe risks remains challenging and the models continue to vary in their approach, level of development and industry acceptance as described in the following sections. However, there is one consistent theme across all of them: to bring a robust analytical thought process to better understand and to the extent practical, quantify the risk. This will create a marketplace where these risks can be transferred to third parties or retained with greater confidence by (re)insurers. This occurs against a backdrop of increased regulatory oversight with rating agencies asking these same parties to quantify these unknown risks with a formalized risk evaluation process. Underwriters addressing crystalizing technology risks should provide a competitive advantage to those ahead of the curve in their identification, modeling and mitigation. In addition, regulators also have the responsibility to ensure that improvements in the data and modeling of emerging risks are not underestimated or overlooked, resulting in long term industry instability.

All of these dynamics are combining to force the (re)insurance industry to bring these standardized processes to the casualty marketplace.

In our report, we examine four key areas where risks continue to emerge or, perhaps more importantly, contain elements where the risks are unknown at this time:

Link to Part I>>

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NOTE:

1. Dr. Andreas Tacke, Hannover Re: Hannover Re on Emerging Risks, February 2013.

 

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