August 23rd, 2016

Emerging Risks: Modeling Considerations Moving Forward: Part I

Posted at 1:00 AM ET

william-garland-smWill Garland, Managing Director


Technological progress is accelerating at a rapid pace and with it are the risks and opportunities that accompany those changes in many different segments of our economy:

  • *Exposures to cyber-attacks are increasing due to proliferation of technology, cloud computing and electronic commerce.
  • *Medicinal advances, pharmaceutical breakthroughs and a continued focus on healthy life styles are prolonging our lives, increasing exposure for annuity or pension plan providers.
  • *The cost of medical services continues to increase, putting pressure on health (re)insurers to price their products correctly as well as adequately quantifying potential claims volatility over multiple years.
  • *New chemicals are being used every day in new products - and these products could lead to diseases that are not yet quantifiable, creating unknown implications for any number of product lines.
  • *New mechanical products and processes, such as drones, 3-D printing and self-driving automobiles are transforming the liability potential for (re)insurers in many different industries.

The emergence of these increasingly complex global risks is challenging the way the (re)insurance industry evaluates, analyzes and manages these new exposures. The industry needs to build credible models of potentially accumulating incidents so that risk appetites can be aligned with the exposures being faced. However, the problem with emerging risks is the lack of historical data with which to build these models since many of these risks continue to evolve and change.

Consider the evolving nature of cyber risk. Cyber-attacks are now considered to be above average in terms of likelihood and impact, according to the Marsh 2015 World Economic Forum Global Risks Report (1). At the same time, data breaches continue to evolve, with the potential form(s) and target(s) of the next cyber-attack being unknown. As a result, there is little information to assess the severity and frequency of possible cyber catastrophes, particularly if multiple insureds were to be implicated in a single breach.

Meanwhile, longevity risk is beginning to raise concerns. The United Nations expects the aggregate expenses of the elderly will double over the period between the years 2010 and 2050. Beyond the impact on governments, this directly challenges pension fund managers and annuity writers who are assuming whole-of-life financial liabilities. Faster than expected improvements in mortality can result from improvement in underlying population health or dramatic changes in the underlying prognoses for specific pockets of individuals. The issue for (re)insurers regarding longevity risk lies in the inability to measure it because changes in longevity are difficult to forecast.

Link to Part II>>

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1. Global Risks 2015 (10th Ed.), World Economic Forum, Geneva, 2015

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