August 24th, 2016

Emerging Risks: Modeling Considerations Moving Forward: Part II

Posted at 1:00 AM ET

william-garland-sm1Will Garland, Managing Director


Clearly, we are entering a new phase of technological advances that will bring new exposures that were not present in any historical database. For example, two areas where technology risk has rapidly become apparent are nanotechnology and drones. Chemical technology breakthroughs from nanotechnology involved in making stronger and enhanced materials may have unknown liability outcomes many, many years in the future. Drones and other technological advances remove human input into the machine’s operations.

The commercial applications are increasing rapidly and potential for misuse of this technology needs to be considered. With an unknown liability potential, (re)insurers will need to develop models that are based more on estimates and assumptions than on experience.

Implicit in the very idea of emerging risks is the impact on reserving and capital setting. A single product or another high-tech risk can result in a chain reaction that can produce losses over several accident years’ reserves simultaneously and even expose a company to insolvency. If these exposures are unaccounted for and appropriate reserves provisions have not been made, adverse reserve development would be a likely result.

The best historic example is the liability from exposure to asbestos. A.M. Best has stated that asbestos has cumulatively paid out over USD85 billion, and by some accounts after several decades, is just entering its third wave of emergence (1).

A casualty catastrophe model must contemplate the complexities of damage and liability that will not be contained to one geography or one industry. GC ForCasSM has been developed as a platform with model components to cover U.S. commercial lines losses resulting from casualty catastrophes. It is an experience-based model that groups historic losses into three main perils, or modules: Sudden Disasters, Financial Institutions and Cyber. An additional module covering Products is in development. GC ForCas leverages a variety of industry sources to model loss scenarios and line of business dependencies. Through the modeling process, industry portfolio concentrations will be uncovered by mapping exposures and analyzing the interrelationships among those industries.

The modeling of emerging and casualty catastrophe risks remains challenging and the models continue to vary in their experience and exposure based approaches, level of development and industry acceptance. 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.

Link to Part I>>

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1. A.M. Best: Asbestos Losses Fueled by Rising Number of Lung Cancer Cases, October 2013

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