One purpose of enterprise risk management (ERM) is to help (re)insurers determine how much capital is needed to support the risks they assume (subject to risk tolerance). Instead of segmenting portfolios and handling each peril on a standalone basis, a robust ERM methodology would use a holistic approach to risk and capital management where threats are identified and monitored, all action plans are developed and risks are measured.
While one risk, on its own, may seem tolerable, it could lead to disproportionate accumulation of linked risks. A portfolio may appear to be diversified, but one event (known and/or emerging) could expose a costly underlying reality. This is exactly the problem that casualty writers experience in regard to casualty catastrophes and emerging risks. Insureds from several industries or countries could be affected by the same event, diluting the benefits of risk and geographic diversification. Separate risks do not reflect the integrated reality, masking a greater risk that typically goes unhedged.
Using an ERM approach, casualty (re)insurers can ascertain the impacts of new and emerging risks on their entire businesses. Within the casualty catastrophe context, this includes the risks resulting from the proliferation of risk along a supply chain or through other business relationships, such as joint ventures and partnerships. The implications of covering a new insured may be more profound than they appear at first.