As Guy Carpenter launches its new Cyber Solutions Specialty Practice, we review recent GC Capital Ideas stories on cyber.
Posts Tagged ‘risk management’
Here we review recent GC Capital Ideas stories that have focused on climate change.
Responding to Climate Change: Part I: it is vital that (re)insurers consider how the changing climate could impact future losses. Global warming potentially poses a serious financial threat to (re)insurers, with implications on catastrophe risk perception, pricing and modeling assumptions.
Responding to Climate Change: Part II: An increasing number of (re)insurers are therefore adopting comprehensive climate change strategies to recognize the potential impact on their businesses. Investing in solutions that help predict the likely effects of global warming on the location, intensity and cost of weather-related catastrophes is critical to acquiring a better understanding of climate change risk.
Climate Change: A Look into the Future: Part I: Global climate models project a best estimate of a further two to four degree (Celsius) increase in the mean temperature of the Earth by the end of this century. Although this may seem insignificant on an intuitive level, the resulting impacts are of significant concern. Sea-level rise is the most significant threat for coastal areas as a result of melting glaciers. Apart from this threat, changing weather patterns will result in drought and inland flood threats for some areas. As a general principle of climate change, changes to the mean of meteorological extreme value distributions can be expected but an increase in tail thickness (or variability) is of greater concern. The day-to-day variability that we see today will likely expand.
Climate Change: A Look into the Future: Part II: Global warming is also impacting drought and wildfire patterns around the world, with notable regional differences. The IPCC says that some regions of the world have experienced more intense and longer droughts (southern Europe and West Africa in particular) while other areas such as central North America and northwestern Australia have seen less frequent, less intense or shorter drought events.
The Reality of Global Warming: The increase in the global mean air temperature, as compared to the 1951-1980 average, is depicted in Figure F-2, and the surge in average oceanic heat content for the 0-700 meter layer is depicted in Figure F-3. The increase in oceanic heat content in particular is notable as it takes a very large amount of energy to heat such a volume of water.
Global Warming: Adaptation Measures: The Intergovernmental Panel on Climate Change (IPCC) publications represent scientific consensus among many of the world’s top scientists (and scientific consensus is difficult to achieve). Their findings are generally consistent with the broader scientific literature.
Global Warming: Losses: Economic losses resulting from natural disasters increased from USD75.5 Billion in the 1960s to USD659.9 Billion in the 1990s. Insured losses have also increased, and “the dominant signal is of significant increase in the values of exposure.” Furthermore, the IPCC states that “failure to adjust for time-variant economic factors yields loss amounts that are not directly comparable and a pronounced upward trend for purely economic reasons.”
The Reality of Global Warming: According to the IPCC Fourth Annual Assessment Report (AR4), the scientific consensus is that global warming is indeed an established scientific fact. The evidence is undeniable.
Global Warming: The Evolving Risk Landscape: Global warming is an established scientific fact, and one that cannot be explained by statistical “noise” or natural variability alone. The single greatest threat under global warming is that of sea-level rise, which is expected to increase coastal flood frequency and severity under tropical cyclone, extratropical cyclone and tsunami events. The growing urban footprint and population density in coastal areas amplifies the financial and societal implications of such events.
Here we review recent GC Capital Ideas stories that have covered issues related to supply chain management.
Emerging Risks: Managing the Unknown: Having examined the three emerging risks of cyber, climate change and space in detail, it is clear they present serious threats to businesses and (re)insurers. Not only will the fallout from these risks result in losses we can currently anticipate and predict (such as increased property damage and liability vulnerability), but they also have the potential to trigger costly secondary impacts such as a breakdown in supply chains, reputational damage, disrupted power supplies and possibly others that are more difficult to foresee.
Supply Chain Risk Management and (Re)insurance Solutions: Technological advances have resulted in business being conducted all over the world in an instantaneous manner, meaning supply chain failures can significantly impact companies’ revenue, credibility and reputation. Companies are therefore now far more exposed to external risks than ever before. This has raised (re)insurers’ concerns over the ability of the market to understand the risks that are being underwritten and the viability of offering business interruption/contingent business interruption cover. Indeed, some (re)insurers have taken the view that risk management strategies at the company level need to be improved before coverage can be offered.
Causes of Supply Chain Disruption: The Business Continuity Institute’s 2012 Supply Chain Resilience Survey estimates that outsource service provider failure represents one of the most significant causes of supply chain disruption, only lagging behind adverse weather and technology. The particular danger represented by the supplier or service provider, especially if it involves an aspect of critical infrastructure, is that the failure is likely to cut across multiple industries and geographies. For example, the disruption caused by a component part of technology used by a power generator does not just shut the utility down - all commercial and residential operations grind to halt.
Cyber Risk and its Impact on Supply Chains: Cyber risks are not isolated and are usually connected to other risks. Many companies that are exposed to cyber risks are, for example, also exposed in turn to risks to their supply chain. Due to technological innovation and advances, many parts of a company’s or industry’s supply chain have become interconnected and automated. Technology is indeed a critical enabler of a supply chain’s operations. Therefore a cyber attack has the potential to put an entire company’s supply chain at risk. Cyber security and supply chain risk management must therefore be considered in conjunction with one another.
Contingent Business Interruption: Life Support for Industry: Contingent business interruption (CBI) is a generic term for extensions to the standard cover that provide for reduction in revenue as a result of damage at locations other than the insured’s own premises, whether it be suppliers or customers. In some cases insurers are providing cover on a “non-damage” basis, which protects against insolvency or political risk among an array of contingencies that might disturb the supply chain.
The rapid growth of new technologies such as nanotechnology also presents significant challenges to risk managers and (re)insurers. Nanotechnology, the science of manipulating matter at the molecular level, is already being used in numerous consumer and industrial products such as paint, fabric, cosmetics, treated wood, electronics and sunscreen. Its use is also expected to grow in areas such as medicine, pharmaceuticals, pollution clean-up and electronics. Despite the widespread use of nanomaterials in many products today, very little is known about the long-term implications on health or the environment.
Having examined the three emerging risks of cyber, climate change and space in detail, it is clear they present serious threats to businesses and (re)insurers. Not only will the fallout from these risks result in losses we can currently anticipate and predict (such as increased property damage and liability vulnerability), but they also have the potential to trigger costly secondary impacts such as a breakdown in supply chains, reputational damage, disrupted power supplies and possibly others that are more difficult to foresee.
Space weather risks are difficult to quantify due to the lack of understanding and clarity about the likely duration and consequences of extreme events. However, it is clear the interconnected global economy that exists today is vulnerable to the risks posed by space weather. Indeed, extreme solar weather events have the potential to create systemic risk by triggering cascading failures across industries and regions.
Risks emanating from space pose a serious and real threat to the (re)insurance sector. Space debris and satellite collisions have the potential to cause losses in the millions or even billions of dollars, while extreme space weather has the potential to cause systemic failures across the globe. Although both risks are difficult to quantify given the uncertainty involved, (re)insurers have a responsibility to promote risk mitigating measures as the potential costs involved are considerable.
As the majority of historical events illustrate, higher geomagnetic latitude countries such as the United States, Canada and Nordic countries are most at risk of suffering the effects of extreme solar storms. (1) However, lower geomagnetic latitude regions such as the Caribbean and more central and southern parts of Europe could also be affected during extreme events. Other factors such as geology, proximity to the coast and location and fragility of power grid infrastructure help determine the risk posed by solar activity.
The severity of space weather varies as the Sun follows a consistent 11-year cycle of changing solar activity. The next cycle peak is expected between 2013 and 2015. Extreme geomagnetic events are nevertheless relatively rare, with return period estimates ranging from between 100 and 200 years to up to 500 years. (1) Less severe events are more frequent and often occur on an annual basis. The cumulative impact of milder disturbances should not be underestimated, however, particularly as our dependency on power increases and power infrastructure in some countries fatigues with age.