Guy Carpenter Report Examines Major Emerging Risks Facing Re/Insurers

September 16, 2015

A report published by Guy Carpenter & Co., released Sept. 2015, identified four key areas of emerging risk for re/insurers: cyber risk, technology risk, casualty catastrophe and reserving, and life, health and longevity risk.

In the report, titled “A Clearer View of Emerging Risks,” the reinsurance broker underscores the importance of “robust analytics and modeling in quantifying new and unknown risks.”

“The emergence of increasingly complex global risks is challenging the way the insurance industry evaluates, analyzes and manages these new exposures,” said Will Garland, U.S. head of Specialties at Guy Carpenter, in a statement that accompanied the release of the report.

“In this year’s report, our goal is to assess the challenges facing the industry as respects modeling and quantifying the most pressing technological risks,” he said. “Establishing a path toward a more robust analytical thought process will provide insurers and reinsurers greater confidence as they anticipate, transfer and manage risk.”

Cyber Risk

The report said cyber risk is becoming a strategic priority in corporate boardrooms and by governments around the world. “As the global economy becomes increasingly dependent on e-commerce and cloud computing, the susceptibility to cyber risk increases exponentially.”

Businesses and re/insurers should be concerned “by risk aggregation, given the possibility of single attacks leading to losses across a large number of firms.”

This emerging risk presents significant opportunities for the industry, but there are also many challenges, the report emphasized.

The opportunities? The cyber insurance market is projected to increase from approximately USD$2 billion in 2015 to USD$5 billion over the next five years, the report said, noting that this will be driven by new purchasers of the product and the purchase of more limits by existing buyers.

The challenges? The report said there is exposure from cyber network security and privacy liability policy portfolios as well as the potential for loss to physical assets, which could be significant for energy and utility infrastructures, financial institutions and power grids.

Another challenge is the fact that the peril’s limited history, lack of data and emerging exposure make it difficult for re/insurers to measure cyber risk and calculate capital needs, the report said.

Modeling the peril is difficult because data breaches “are very difficult to predict and the potential form and target of the next cyber-attack are largely unknown,” the report said.

“[T]he level of historical and scientific data needed to build probabilistic models for natural catastrophes does not yet fully exist for cyber risk,” it continued.

“This fact, coupled with the potential for a single breach to have a wide-spread, cascading impact presents both a significant challenge and opportunity for the industry.”

Technology Risk

In a section titled “New Technologies, New Liability Risks and Emerging Product Exposure,” the report said, the world is entering “a new phase of technological advances that will bring new exposures that were not present in any historical database.”

“As a result, insurers and reinsurers will need to develop models that are based more on estimates and assumptions than on experience. Sorting through fact and fiction becomes a critical part of assessing technological risk when there is little or no historical data available,” according to David Lightfoot, head of GC Analytics – Americas.

The report highlighted two technological risks – nanotechnology and drones – which may have unknown liability exposures.

“While it appears almost certain that the rewards [of nanotechnology] will greatly outweigh the risks, attention must be paid to possible dangers to the well-being and the potential of human latent bodily injury from this new technology.”

The re/insurance industry has a major role in helping “society capture the benefits of this technology by helping to spread the risks,” Guy Carpenter said.

“As it stands today, most global re/insurers do not differentiate or exclude risks from nano-products. As a result, many in the industry acknowledge that insurance policies and reinsurance agreements in place may already be covering these risks,” the report went on to say.

Moving on to drones and driverless vehicles, the report said these technologies can lead “to notably higher productivity and standards of living,” as long as they are regulated properly.

“However, if they are not, and the technologies are carried out on a massive global scale and subject to widespread misuse, the consequences could be catastrophic. This would clearly impact the balance sheets of re/insurance companies and these possibilities need to be considered if these products are to be insured.”

Casualty Catastrophe and Reserving

“Casualty or liability based catastrophes, in general, have become increasingly frequent and severe over the past decade, exposing re/insurers to new risks for which they may not have made appropriate provision within their reserves,” the report noted.

“There are many uncertainties in managing long-tailed, heavily legislated lines of business that can be triggered from emerging risks,” it said.

“Unforeseen inflation and anticipated legislative changes over a 10 to 30 year period present many demands. In order to prepare for emerging risk scenarios, future trends and related uncertainties need to be explicitly identified, contemplated and estimated,” the report continued.

“Emerging risks need to be carefully considered in a company’s reserving process and sufficient capital held to mitigate potential losses,” said Vic Jenkins, head of Technical Innovation, EMEA. “These potentially systemic risks can result in a chain reaction that can impact several accident years’ reserves simultaneously and even expose a company to insolvency. Most commonly used reserving techniques rely on historical data, but for emerging risks, that information may not yet exist.”

Life, Health and Longevity Risk

The report also addressed longevity risk, which represents a “tremendous success for humanity as a whole,” but is a growing concern for insurers and reinsurers, which provide annuities, disability protection, long-term care, critical illness and other lifestyle protection coverages.

“The issue for re/insurers lies in the inability to measure this risk and, in turn, anticipate and quantify its impact.”

Source: Guy Carpenter

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