Lloyd’s mandate that all Managing Agents have processes in place to identify, assess and manage emerging risks; and they recently clarified that this should involve consideration of at least three risks a year. As with all regulatory changes, insurers can look at this as a burdensome, box-ticking exercise, or, see it as an opportunity to add value to their business. For some insurers, emerging risks may have been overlooked. Others may have blindly jumped into a class without considering the potential downsides. Lloyd’s is pushing insurers to be more proactive in identifying potential emerging risks and take a more methodical approach to analysing the pros and cons.
When considering emerging risks, the key is diversity: of opinion, of experience and of background. Ideally all areas of the business would have a chance to be involved: actuaries, risk modellers, operations, marketing, finance and more. Within underwriting as well, a broad range of classes should be considered. While a property underwriter may not see any potential impact from a risk, for a marine or political risk underwriter the potential for a large or unexpected claim from the same risk could be significant. Titles aside, more effort should also be made to include less experienced views. While senior personnel bring an essential perspective to the conversation, at Asta we have found that some of our most innovative ideas have come from our newest team members. They bring a fresh perspective and are often aware of new technologies, developments or trends that weren’t on our radar.
Establishing an emerging risks committee is a major first step in acknowledging the importance of the task. The next step is to identify which risks to focus on. Emerging risks are exciting and new, and it’s easy to get lost in interesting topics. A calm head is required to ensure efforts are focused on identifying risks that represent the most relevant challenge to the business and its customers. Some of the emerging risks Asta has looked at recently have included drones, cryptocurrencies, GDPR, antimicrobial resistance, driverless cars and global regulatory changes.
It is then important to look at each risk from multiple dimensions. Insurers should briefly analyse whether the emerging risk changes the frequency or severity of an existing risk, represents a new risk or has the potential for bringing a new risk accumulation. Emerging risks can cost insurers from both an operational perspective as well as an underwriting one. Operational impacts shouldn’t be ignored as they could hinder employees from getting to work, could increase internal costs, or challenge the way that we do business. From an underwriting perspective, they can result in more claims, change the rating environment, affect compliance, and more. Identifying potential underwriting costs tends to be more difficult than looking at the risk from an operational perspective, but it’s essential to strike a balance between the two. Having an emerging risks committee comprised of professionals who bring insight from both underwriting and operations is one way to achieve this.
For exposure management professionals, our worst nightmare is unexpected risk aggregation or accumulation. Emerging risks are a breeding ground for both. ‘Silent cyber’ has been a frequent topic of discussion in the market, and in July the PRA delivered an updated ‘supervisory statement’ warning insurers to assess the potential for cyber risk accumulation. For example, a major cyber hack could result in claims across multiple lines of business. Physical, digital, and reputational damage could occur from classes as diverse as property, marine, energy, event cancellation and more. Insurers who did not specifically exclude cyber, or who did not properly assess what the potential cost of including cyber in a policy might be, could be on the hook for huge costs.
Another emerging risk that Asta has considered is the concept of ‘shared ownership’ and how this could result in future risk aggregation. Bike-sharing schemes, which started as a London fad, have now spread across the country. The number of towns and cities with schemes has more than doubled in the past two years. Rather than purchasing their own transport, millennials are showing a preference for the simplicity and ease of shared ownership. If this concept is applied to automobiles, insurers will no longer be writing multiple motor policies for cars spread throughout the city in different driveways. They would instead be liable for a huge treaty of motor policies, with thousands upon thousands of cars located in the same structure. Were a fire or flood to affect that structure, insurers could be looking at claims similar to that of the Tianjin explosion. In this kind of instance, an emerging risks committee filled with a group of diverse professionals will enable exposure management professionals to spot the potential for risk aggregation and accumulation more easily.
However, while emerging risks present challenges, there are also opportunities which can be discovered by ensuring that your committee is filled with individuals capable of looking at problems from different angles. When many first looked at drones, they were concerned about liability, accidents and potential claims. However, drones also present great opportunities for our market. They can be essential in risk assessment after a natural disaster. While it may be unsafe to send a risk adjuster to the location, flying a drone over the area can provide the claims team with valuable information. Additionally, we are seeing some insurers use drones to photograph various sites, such as stadiums, when underwriting a policy. Not having to fly an underwriter out to various locations will enable insurers to gather data faster and more cost-effectively.
This is an exciting time for our market. We are seeing more advancements in areas such as technology than ever before. Emerging risks can be fun, appealing and provide plenty of opportunities. However, the insurers who navigate this most efficiently will be those who set up a framework for considering the pros and cons, and obtain input from diverse and knowledgeable people within their organisation as a standard part of their day to day business.
This article has been re-produced with the kind permission of Informa and was first published in Insurance Day on 5th March 2018
Alan Godfrey started his career at Amlin in 2004 after studying mathematics at the University of Cambridge. In 2006 he set up and led the company’s catastrophe modelling team, which by the time he left had grown to 40 full-time employees covering Reinsurance, Property and Marine classes, based across multiple international locations.
Through this role Alan gained extensive knowledge of the uses, strengths and weaknesses of the main catastrophe models, as well as the developing best practice in Exposure Management. With particular focus on the operational efficiency and effective use of capital, he provided support to Amlin in achieving one of the first Solvency II approved Internal Models. Alan joined Asta in 2015 as Head of Exposure Management.