35 emerging risks to watch

35 emerging risks to watch

The media is apt to hype risks to the point where it seems apocalypse is imminent or the world is boiling over into anarchy. What might be a more accurate observation is that the risk landscape shifts faster these days. For an industry that exists because of risk, with the job of transferring and mitigating it, re/insurance practitioners need to keep abreast of changing risks, lest they go the way of the dinosaurs. Reactions has looked at 35 emerging risks that the re/insurance industry should be grappling with – whether or not they come true – ranging from millennials and the Arctic, to Jihadi terrorism and China’s anti-corruption measures.

emerging risks

Arctic risks

Ståle Hansen, president and CEO, Skuld

The Arctic represents a new frontier, creating opportunities and challenges for the shipping and offshore industries. As exploration in this unaccommodating region gathers pace, the risks for insurers fall into four main categories:

Personnel: the lack of Arctic infrastructure will impede remedies to the injury or illness of personnel. Distances from operational areas to the mainland are likely to be greater, and the climate more unpredictable.

Pollution: the cost of a calamity such as an oil spill is of great concern. BP estimated that their share of Deepwater Horizon liabilities totalled roughly $42bn. It’s easy to envisage similar incidents in the Arctic would cost more. Property/wreck removal: the cost of removing the Costa Concordia wreck spiralled despite its loss in relatively benign waters. Arctic drilling will be remote and conducted in extremely harsh conditions, so the cost of wreck removal is likely to be high.

Pricing: when providing cover in relation to these new, complicated, and unknown risks, we need to ensure pricing is set appropriately. The challenge is the scarcity of data.

Ocean mapping is an important feature of underwriting any marine risk, but appropriate charts for the Arctic are sorely lacking. Complicating the problem, floating ice cannot be mapped, and one need think only of the Titanic to understand the incredible peril this presents.

Supply chain risk

Roger Bickmore, group strategic development director, Tokio Marine Kiln

The modern-day business is able to procure goods and services on a global basis thanks to ever increasing levels of international development and improvements in connectivity across the globe. However, as the geographic horizons of supply chains expand, the risks they face increase exponentially in both size and reach. Supply chains are now exposed in ways industry would have struggled to imagine in the past. An event that would have, 50 years ago, only affected a limited range of businesses, may now lead to consequences in diverse and unexpected locations.

For example, an international business who had a factory located near the Port of Tianjin in China, found that they could no longer ship their goods from the port after the Tianjin explosion created a shutdown and subsequent bottleneck in the supply chain. The cost and time this factory required to ship its products abroad increased abruptly and unexpectedly, inflating the cost of the entire supply chain process. In this case, the client was able to claim for the loss in profit caused by the additional expense of getting their goods from factory to port.

Trade disruption insurance (TDI) has developed to protect businesses when their supply chains suffer from these kinds of disruptions. In TDI cases the goods are usually not damaged from the interruption, however, the additional cost or time required to manage the supply chain disruption eats in to subsequent profits. This is what insurance will indemnify against.

Stranded assets

Tim Watson, political and credit risk underwriter, ANV Syndicates

Much has been written of late about the impact that low oil and other commodity prices have had on political and credit risk insurers. From the devastating effect on exploration and production (E&P) companies and miners (who provide substantial premium income in this class) to the increase in political unrest in exporting countries most dependent on these commodities.

However one potentially more significant emerging risk is the effect of a global switch from fossil fuels to renewable energy. The theory goes that as governments try to curb global warming fossil fuel assets could be left stranded and obsolete, plunging in value as a result of emission restrictions that leave coal, oil and gas effectively unburnable. The impact this might have on some companies is huge - some analysts have predicted as much as $28trn in lost revenues over the next two decades. The likely impact on political and credit risk insurers is less quantifiable, but the insureds and counterparties potentially affected are familiar names in the market.

There are also wider ramifications. It is worth noting that 19% of FTSE 100 companies are engaged in extractive industries or natural resources, and insurers are among the largest investors in stock markets. Of course much will depend on the availability and viability of alternative energy sources in the years ahead. The theory also remains contentious, with some industry executives objecting to Mark Carney’s recent warning in a speech to Lloyd’s. Nonetheless, it is an issue that deserves increased attention.

Electrical blackouts

Paul Cullum, product development manager, HSB Engineering Insurance

Electrical blackouts are a growing problem. They are becoming more frequent and more severe in both developed and developing economies. Extended power outages can cause significant disruptions to our daily lives and pose a major threat to our economic health and public safety. It is estimated that total economic loss to the US from power outages is over $100bn a year.

This is largely down to a perfect storm of increasingly volatile weather, ageing, underinvested infrastructure, and reducing capacity margins – the safety buffer between peak demand and available supply. Ironically, the introduction of renewable technologies such as wind and solar as a response to climate change has contributed to this situation. Their inherent volatility is not always compatible with grids built with conventional power stations in mind and as fossil fuel and nuclear plants are decommissioned, margins for error reduce. And whilst connecting national grids together brings many benefits, it also increases the likelihood of widespread blackouts resulting from local grid failures being exported in a domino effect.

Increasingly, sophisticated blackout modelling has an important role to play. This combines meteorological and power distribution models to help underwriters and customers better understand a business’s vulnerability to power blackouts. In addition, more loss control emphasis will be placed on mitigating business interruption losses resulting from utility failures. The response to this threat will also present new risks and insurance opportunities as businesses and organisations move to more decentralised energy solutions like micro-grids and energy storage.

Talent

Stewart Taylor, head of business and market development, HFG

The topic of talent is broad so I just want to cover three of the areas I believe are a risk to global insurance businesses.

Engagement: Engagement with your top talent is essential. Competition for their skills is increasing so you need to think about development, progression, internal mobility and diverse secondments to keep people interested. Also, don’t forget to consider the need for succession planning to safeguard you if they leave.

Diversity: As new economies and differing demographics engage in the purchase of insurance - how, where and why they purchase it is changing, but legacy thinking is holding back some business. A diverse group of people in terms of gender, age, culture and social background will equip businesses for the new insurance business models, distribution and technology environments.

Attraction: The problems are different depending where in the world you are. Finding talent in Latin America will be different from the usual fight for talent in London, but unfortunately, young graduates and millennial employees who are needed for insurance to thrive in the future, harbour an opinion of insurance as outdated and dull. We need to promote risk management and insurance as a dynamic business that underpins the development of economies and comes to the rescue in the most demanding circumstances.

It offers a wealth of opportunities that are varied, challenging and offer stimulating and rewarding careers.

China’s anti-corruption measures

Over the last year, anti-corruption measures have contributed to a decrease in political risk in China, according to Aon Risk Solutions.

Nonetheless, recent implementation issues and policy uncertainty have clouded the overall outlook.

“The rebalancing and slowing of the world’s second largest economy is likely to present challenges for China’s neighbours and key trading partners, who could experience higher political and economic risks as the pace and composition of growth changes. Recently there have been signs of an improvement in the communication of policy, but risks remain, particularly around the building up of further leverage in the Chinese banking system,” said Aon in the release of its political risk map in early March.

The anti-corruption measures have also clashed with China’s economic slowdown and pullback of its overseas investment, combined with a flight of capital back towards developed markets.

Together these have all contributed to reduced project financing, with knock-on effects for re/insurance business.

The outlook for China and other emerging market economies will be based on whether politicians are able to implement pledged reforms to attract more investment at a time when weaker global trade and economic growth is increasing competition for capital, Aon argued.

“So far, many of the structural reform plans have disappointed, weakening growth and reducing resiliency to shocks.

“Two in the spotlight this year are India and Indonesia, who have stronger balance sheets than many peers, but who have been struggling to implement policies. Doing so would help alleviate political risks,” said the broker.

Driverless heavy goods vehicles

Caroline Coates, executive partner at DWF

The UK’s spring budget confirmed the Government’s determination that the UK should be at the forefront of the development of connected and autonomous vehicles (CAV) with the following announcements:

- Conduct trials of driverless cars on the strategic road network by 2017

- Consult this summer on sweeping away regulatory barriers within this Parliament to enable autonomous vehicles on England’s major roads

- Establish a £15m ‘connected corridor’ from London to Dover to enable vehicles to communicate wirelessly with infrastructure and potentially other vehicles

- Carry out trials of truck platooning on the strategic road network (Grouping vehicles into platoons is a method of increasing the capacity of roads. Using an automated highway system is a proposed method for doing this)

- Start trials of comparative fuel price signs on the M5 between Bristol and Exeter by spring 2016 to drive fuel price competition and help motorists save money

This announcement comes hard on the heels of the Netherlands’ European Truck Challenge, encouraging a trial to demonstrate the health and economic benefits of platooning.

The UK truck driver is used to being monitored with increasingly sophisticated data collection.  CAV brings another level where information is constantly streamed to and from the vehicle, not only for the purposes of keeping the truck on the road but also for commercial purposes, supporting real just in time deliveries.

But what are the risks attaching?  Going back to the platoon example, how will car users cope with manoeuvring around these; what warnings will they need to display; if a car is overtaking in the fast lane and needs to exit at a junction, are there safety risks? 


Brazil Olympics amid economic turbulence

As Rio de Janeiro prepares to host the 2016 Summer Olympic Games, Brazil’s longest recession since the 1930s remains a significant strain on the country’s social resilience, Aon Risk Solutions has warned. “Although many of the drivers of the crisis are political, including the gridlock between political parties which has left fiscal and economic policies in unsustainable limbo, the increase in unemployment and falling wages is challenging both households and companies,” said the broker when it released its annual political risk map in March.

For 2016, non-performing assets in state-banks will continue to increase debt and debt service will become increasingly costly while ongoing political deadlock will erode the country’s ability to cope with a range of economic, social and health shocks, including the Zika virus, warned the re/insurance broker.

“The Brazilian economy is experiencing its most prolonged downturn in recent history as it prepares for Rio 2016,” said Paul Domjan, managing director of Roubini Global Economics. “Over the long run, the business environment has been weakened by poor economic performance and this could become an even bigger issue for firms operating in Brazil. Brazil’s buffers are being eroded, and even the potential upside from rooting out corruption is bringing significant collateral damage as cases work their way through the legal system,” he added.

Board membership

Clare Barley, chief risk officer, Asta Managing Agency

One risk starting to emerge is the potential strain on managing agency boards, driven by the ever increasing regulatory burden.

Regulatory changes in recent years, including those under Solvency II and the new Senior Insurance Mangers Regime (SIMR), have acted to increase the responsibilities and accountability of boards. Whilst the impetus behind the changes is commendable, in practice this is likely to mean that the length of meeting papers and board meetings must continue to grow to meet the requirements. As a result board members will carry a heavier burden, coupled with heightened personal accountability and liability.

For non-executive directors (NEDs), this may mean a board position poses more risk and a greater workload than is willingly accepted and it is possible that the ultimate result of the regulatory requirements could actually reduce the quality of future insurance boards. Finding effective, truly independent NEDs is already a challenge and increasing the burden of the role itself may dissuade qualified senior leaders. These changes may also lead to additional recruitment costs and remuneration as managing agents seek the best NEDs to fill a role with a greater risk profile. Now that the regulations have been implemented we need to invest in the promotion of training and mentoring the next generation of leaders in the required skills before they reach the board.

This includes ensuring they are confident in taking up the vital role of an NED with a clear understanding of the commitment required.

Cyber coverage for maritime physical losses

Charles Cowan, counsel, Drinker Biddle and Reath

Cyber-related losses have been relatively rare in maritime commerce to date, but numerous studies have identified significant vulnerabilities in the industry to cyber-attack. From propulsion to global positioning systems (GPS), large commercial vessels have literally thousands of “hot points” that may be accessible to sophisticated (and, in some respects, less-than-sophisticated) cyber criminals. As shipping companies contemplate the future uses for “autonomous” ships, the risk of cybercrime increases. And those intent upon engaging in such attacks can inflict a variety of harms, from data losses to denial of service and, conceivably, property loss.

In recent years, several concerns have been raised about the response of the maritime industry to the risk of cybercrime and the ability to address that risk through insurance. Traditional hull policies, for example, exclude coverage for cyber losses and bespoke products designed to cover such risks for the maritime industry have only recently begun to emerge. As in the case of non-maritime cyber policies, however, those purchasing maritime cyber insurance would be well advised to determine the extent to which it covers losses due to physical damage. Many “standalone” cyber policies, for example, explicitly exclude coverage for property damage and yet maritime businesses may be particularly vulnerable to this type of loss. Consider a scenario in which cyber criminals hack into a vessel’s GPS and either re-direct the vessel or input false coordinates. Such an attack could conceivably lead a vessel to founder, causing significant hull damage as well as damage to cargo and, more importantly, crew.

Brexit

A UK exit from the European Union would be a “disaster” for the continent and would make London’s re/insurance industry less attractive, Scor’s chief executive and chairman Denis Kessler has warned. The French reinsurer’s leader said the immediate impact of the UK leaving the EU would be more minimal, but it would be in the medium to long term that London’s insurance and reinsurance industry would start to suffer from a so-called Brexit.

BlackRock backed this view when it announced the UK would generate less economic growth and suffer a drop in investment if voters decide to leave the EU. In a research note to clients, vice chairman Philipp Hildebrand said Britain’s exit from the 28-member bloc “offers a lot of risk with little obvious reward”. The firm, which manages $4.6trn globally, added that volatility in UK and European assets will increase before the vote, which Prime Minister David Cameron has called for June 23.

“An actual Brexit would hit global risk assets, we believe, whereas a vote to stay would reassure markets,” warned the asset manager. Planning remains difficult for a Brexit scenario. Last week UK-based Jupiter Asset Management said it remains “difficult” to put forward an investment strategy purely centred on a Brexit. “It goes without saying that investors need to be vigilant and mindful of potential short-term volatility which might arise in the lead up to the referendum and its aftermath, but they should not be paralysed by it,” said Alastair Irvine, product specialist for Jupiter’s funds team.

Data privacy

Mark Williamson, partner, Clyde & Co

Almost every insurer is talking about data, particularly big data. They understand that the data they hold is a very valuable asset and, if used correctly, can deliver powerful insights into business generation, underwriting and claims handling. However, while the benefits are understood, the costs of not complying with an evolving regulatory landscape are less so.

In Europe, the arrival of the EU General Data Protection Regulation is set to revolutionise data protection across the region in the next couple of years. And the costs of non-compliance with this could be fines of up to 4% of global group turnover. While this presents an opportunity to insure against those risks, insurers need to make sure they get their own houses in order.

There are many things to consider but the first step has to be an audit of all the data that the business holds. Without knowing what, where and how much, no insurer will be able to demonstrate compliance to the standards needed. Next, insurers will have to look at their IT systems in terms of what data is being collected and why.

They will also need to review their product design process to ensure that it incorporates steps around data collection and privacy.

There are also currently limited rules around the relationships insurers have with their third party data processors – of which most insurers have a complex network - but that is going to change completely. This will require the review and re-write of every commercial contract that involves this type of third party.

M&A transactions

Angus Marshall, UK M&A manager, AIG

Merger and acquisition (M&A) transactions inherently contain risk and as more and more businesses look for growth through acquisitions, the need to mitigate risk arising from breaches of deal terms is increasing.

According to a recent global study of claims data for M&A policies between 2011 and 2014 nearly 14% of M&A policies written globally by AIG resulted in a claim.

The study found that transactions with deal values of greater than $1bn had the highest claims with 19% of policies covering this deal size seeing a claim.

This risk is growing globally. The study found clients in the Asia Pacific region were the most likely to file claims. Some 18% of policyholders in that region reported a claim during the study period. Europe, the Middle East and Africa had the lowest rate of claims reported with 11% of policyholders submitting a claim, but they tended to be more severe, accounting for the majority of the largest claims paid out by AIG during that time period.

What is more, a deal can come back to haunt businesses quite a long time after closing. While 74% of claims were filed by policyholders within 18 months of the close of transaction, a significant 26% were filed after the 18-month mark.

Recently, warranty and indemnity (W&I) insurance has become a widely accepted tool used by M&A dealmakers for strategic objectives including reducing escrow or facilitating the giving of warranties by parties historically reluctant to do so (i.e. private equity funds).

The evolving threat of Jihadi terrorism

Ed Butler, head of risk analysis, Pool Re

Terrorism is not a new phenomenon. It has thrust considerable challenges upon the UK which, over time, the government, security services, insurers, and industry have answered. However, the methodology of today’s terrorists differs markedly from the threats presented by the IRA, which prompted the establishment of Pool Re and the threats around the world which led to the creation of terrorism reinsurance pools in other countries. The terrorist acts which dominated headlines throughout 2015 demonstrate the intensity and persistency of these new threats. We need to be even more dynamic to maintain our resilience.

Daesh and Al Qaeda now employ a wide spectrum of methods to deliver violence including the use of marauding gun groups and have access to a more dangerous arsenal. Their focus is also different: their principal aim is to cause mass casualties, not just damage. The frequency and diversity in attack vectors represents a new stage in international terrorism; one which requires a changed approach by the insurance industry.

The world’s pools were created in response to a different threat, but they can evolve by broadening their propositions. In doing so, they will be better positioned to protect their people and interests. Precedent for such change was set in 2002, when Pool Re’s cover was extended to an “all risks” basis, enabling members to offer cover which includes damage from chemical, biological, “dirty” radiological and nuclear attacks. Greater collaboration between governments, security services, the insurance industry and terrorism experts is essential if we are to evolve to negate the threat.

Millennials

Clare Barley, chief risk officer, Asta Managing Agency

Much has been written recently about the impact of the millennials (those born between 1980 and 2000) and what we can do to attract and retain this generation. Having grown up in a period of rapid technological change and economic disruption, they are set to reshape the workplace. But for an industry as traditional as insurance, how can it adapt in order to attract this generation?

In 2015 The Hartford conducted its ‘Millennial Leadership Survey’ which found that only 4% of millennials see insurance as an appealing industry. This is worryingly low and we risk creating a talent gap.

Technology could offer many opportunities for a flexible approach to work, that in recent research ‘Why millennials matter’ by PwC concluded was top of their priority list. However whilst flexible working may be relatively easy to deliver, the rapid career progression that was also a top requirement for millennials will need more investment in time and thinking from the industry.

With larger and regulated entities the bedrock of the financial security insurance offers, we will need to adapt our management style and create corporate cultures to allow millennials to take responsibility, and the risks that entails. In recent years the industry has started to take steps to mitigate this risk, from conducting surveys to analyse skills shortages to setting up committees and groups for millennials. With PwC’s research noting that by 2020 millennials will form 50% of the global workforce, attracting the most talented people of this generation is critical to our industry’s future.

Low oil prices

Matthew Shires, head of political risk, Aon Risk Solutions

Topping the list of political risks facing emerging market investors in 2016 is the impact of oil prices in already fragile oil-dependent countries such as Iraq, Libya, Russia and Venezuela. The 2016 Aon Political Risk Map indicates that countries with more resilient institutions and greater foreign currency reserves will be better positioned to minimise sovereign non-payment and exchange transfer risks, including members of the Gulf Cooperation Council (GCC) as well as Colombia, Malaysia and Kazakhstan. Still, increased security risks in neighbouring countries such as Iraq, Algeria, Nigeria, Libya and Syria are likely to hinder improving risk outlooks for countries that might stand to benefit from cheaper oil, like Egypt, Tunisia and Morocco.

“Oil-producing nations must find substitutes for lost revenues which will put pressure on their corporate sectors at a minimum through tax regime adjustments and at the extreme through IPOs of state-owned enterprises,” said Matthew Shires, head of political risk for Aon Risk Solutions. “With no sign of oil prices returning to previous levels, turbulence in many oil producing states is likely to continue, and could worsen.”

Weaker oil prices are exacerbating exchange transfer risks, putting pressure on corporations and individuals seeking foreign currency and discouraging investors. Meanwhile weaker revenues are increasing sovereign non-payment risk. While only a few countries have sizeable foreign currency debt burdens (Venezuela), government budget gaps are widening, putting pressure on banks, which in turn are perpetuating a credit crunch in the GCC countries, CIS countries and African oil producers. In some of the more vulnerable countries, government arrears are growing, providing further strain on the private sector.

Faster decision making

Dimitri Achermann, data architect, Peak Re

Our constant desire to achieve faster ways of communication and the need to improve data exchange have on the one hand given us many new and additional sources of information for comprehensive decision making, but on the other hand have also forced us to take greater effort to judge and react to it.

In order to stay on top of the game and keep up with the information flow, many judgements and conclusions have to be made within a short and shrinking period of time.

With the technology advancement in recent decades, we see trends in relying on computers to “analyse” and “make decisions” for us.

The 2010 Flash Crash in the US saw billions of dollars crushed in the stock markets within only 30 minutes thanks to the very efficient help of computers taking fast decisions.

At the same time, we are also experiencing more and more human errors due to the urgency of making quick decisions with the overwhelming amount of information available, from forwarding an email to a wrong recipient to making a wrong move on business deals, and directors’ and officers’ liability, errors and omissions and merger and acquisition insurance are likely to have to tackle part of the risks associated.

There is no doubt that the world has become much speedier in decision making, but we shall never underestimate the various risks associated with the consequences.

It may be difficult to evaluate and price for some of the risks, but this is also where product innovation lies.

Nanotechnology

Jeremy Brazil, director of underwriting, Markel International

Nanotechnology is all about using materials at a molecular scale. It has the potential to be applied to a wide range of scientific and industrial areas.

All new technologies create new risks. At a personal health level, workers and consumers of nano-materials or products may be affected, with workers who are exposed to free form nano-particles at greater risk. There may also be exposures when nano products reach the end of their life, are disposed of or recycled.

There may be environmental risk exposures with the creation of waste material during production and at the end of a product’s life.

Underwriters may not be aware that nano-materials are being used in a manufacturing process unless they enquire and because, thus far, loss activity related to nanotechnology has been small, underwriters may have a false sense of security.

But there is evidence of nanotechnology impacts. For example, a 2014 report in the American Journal of Industrial Medicine cited the first reported case of possible nanotechnology exposure causing illness in the US, when a chemist developed various symptoms after starting to work with a powder containing nano-nickel particles used to make ink fluid.

So far, the FDA has not come to a conclusion if nanotechnology is safe or harmful. In the UK it is regulated under several different regimes, none of which comprehensively encompass its reach. Over time the regulatory environment may become more coherent and that potential impacts will be better understood, both of which may have impacts on insurers’ exposures.

Pandemic: business interruption

Tom Hoad, head of innovation, Tokio Marine Kiln

When a pandemic strikes the greatest concern is for the human impact this may have. Recent incidents such as Ebola have had a devastating impact, especially across developing countries, with a significant loss of life and a human burden placed upon nations for years to come.

The economic impact of pandemics is also well known. A World Bank report in January highlighted the detrimental effect Ebola has had on the economies of Guinea, Liberia and Sierra Leone, whilst other pandemics such as Sars shut down whole cities in Asia, with millions afraid to venture outside. While international governments and populations have demonstrated willingness to rally to fund front line medical care, development of vaccines and other emergency services, it is clear that further financial support of affected regions is needed.

But what impact do pandemics have on individual businesses and what can they do about it? As employees, suppliers and customers stay away from work and economic activity grinds to a halt, the loss of profit a business can suffer is significant.

This is where insurers can help. Pandemic BI insurance indemnifies a company for interruption that can occur from a pandemic, regardless of what part of the business chain this interruption affects. An insurance policy will pay for the loss of profit during the period of a pandemic when compared to that of a normal period of business activity. This is currently an underdeveloped area of insurance and will require collaboration between the international insurance markets, as the frequency of pandemic outbreaks continues on an upward trend.

Peer-to-peer insurance

Enrico Bertagna, senior vice president, Allied World

The concept behind peer-to-peer (P2P) insurance is very simple. It’s taking insurance back to its two basic principles: mutuality and statistics.

Essentially, it is a new twist on the established mutual structure. Members of a network pay a portion of their premium into a mutual pool and the balance of the premium to an insurer. The mutual pool is used to fund claims, with the insurer providing administration services and paying claims when the pool is exhausted.

The key difference between P2P and the traditional mutual structure is the use of social media technology to group people in a fund. This is a very powerful way of profiling the members in terms of their behaviour and in preventing fraud. People are less likely to make fraudulent claims as they risk getting kicked out of the network and being subject to disapproval from other members.

Although P2P is in its early stages, it has significant potential to grow as more people realise that they can make more efficient use of their money by pooling it into a mutual fund. It is most likely to appeal to the younger generation who are not as accustomed to the traditional ways of transacting insurance, are more open minded and creative and, crucially, more comfortable with social media.

While most P2P insurance models are currently mainly personal lines, there is scope for a move into commercial lines as awareness grows that this could be a more efficient way of managing basic insurance needs.

Renewable energy

David Coram, engineering and technical risks manager, international property facultative and treaty, Aspen Re

Power utilities has been identified as the sector which has the biggest potential for meeting emissions reduction targets and should almost totally eliminate harmful carbon dioxide emissions by 2050. Electricity will increasingly come from renewable sources, such as wind, solar, water and biomass, or other low-emission sources, such as nuclear power plants or gas fired power stations. But there are roadblocks in making the transition to more carbon-friendly sources of energy, and we cannot currently rely solely on renewables which are dependent on the forces of nature. The challenges include grid capability and storage. Further development of renewable energy is dependent on viable solutions.

Cost is one consideration and space is another. Storage facilities, underground trains – set in motion by surplus electricity which can then be reconverted later – and flywheels all need space, as do solar farms and wind farms. As renewable energy projects evolve, underwriters will be required to be equally innovative in their approach. Typically, a turbine is considered to have a proven record within the power insurance industry if it has operated for 8,000 hours. But when mixed technologies with proven and unproven parts are employed, the situation is far from clear.

Risk still needs to be appropriately underwritten with rates set to reflect these additional exposures.

Wordings need to be well researched to ensure that the cover is appropriate to the client’s needs but acceptable and well understood by the re/insurers.

Errors and omissions

Laurie Davison, CEO, Adsensa

My emerging risk for 2016 is one of the oldest problems in the market; errors and omissions (E&O).

The London market is having to improve its productivity as rivals eat into its market share. Falling prices are giving many underwriters little option other than broadening terms and conditions, while at the same time regulators are breathing down the necks of managing agents, with the Lloyd’s performance management directive conducting its own review into potential aggregate exposures in emerging risk areas like cyber.

All the evidence indicates the spotlight is increasingly turning towards underwriters and managing general agents in terms of their capability to map exposures and justify the performance of their portfolio.

Lloyd’s will take the lead in scrutinising underwriters to protect the central fund, but outside number one Lime Street; shareholders, investors and capacity providers to the re/insurance industry will look on with interest as the market picks underperforming syndicates out from the pack. Only those businesses able to review their portfolios with absolute certainty will be able to deliver a satisfactory answer and thus I return to terms and conditions. A write-back here or an exclusion removed there will always be accepted practice in isolated cases. But anything more extensive, could lead to graver consequences and a substantial E&O risk. It’s essential that underwriters have the means to analyse their policies in force so that they can justify the prices they’ve been charging. For a loss making book of business, the stakes just got higher.

Reputational harm

Laila Khudairi, deputy underwriter for enterprise risks, Tokio Marine Kiln

With the rise of social media, reputational risk has emerged as a significant threat that businesses face, especially those for whom consumers are the life-blood of their enterprise. Warren Buffett offered the cautionary words that, “it takes 20 years to build a reputation and five minutes to ruin it”. This is true now more than ever. Reputational risk is a peril that slips under the radar when considering traditional insurance protections, yet when a company faces adverse media coverage it can be extremely damaging.

Reputation has intrinsic value to a company, just ask Malaysia Airlines CEO, Christoph Mueller, who, after two high profile incidents described the company as, “technically bankrupt”.

One segment of commerce that is at significant threat from reputational damage is franchise operations, especially in the restaurant industry. Whilst in many cases individual restaurants are run independently at a store level, the brand is managed centrally. An incident in one part of the franchise can damage the whole overall operation.

Individuals that operate in the public eye, celebrities, politicians, CEOs of FTSE 100 businesses, also face an increasing need to monitor and control their online presence.

Savings failure

Chris Kershaw, managing director, global markets, Peak Re

An emerging risk that we identify is what we have described as “savings failure”. This has two aspects. The first is the well documented Western Hemisphere issue of failing to save – both for current “emergency” needs and for future retirement or sustenance needs such as retirement. The second aspect is a more Eastern hemisphere phenomenon where excessive saving leads consumers to avoid spending which is needed to maintain a healthy level of activity in the economy – more accurately expressed perhaps as economic failure as a result of saving, rather than failing to save.

 Failing to save will lead to multiple social problems, possibly steering advanced economies into increased levels of income inequality and poverty. The insurance and reinsurance industry needs to play its part in making saving more efficient and attractive through the development of innovative life and healthcare products, not just repackaging old ideas.

 Failing to spend will lead to lower than optimal levels of economic activity, which in turn will depress incomes, which will subsequently lead to greater savings because of increased levels of uncertainty about the future. Through encouragement of investing and spending on improved insurance products and services, the industry need to try and bring these funds to work in the economy, helping to increase levels of confidence in the future, creating a virtuous circle rather than perpetuating a possible vicious cycle.

Cyber aggregation

Simon Kilgour, partner at CMS

On November 9 2015, Tom Bolt, director of performance management at Lloyd’s, issued a market bulletin ‘Y4842’ requesting details of exposure management principles for cyber-attack.

Reminding members that cyber-attack was now a ‘proximate cause of loss’, Bolt has ordered the market to complete an initial review of cyber-attack exposures by 1 April 2016 and their analysis should recognise possible consequences of cyber-attack that are way beyond the loss or damage of digital assets.

It is becoming increasingly clear that cyber-attack can have wide ranging effects including property damage, business interruption, bodily injury, financial loss and many others. However what is not understood – principally because we have no loss history to base our assumptions on – is what the ‘one in 100 year event’ looks like.

An attempt at imagining such a catastrophe was recently made by modelling specialists at Risk Management Solutions who designed a range of scenarios in their recent paper ‘Managing Insurance Accumulation Risk’. These included mass co-ordinated data breaches and distributed denial of service (DDoS) attacks on a biblical scale, causing amongst other things, a global collapse in consumer confidence or the theft of billions in assets from financial institutions.

This framework for cyber-attack exposure monitoring represents a new line in the sand for syndicates who are themselves required to consider a trio of scenarios with the highest possible gross aggregate exposures. My concern is that without a means to automate checks across a portfolio of re/insurance contracts, carriers will not be able to quantify their exposure and satisfy Bolt’s request.

Water

Arina Tek, vice president, market research and analysis, Peak Re

Water is a vital fluid for all forms of life defined by its abundance (it covers 71% of the Earth’s surface) and scarcity (in terms of safety use). It can be a threat with the industrialisation, globalisation, growing consumption and population. Increasing human activities have already brought undesirable issues and risks like rising sea level, acid rain, eroded soil and pollution of safe drinking water to quote a few.

We might be struck by images of dead aquatic species, or of victims of flooding due to changing rainfall patterns. Behind the catastrophic scenes, business opportunities arise from prevention (drainage system and control, prediction of potential upcoming flood) to environmental services like water management.

According to research, the global demand for clean water will result into a projected compound annual growth rate of over 9% for water filters through 2020. This growth will be largely driven by increasing water and wastewater treatment, and desalination market, particularly from water intensive industries like agriculture, pharmaceutical, paper, energy, construction, etc.

From a re/insurer’s perspective, opportunities will be stemming from re/insuring activities related, but not limited to water management and pollution, prevention of flooding, supply chain, business interruption, food and product safety. Whether these business opportunities are attractive would depend on the local government’s decisions and actions. To be more precise, the insurability of the risks will depend on the quantity and quality of the data made available. With the help of data, the re/insurance industry will be able to better evaluate the risks for their pricing and risks accumulation control.

Underinvestment in risk management

Derek Thrumble, partner of risk consulting, Alesco

It is a challenging time for the oil and gas industry. Commodity prices have been hovering around a 10 year low. Margins are being squeezed. This is compounded by the trend from regulators around the world, demanding higher insurance limits or financial guarantees from companies engaged in offshore activity and the construction or maintenance of major pipelines. The combination of market turmoil and an increasingly stringent regulatory environment has meant that investment in risk management initiatives and health and safety best practice has plummeted.

This is particularly evident in the expenditure to counter emerging risks including: terrorism (including cyber terrorism); business interruption following a “non-damage” event eg a global pandemic leading to a forced repatriation of overseas staff; brand / reputation risk; volumetric (reservoir) risk; direct or indirect impact of extreme weather patterns; and joint venture (counterparty) credit risk

Despite this the commercial energy insurance market continues to provide ample capacity at cost effective prices for most buyers in the “traditional” risk space. However finding insurance partners, who are committed for the long term and have the requisite expertise and market insight to provide relevant coverage and risk management advice is more challenging and should not be underestimated.

This is where maintaining appropriate levels of risk management investment will pay dividends. Cutting expenditure on risk management might deliver immediate savings but it increases the risk in the long term. Companies should be using this downturn to invest in their risk management.

Social engineering fraud

Gabrielle Folliard, claims manager, professional and financial risks, Markel International

Social engineering fraud is bank robbery updated to the 21st century. But rather than holding up the cashiers and blowing the safe, this fraud sees the thief stealing a personality or masquerading as someone of authority, to misdirect funds for their own benefit. As technical security defences become stronger, it’s humans and their ability to be manipulated or engineered that are the weak links in the chain.

Victims of the theft could be accountants, lawyers, trustees or anyone who holds money on behalf of their clients, or corporations’ finance departments. The theft comes in the form of an instruction from the thief, pretending to be someone who has legitimate reasons to order the transfer of money from one bank account to another.

Thieves go to extraordinary lengths to make their instruction look legitimate. They’ll hack in to systems and follow the communications between the two parties involved, so that when they make their bogus instruction, they do so using language that reflects that previously used in genuine transfer instructions, that the amounts involved are plausible, as are the reasons for the transfer. Instructions may come from an email address that looks fine. But, in fact, the .com suffix may be .corn - little differences machines see but humans don’t.

Telephone instructions are given using voice altering technology and urgent requests for transfers are often made late on Friday afternoon when defences are down. Potential victims should make their staff aware of the threats and how the thieves operate.

Diversity and inclusion

David Benyon, Editor, Reactions

Whether or not the companies in today’s global market will be around a few decades from now is a question of recruiting the best possible teams. Recruiting tomorrow’s industry leaders needs to start now. The challenge is increasing: because of staff demographics and a mounting recruitment crisis; and because the sources of the business and the risks are evolving. The Post War Baby Boom generation is now retiring. Most teams in the market – whether in New York, Bermuda, Zurich or London – are still led by a narrow cadre of middle-aged, middle-class white men drawn from this generation, soon be concluding their working lives and drawing pensions.

The market is becoming more truly international than ever before. Underinsured emerging markets represent the biggest growth regions for the industry, and represent an increasing share of global underwriting as each year passes. A broader talent pool reflecting the globalised market is going to be necessary to maximise opportunities and unlock much of that potential.

Then there are the changing risks. To properly broker or write emerging intangible risks – like cyber-attack, reputational damage, or supply chain and contingent business interruption – recruiting the right teams comprised of the best talent and technical expertise is going to be increasingly vital to success.

It is within that context that the historical view of diversity and inclusion (D&I) as an optional extra to be left to HR teams on the periphery of corporate strategy is not sustainable. If companies and leaders want to succeed in the longer term, they need to be doing the right things now.

The Modern Slavery Act

The UK Modern Slavery Act and its implications for insurers are more prevalent than they realise. Businesses supplying goods/services that maintain a turnover exceeding £36m are required to prepare a slavery and human trafficking statement every financial year; the reporting obligation applies to the financial year beginning after April 1 2016. The regulation imposes the requirement on companies that they publish a statement confirming the steps that they are taking to ensure that their operations are free of slavery and human trafficking.

 It’s easy to presume that such regulations are an attempt to deal with sectors which are already plagued with forced labour/slavery issues, such as the readymade garment sector or farming industry. However, the implications for insurers are not to be ignored. If an insurer writes and accepts premiums from those clients employing the use of forced labour, they themselves risk links to violations in their unknowing facilitation of the client’s illegal business practices. Therefore, to minimise risk, insurers must take steps to ensure they are not complicit in the use of forced labour through their undertaking of due diligence procedures.

Furthermore, for those insurers that meet the reporting threshold, in the interests of accurate disclosure and transparency, it is necessary that they incorporate the relevant risk mitigation tools to ensure they can, with full confidence, assert publicly their reasonable steps undertaken to ensure their business was not complicit in the violation of the Act. In its guidance to the Modern Slavery Act, the UK government recommends the use of a compliance framework, co-authored by Mazars.

Hacking

Tim Stapleton, vice president and cyber insurance product manager, overseas general insurance at Chubb

Hackers are changing the game. Moving on from denial of service attacks, they are increasingly holding companies to ransom, either through so-called “ransomware” that hacks and locks a computer, or “ransomweb” an approach that cripples websites by changing the encryption keys needed to keep a website running. In both scenarios the hackers demand money to unlock corporate data. In February, in the UK Lincolnshire County Council shut down its systems after receiving ransom demands and two hospitals in Germany were attacked, to reference just a few of the incidents occurring globally.

This type of attack is not unexpected, particularly as more crucial corporate data is stored offsite in the cloud. Given the evolving nature of these risks and the inevitability companies will face them, it’s important to have a robust insurance solution that includes first party business income loss, data restoration, third party liability arising from privacy and security incidents, plus crisis response costs including forensics, notification, fraud remediation, call centre engagement as well as legal, and public relations expenses. Cover for costs to remove malware from a network, reconstruct data and systems, hire or lease third party equipment, and offset increased costs of labour during downtime should also be included to account for the varying degrees.

Terror non-property business interruption

Andrew Page, terrorism underwriter, Beazley

After a string of terror attacks, including those in Paris in November, companies have been actively reviewing their terrorism exposures and insurance and driving increased demand for non-property damage business interruption (BI) – an insurance cover still largely in its infancy. The lock down in Brussels following the earlier Paris attacks caused particular concern as did the $54m revenue loss by Air France as passengers opted to avoid travel to the French capital.

Typically, property terrorism insurance only covers business interruption following damage to the insured’s property. Most major state-backed terrorism pools also do not extend cover to non-property damage BI. Some cover is available under property policies through denial of access extensions, which could cover business interruption and additional expenses incurred by a government enforced exclusion zone around a property. However, the nature of wordings defining indemnity periods, together with companies’ often weak contingency planning, mean claims are rare.

Risk managers need to understand the clauses in their policies, identify gaps and then look to fill in any grey areas. Beazley has developed a loss of attraction cover that responds to indirect business interruption following a terrorist event. It pays for a predetermined agreed percentage shortfall in profits following a terrorist attack within a pre-agreed radius around a named location.

Although the policy, believed to be a first for the industry, targets companies in the hospitality sector, it could potentially be adapted for companies in other sectors, such as retailers.

Populism and cross-border trade flows

Mike Holley, CEO of Equinox Global

Trade is the lifeblood of our civilisation. It provides jobs and pays the taxes that fund education and healthcare. Harder to quantify directly is the value that international contacts, made through trade, bring in terms of the spread knowledge, innovation and friendship, even reducing the risk of war itself.

But the rise of populism puts trade at risk. There seems to be something in the air at the moment. As recent FT headlines, from a single day: ‘Neo Nazi party rises in Slovakia election’; ‘Who is Donald Trump most like? Hitler or Putin?’; and several stories about ‘Brexit’ demonstrate. Populists of all types share one thing in common – a tendency to blame pesky ‘foreigners’ for all problems. That’s why populist politicians tend to erect barriers to cross-border trade.

This is coming at a time when trade is already struggling. In the global economy, the value of goods crossing international borders fell by 13.8% in 2015.

What are the risks for businesses? Apart from a potential loss of sales if customers in swathes of the world were to become inaccessible, businesses need to be alert to two risks - an increase in the credit risk of their customers and growing political risk.

Most business to business trade is conducted on credit terms. Some customers struggling to maintain sales in an environment of increased trade barriers will go under, leaving bills to suppliers unpaid.

Businesses with international operations also need to be alert to political risk. Foreign branches and subsidiaries are easy prey for populist politicians.

Telematics vs Motor insurance

If, or when, telematics and mobile phone technology converge, car companies have the potential to render swathes of the motor insurance industry irrelevant. Moves made by carmakers and mobile technology providers to deliver telematics hint at the size of the prize for the would-be disrupters. As automation in cars increases, accidents will increasingly shift towards the technology rather than drivers’ errors. That means that the risk will also switch from the driver to the manufacturer, Robin Merttens, a consultant in London who previously worked for GMBC Group and Heath Lambert, told Reactions.

“The next generation of cars will combine telematics and diagnostics,” said Merttens. “Companies like Mercedes will have to take liability for any losses caused by defects with their driverless cars which in turn will highlight the true difference between risks when the car is in motion and risks when the car is parked. Why should you pay the same insurance costs if you are not using your car, if it is just staying in a garage?”

Car companies could be able to send you an insurance bill for how much you have driven the car. That could combine with telematics, enabling them to further determine insurance costs for driving erratically or too fast, using Uber-like payments. Invoices could work in the same way as a phone bill – a base cost and additions based on what the consumer actively did over and above what’s covered by the core, Merttens argued. This will not only change where the liabilities lie but may also see car manufacturers and sellers compete with traditional insurers to provide car cover.

Construction models

Jonathan Brown, partner at Clyde & Co

An emerging risk in the construction sector is the use of Building Information Modelling (BIM) on major construction projects, particularly in the public sector. BIM is the digital representation of a project and its components which generally involves 3D modelling of the project (and increasingly 4D and 5D elements, namely information about programming and costs) which members of the construction team use collaboratively and update during the project lifecycle.

BIM has been introduced in increasing levels of maturity. The expectation is that from 4 April 2016 all government projects will be required to employ BIM level 2, which involves the production of discrete models, but with collaborative working. The next step is a move to the significantly more sophisticated BIM level 3, where all data is held on a fully integrated, web-based system accessible by all team members.

There is potential for BIM to reduce disputes through improved coordination and clash detection. However, it also presents challenges on which insurers should engage with insureds. For example, does the contract cater for the particular characteristics of BIM?

Issues include the use of proportionate liability wording to avoid an insured being liable for all an employer’s losses where something goes wrong due to the combined effect of multiple contributors using BIM, and disclaimers in relation to risks arising from failures of electronic programs. The software will also be important: does it record changes to models (and who made them), so as to enable the cause of issues to be traced?

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July/August 2017

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