A “polycrisis” characterized by the interlinking of diverse risks is having a profound impact on the re/insurance industry, according to one top executive.
Speaking to Re-Insurance Business, Lorie Graham (pictured), chief risk officer and senior vice president at American Agricultural Insurance Company, observed that this systemic pressure necessitates new approaches and strategies to ensure stability and resilience.
“What the reinsurance industry is experiencing right now is a growing complexity and interconnectedness of risk,” she said. “While we actively manage our risks, including climate-related risks, and maintain robust reporting to multiple regulatory bodies, the evolving risk landscape brings additional considerations from regulatory and rating agencies. To ensure comprehensive assessment, we are proactively exploring methodologies aligned with evolving expectations, while carefully evaluating their suitability for our unique business model.”
In response, the reinsurance industry continuously adopts more comprehensive methods for analyzing risks.
“Beyond simply identifying individual risks, we’re actively seeking interdependencies within our portfolio,” said Graham. “The industry is considering how to integrate potential climate shifts into weather peril models to explore future impacts. Scenario planning is also crucial. By incorporating diverse climate scenarios into their risk models, reinsurers can identify potential vulnerabilities and develop proactive mitigation strategies. This allows them to better prepare for future events and minimize losses.”
By integrating climate change variables into modeling and scenario analysis, reinsurance firms aim to anticipate and mitigate potential impacts more effectively. One tool the industry is considering is augmenting scenario analysis with big data and artificial intelligence.
“As risk practitioners, leveraging AI in risk scenario analysis can enhance our ability to identify potential hazards and their underlying drivers, offering valuable insights beyond conventional methods,” said Graham. “While AI has inherent limitations, it can often spark creative perspectives and offer valuable resources that might otherwise be overlooked.”
Using AI to predict and assess risks is of growing interest in the sector – as its primary use today is in handling more administrative roles. According to a report from Mantra Labs, 64% of insurers plan to use chatbots to handle customer-facing issues, with EY’s Global Insurance Outlook 2024 adding that 52% of insurance CEOs plan significant investments in AI this year. And while AI is useful, it is important employers do not roll it out blindly and always use ‘common sense’ when assessing the output.
For Graham, she said it is important to maintain a robust governance framework for AI utilization, with a particular focus on safeguarding confidential data through a clear-cut policy against uploading proprietary information into open AI platforms.
“AI serves as a powerful tool to augment human expertise in risk analysis, facilitating the efficient exploration of potential scenarios and their drivers while acknowledging the crucial role of expert judgment in interpreting and validating the outputs,” she told Re-IB. “By integrating AI into scenario analysis, we can gain a more comprehensive understanding of evolving risk landscapes, enabling proactive mitigation strategies and informed decision-making.”
In the world of complex risks, regulatory scrutiny has also intensified, according to Graham, adding another layer of complexity to risk management. “There are definitely some complexities in managing reporting requirements. For example, the solvency assessment process differs in Canada, which necessitates additional work. And we’re constantly adapting to evolving disclosure expectations both here and abroad, such as the recent introduction of climate-related reporting.”
All the added regulatory updates may be keeping insurers busy, but so too is keeping up with industry developments. Looking ahead to 2024, companies are always looking for the next big opportunity – a chance to innovate their practices to really thrive through the months ahead. As Graham mentioned, reinsurance is undergoing a ‘polycrisis’ of sorts – but could this disruption be a catalyst for transformative change?
“Our approach to product development goes beyond simply identifying potential rewards,” noted Graham. “We conduct comprehensive risk assessments to understand the impact on our dynamic risk appetite. Under the right circumstances, such as favorable environmental and financial conditions, we may choose to adjust our risk appetite and risk tolerance to pursue innovative opportunities that involve higher, but meticulously managed, risks.” By starting with appetite every time, insurers can keep ahead of any emerging trends in the sector, something that will prove crucial in navigating the uncertainty of the months ahead. Graham said that, as an industry, organizations need to identify new risks that are emerging and evolving.
“When confronted with an evolving risk, particularly one exhibiting deviations from historical patterns, the absence of extensive data necessitates creative solutions,” she explained. “Drawing connections to comparable risks with analogous data sets or developing novel methods for capturing indicative exposure metrics are crucial. Proactive research, including delving into the underlying drivers of these changes and establishing key risk indicators, become essential for anticipating future shifts and adapting effectively.”
