The risk environment is an ever-changing ecosystem – as emerging risks become evolving risks which, in turn, become established risks.
Emerging risks and the ways in which insurers can predict and manage them were under the spotlight during a recent SEND webinar which brought together Aditya Sanghvi, innovation manager at CFC, and Lauren O’Rourke, exposure manager at New Syndicates, Apollo, to share insights into market trends.
The complexity of today’s risk environment is becoming further complicated by the interconnectivity of risk – emerging and otherwise. “It’s not just about the emerging risks,” noted O’Rourke. “It’s emerging risks’ interaction with existing risks and other emerging risks.” She highlighted the example of the energy transition and the growth of renewable energy sector, between offshore wind and solar farms.
There are ambitious growth projects planned for the transition to green energy in all the world economies, but it’s important to factor in that the technology and engineering involved in building these giant structures are adding more risk. These have to stand potential risks resulting from climate change, whether that’s the increased frequency and severity of storms, and that’s in conjunction with the risks in designing and engineering the structures involved to ensure they can withstand these natural hazards.
Sanghvi suggested emerging risks are those net new risks which present the opportunity to create new products. He also looked to the challenges and opportunities presented by the climate change transition, echoing O’Rourke’s identification of climate risk and technology – particularly AI - as key considerations.
“I think AI is still in its early stages and it’ll evolve and present new risks that we’ll have to understand and address over time,” he said. “It’s the same with the climate transition. There’s so much that the insurance industry has to do in terms of enabling the transition, and there are new risks popping up in all different ways.”
A second key area of risk to consider is around man-made catastrophes with geopolitical instability representing a key area of concern for the market. That’s not just at a national and international level, but also at a local level, O’Rourke said, with increased tension and polarization being seen across communities amid local and national elections across the globe. “That leads to an increase in civil unrest, as we’ve unfortunately seen recently in this country,” she said. “[…] National election changes and governmental changes may change global collaboration on things like security, trade and climate change.”
Sanghvi highlighted how geopolitical risk joins the ranks of cyber as an evolving risk, which is generally well understood but so dynamic that it’s capable of changing overnight. Whether you’re talking about emerging or evolving risks, being able to manage them adequately comes down to understanding how they’re changing and monitoring them closely.
That monitoring and managing piece is only made possible by collecting the right data and using it in the right way. There’s increased recognition of the importance of data across the insurance and risk management industries but there are still inroads that need to be made if companies are going to have access to the granular detail and data analytics tools required to understand and manage emerging risks. “If these risks are implicitly included in policies, you don’t know which policies are already included and which aren’t,” O’Rourke said. “So, capturing the granularity of those perils is key to understanding your risks and identifying the opportunity to build new products to tackle or focus on certain perils.”
If insurers haven’t explicitly identified what is and isn’t covered in a policy, it becomes much more difficult to carry out the scenario planning required to help them manage a risk, O’Rourke said. Her advice to the market is to collect as much of the right data as early as possible and utilize it to develop scenarios able to identify the full scope of the coverage. That’s the only way the industry is realistically going to develop a clear understanding of its exposures, and move towards closing the protection gap, rather than having to just exclude those risks entirely.
“When I think about the way the industry can address emerging risks, there are three things we can do,” Sanghvi. “Firstly, we can change what we underwrite […]. We can add in new coverages and create new products that don’t exist today. On the other hand, we can change how we underwrite.”
This could look like proactive solutions, which monitor potential clients from the moment they are quoted on their risk, he said, which is a fundamental shift in how insurers underwrite. The third piece is around how the industry manages its exposures, and using that to understand if there’s anything that can be done to minimize clients’ risks. “I think, as an industry, those are the three levers that we have,” Sanghvi said, “and the three pillars that we can use in terms of what we do, how we do it, and how we can mitigate the risk.”
