Emerging risks, mitigation focus of Guy Carpenter report

A new report identifies cyber, technology, longevity and casualty catastrophe as four main emerging risks and discusses how insurers can use modeling and analytics to manage them.

The report, “A Clearer View of Emerging Risks,” was published Monday by New York-based Guy Carpenter & Co. L.L.C. a wholly owned subsidiary of Marsh & McLennan Cos. Inc.

“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 this year's report, our goal is to assess the challenges facing the industry as respects modeling, and quantifying the most pressing technological risks … and establish a more robust analytical thought process” to anticipate and manage them.

The report uses data breaches to show how difficult emerging risks are to predict. Key to modeling is determining the likelihood of an event, and once it happens, the size of that loss, the report says. But data like that used in building predictive models for natural catastrophes does not fully exist for cyber. This, coupled with the potential for a widespread and cascading effect of a single breach, presents a significant challenge and opportunity for the insurance industry.

Likewise, technology risks are constantly evolving, the report said, citing nanotechnology and chemical technology. Growing commercial applications for drones and other technologies that remove human input increase the potential for misuse, the report says.

Similarly, changes in longevity are difficult to forecast; the challenge for (re)insurers lies in the inability to measure this risk and then to anticipate and quantify its impact, as survival rates have grown longer, according to the report.

The report also points to casualty/liability based catastrophes, which have grown in number and strength in the past decade, exposing (re)insurers to risks for which they may not have made appropriate provision within their reserves.

“Emerging risks need to be carefully considered in a company's reserving process and sufficient capital held to mitigate potential losses,” said Victoria Jenkins, head of technical innovation for Europe, the Middle East and Africa. “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.”

Continuing scientific advancement will keep the pressure on the industry to manage these exposures, added Ms. Jenkins. “It is that level of innovation that will translate risk into opportunity.”