What risks will emerge in 2017?

A look at the emerging risks for 2017 reveals two clear touchpoints: people and politics – and especially politics. Risk experts in areas ranging from human capital to transportation, from Washington, DC to Brazil are looking at the broad implications of political trends that could have profound effect on the global economy. The trends toward populism, protectionism and deregulation could change the risk profiles for many industries. Which one are you keeping an eye on this year? Take our poll and let us know.

Executive risk:  Cybersecurity disclosures

Cybersecurity and cybersecurity disclosure timing may overtake individual accountability as the top emerging risk in D&O liability. In what is seen as a potential watershed event, the U.S. Securities Exchange Commission is investigating whether a global Internet company that suffered two massive data breaches should have reported those events to investors sooner. Many in the D&O liability space had wondered if the SEC’s CF Disclosure Guidance: Topic No. 2, Cybersecurity, which detailed SEC’s minimum expectations for required cybersecurity-related disclosures, would be that watershed event, but it wasn’t. It was almost a non-event as securities lawyers worked their magic and came up with wording that apparently effectively mitigated the risk of a new wave of class action litigation. (For more information see, Willis Fortune 500 Cyber Disclosure Report, 2013). This year’s SEC investigation could change everything. While this is not the first cyber disclosure investigation by the SEC, the two-year period between the breach and the disclosure distinguishes this investigation from the other investigations. Now, the SEC has test case where it is far more likely to take game-changing action. While it is too early to say how the SEC might choose to respond, whatever that response, it could make it clearer to issuers, directors and plaintiff’s alike, what cybersecurity disclosures potentially violating the law. In doing so, the SEC could help insureds better understand their duties, but just as likely, it could also help the plaintiffs’ bar build a model for a new wave of securities class actions, too. More on this soon . . .

Transportation: Populist politics disrupt trade and workforces

The rise of populist politics in Europe and elsewhere is an emerging risk that has implications for most industries, particularly transportation and the financial institutions that support it and the export sectors in those countries. Any new world order shaped by growing nationalist sentiments will have repercussions for international trade and supporting supply chain ecosys­tems. In general, the mandates of populist parties slow the march of globalisa­tion, contracting supply chains as strategic and political emphases shift to the expansion of domestic work­forces and national production. Existing multinational trade deals are already the first casualties. Consumers may face higher prices caused by initiatives such as new import tariffs and/or the relocation of manufacturing to higher-cost environments to create jobs; as consumer costs rise, discretionary spending shrinks, and demand along with it. New immigration policies can also shift the availability of affordable labour, or make it more difficult to source the right skill sets, compromising competitiveness. As the transportation industry has an intimate relationship with the global economy, its senior executives will need to carefully monitor the winds of political change this year.

Terrorism: Political rhetoric inflames extremism

Rohini Sengupta and Charles Needham

There are several factors that may lead to an increase in terrorism and political violence, both in the U.S. and globally, in 2017. The trend over the past three years has been one of increased violence, with an expansion in both location of attacks and casualties. The world has seen that with minimal official coordination, ISIS has been able to inflict casualties far from their strongholds in Syria and Iraq by using small jihadist cells or inspired lone wolves. In fact, routing ISIS from territories across Syria and Iraq will do very little to safeguard civilian populations from lone-wolf attacks as deeply embedded networks exists across the West – especially in Western Europe. In the U.S., the heightened levels of divisive political rhetoric and polarization, along with the ease of acquiring firearms, increase the chances for terrorism and political violence, as lone-wolf extremists may feel even more emboldened to launch an attack. While the new U.S. administration recalibrates the country’s counterterrorism strategies, corporations across all industries should take steps to protect their assets. The most critical step is that decision makers within these companies are aware and monitor the constantly evolving geopolitical landscape so that they take necessary and well-informed precautions.

Climate change: Lack of adaptation and mitigation progress

After last year’s landmark COP21 agreement to address climate change, the possible emergence of a backlash against climate change mitigation policy, by key players in the global community, would be the greatest risk our society faces in the coming decades. Impacts may not be felt immediately by most, but a growing mass of scientific evidence attributes certain aspects of extreme weather and climate to changes that have already occurred to anthropogenic climate change. A lack of movement toward a global zero-carbon economy only enhances the very real risk of leaving our cities and communities more vulnerable to the impacts of climate change, such as more severe storms, longer droughts, sea-level rise and many more. And those most vulnerable will be least able to adapt. This lack of action connects to many other societal pressures, such as conflicts and mass migrations. Disaster relief has risen to unprecedented levels in recent years – a rise that is not likely to abate in a globally warmer future as society struggles to adapt. This will add pressure both to the communities immediately affected, and the global economy. If we do not heed the evidence that CO2 emissions from fossil fuel burning is indeed causing climate change, and we compound this folly by disregarding the precautionary principle, then we are gambling with our children’s and our grandchildren’s future.

Financial services: Regulatory uncertainty

Political, economic and regulatory uncertainty within the U.S. and Europe has swiftly become the new normal. Financial institutions, traditional media and politics were surprised by the Brexit vote and Trump’s election victory. Political uncertainty remains over the nature of Brexit and, following a successful legal challenge, the timing and role of parliament in triggering Article 50. Brexit has also highlighted a wider risk of rising nationalism and anti-global sentiment; forces at odds with a financial sector that has become increasingly inter-connected and flourished through globalization. In the U.S., the new Administration has also prioritized deregulation, indicating the dismantling of Dodd Frank and other financial regulation. Brexiteers are equally hopeful that departure from the EU will result in a bonfire of regulations. Financial institutions face an uncertain regulatory framework and could end up implementing regulatory requirements which may soon be repealed. The one certainty that financial institutions can take is that their world has become increasingly uncertain.

Financial services: Artificial intelligence exceeding human control

Michael O’Connell

Artificial intelligence is being adopted by more and more financial institutions and integrated into their retail services, trading and compliance departments. While this offers substantial benefits in terms of costs and efficiency it is also an emerging risk. Failures or flaws in an artificial intelligence system could quickly become a financial crisis for a single financial institution or potentially even a larger crisis. It was renowned astrophysicist Stephen Hawking who said, “I think the development of full artificial intelligence could spell the end of the human race.” Elon Musk and Bill Gates have also echoed concerns about the future of AI. However, 2016 saw a dozen AI-controlled trading funds launched and numerous AI financial institution compliance programs introduced. While the benefits AI brings to the market are undeniable, it is important to recognize that the speed with which machines work means that errors can happen at a pace beyond human control.

Reinsurance: Covering the myriad cyber risks of the Internet of Things

Mark Braithwaite

Cyber insurance started with internet liability and privacy coverage, but now as the world becomes more and more connected as an “internet of things” (IoT), the exposures have evolved as well. Hackers can theoretically take control of drones, cars, planes, trains, boats, satellites – anything that has a computer and is connected to the IoT. As we proceed into 2017, almost everything is connected to the IoT. Even some electric toothbrushes and sous-vide cookers have Bluetooth and WiFi capabilities. How will the (re)insurance industry provide protection for these risks? If a car crashes into a building and causes physical damage, will the driver’s liability policy respond, or the building owner’s property policy, or the car manufacturer’s cyber policy? As the underlying risks evolve and become more and more convoluted and “cyber-related,” how will the industry keep up to ensure that there is clarity of coverage? How will insureds and risk managers and reinsurance cedants ensure that their (re)insurance contracts don’t leave gaps in coverage? This will certainly be something to watch in 2017.

Energy: High-temperature hydrogen attack

An emerging risk that is giving some refinery owners cause for concern going into 2017 is high-temperature hydrogen attack (HTHA), an insidious condition that can occur in process equipment exposed to hydrogen at elevated temperatures under dry conditions, when hydrogen disassociates into nascent (atomic) hydrogen. This is then driven into the steel by the temperature and pressure of the environment. The atomic hydrogen then reacts with unstable carbides in steel to form methane gas, which accumulates in the microstructural grain boundaries, eventually leading to cracking. This is often hazardous as refineries contain hydrocarbons at high pressures and temperatures. On April 02 2010, HTHA resulted in a catastrophic failure, of a 40-year-old heat exchanger at the Tesoro Refinery in Anacortes, Washington, with 7 fatalities. It’s no wonder that one of our major clients has recently investigated the findings relating to this loss in depth. As a result, they have identified several heat exchangers across their two refineries where the metallurgy may be susceptible to HTHA, and they are therefore performing more inspections and are planning to replace some items. We shall be commenting more on this risk in our 2017 Energy Market Review, due for release on April 4.

Tech media & telecom – Artificial Intelligence (AI) and the talent shift

Michelle Alvarado

The advances in AI and work automation are changing how companies conduct business and how they recruit and employ people. Technology will increasingly be used across all industries thanks to developments in areas such as robotics, cognitive computing, nanotechnology, and machine-to-machine networking. Compared to previous industrial revolutions, the technological revolution will be the most disruptive in terms of its impact on jobs and people, leading to certain job displacement and new job creation. As more companies utilize emerging technologies to improve productivity and reduce cost, they will have to develop a new strategy to move from a human workforce to an integrated model of human talent and technology. With an eye on the future, companies will have to address the shortage or surplus of talent and identify ways to develop and tap the skilled workforce needed to thrive in the age of automation

Human resources: The human factor in risk management

The estimated cost of US customers switching companies due to poor service is $1.6 trillion – that’s trillion with a “t” – according to Accenture’s recent Global Consumer Pulse Research. We’ve seen many recent examples of human error or misjudgment causing dire consequences to financial results, quality, service to customers and others, brand and even human life. So we think the most significant, and perhaps unanticipated, emerging risks to a company are human capital risk. Human capital risk, as part of an effective overall operational risk management program, requires that companies consider the impact of human behavior on business outcomes. It examines liabilities arising for human capital, like skill shortages, poor management and leadership and unclear expectations, and liabilities arising from it, like compliance, fraud and theft and cyber risks.

Human resources: Non-communications

An emerging, or we might say “ongoing” risk, is not communicating with your employees clearly and consistently about the value of their total rewards, including compensation, health and welfare benefits. We know that employees who understand their benefits tend to value them more, and this leads to increased engagement and productivity. Better still is the fact that an engaged employee is more likely to stay with their employer. In 2017, employers will be required to disclose their pay ratios. Once that happens, they should be prepared to discuss the concerns of employees, shareholders and customers. Make it your priority to educate your employees on their benefits year-round. You might consider distributing a total rewards statement or investing in an online portal to share this information. Consistent and repetitive messaging can play a critical role in helping employees understand and value the “sum” of their pay and benefits, rather than focusing exclusively on specific elements.

Brazil: #3 in the world for cyber attacks

Eduardo Figueiredo

We must be aware of the cyber risk, which has been growing exponentially in the world and especially in Brazil. Crimes committed by hackers grew 197% in Brazil in a year, putting the country among the three that experience most cyber-attacks (along with the U.S. and China) and representing the biggest target in Latin America. Remember that every minute 45 new viruses are created, 200 new malicious sites, 5,000 new versions of malware, 180 identities are stolen and 2 million dollars are lost. Given this scenario, despite the fact that Brazilian companies still pay little attention to the potential risks involved in a cyber-attack, I understand that the perception on this topic will be amplified in the coming years and the search for adequate protection will be a necessity.

Health in Brazil: Mosquitos and unemployment risks

Walderez Fogarolli

Aedes aegypti is the highest health challenge in Brazil in 2017. The arrival of the heat and rainy season drives the mosquito’s proliferation, which is the transmitter of dengue, zika and chikungunya. Brazil already experiences 88% of the confirmed chikungunya fever cases in the Americas, according to the Pan American Health Organization (PAHO). The disease has no cure, only medication for relieving fever and intense pain. The concern of experts is that the situation worsens in the summer and will overwhelm the health services. For that reason, information and prevention are essentials. In addition, in the scenario of supplementary health in Brazil, there was a reduction in the number of users and an increase in costs in health plans. The economic crisis and the risk of unemployment (reaching 11.8%, according to the Brazilian Institute of Geography and Statistics – IBGE) may have increased health costs in Brazil. The fear of loss of employment and, by extension, the benefit of the health plan, leads to an anticipation in the conduct of examinations and consultations.

Which emerging risk are you most concerned about?

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Categories: Cyber Risk, Directors & Officers, Employee Engagement, Energy, Financial Services, Health Care Industry, Natural Catastrophe, Political Risk, Reinsurance, Terrorism | Tags: , , , , , , ,

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