New and emerging risks, related risk transfer and financing strategies were topics of discussion presented by Marc Paasch and Derrick Easton from the Alternative Risk Transfer team, and Melena Ortega from Munich Re, at RIMS this year.
Emerging risks, defined
These include trends, or events that happen suddenly, and are characterized by a high degree of uncertainty in terms of probability of occurrence, size of loss amount and potential impact of the event. There are two types of emerging risks: old risks with emerging losses, and new risks with unknown or emerging loss potential. Both are relevant; however, the presentation focused on the latter of the two.
The speakers noted that to successfully analyze emerging risks, a focused enterprise risk management process to define and categorize is essential. The five risk categories identified by the panel were: Economic, Regulatory, Social & Political, Environmental & Weather, and Technology.
Here are a few key takeaways on the social/political, environmental/weather and technology fronts.
Social & Political
Consumer behavior is impacted significantly by events such as terrorism and pandemic. A drop in revenues can, in many cases, be directly correlated to an event. Traditional insurance market solutions are being expanded and broadened to accommodate these emerging risks, but in certain instances, this may not be enough.
For example, a non-damage event can cause serious business interruption, but may not be covered. Two approaches from within the alternative risk transfer space were described. First, an index approach. With credible data provided on footfall, occupancy, passenger and other similar metrics, reference indices can be structured to use in insurance policies. Claims are triggered if the normalized location-specific index falls below the defined trigger. Triggering events defined in the contract can include terrorism, epidemic/pandemic and other causes of loss of attraction. This is a form of parametric solution.
Second, in connection, loss of income due to the above and also civil authority, contamination, crisis, disease, epidemic, eviction, familial act, mortality and subsequent loss of attraction, can also be covered with the help of a highly-funded solution, a structured solution.
With technology firms driving innovation and dramatically accelerating development, residual value of hardware is becoming more volatile. Technology providers’ potential default creates a threat for investments. In the alternative risk transfer space capacity providers are actively involved in tailor-made structured solutions to help with risk financing. Underpinned by rigorous analytics, residual value solutions can be created to manage residual value risk on a portfolio basis.
Environmental & Weather
The CRO Forum is a high-level discussion group formed and attended by Chief Risk Officers of major European listed, and some non-listed, insurance companies. In a recent report published by the CRO Forum– “Water Risks”– it was predicted that the world will see an increase of water shortages and droughts in the future. This is an effect of demand growth and supply decrease of water. A number of associated risks are pointed out in the report. One is highlighted below:
Wildfires – Drought, drier conditions and increasing “wild land – urban” interface lead to more frequent and greater severity of wild fires. A consequence is higher costs to society, publicly funded firefighting and companies that have their business interrupted. The use of parametric solutions for wildfires was presented at RIMS and has been outlined in an earlier ART blog.