Emerging threats such as cyber, climate change, health and urbanisation, are challenging businesses and insurers, requiring a new approach and new modelling solutions. Mr Peter Cheesman of Aon Benfield Australia discusses the changing risk landscape.
As anyone in the industry knows, we are constantly having to rethink what we thought we already knew.
In a world where technology and changing consumer behaviour is reshaping traditional business models, companies must innovate and reinvent themselves if they want to remain relevant. Add to this backdrop, volatile investment markets, unpredictable weather, fierce competition from both large incumbents and agile FinTech, and increased political and regulatory reform, there is no doubt the financial services sector is grappling with change.
A changing risk landscape
Aon’s 2017 Global Risk Management Survey underscored that companies are facing new risks and that there are differences of opinion on how to best prioritise and respond to them. (See Top 10 global risks)
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Top 10 global risks
- Damage to brand & reputation
- Economic slowdown / slow recovery
- Increasing competition
- Regulatory / legislative changes
- Cyber crime / hacking / viruses / malicious codes
- Failure to innovate / meet customer needs
- Failure to attract or retain top talent
- Business interruption
- Political risk / uncertainties
- Third party liability
Source: Aon Benfield 2017 Global Risk Management Survey
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Mapping of trends help us to predict and plan. As the risk landscape for commerce evolves, businesses can no longer rely solely on traditional risk mitigation or risk transfer tactics.
Emerging threats from cyber (number five in the 2017 risk list), climate change, health and urbanisation, require a new approach and new modelling solutions.
We want the catastrophe models to be right – but let’s face it – we know they have strengths and weaknesses. It would be naïve to expect highly accurate loss predictions, when nature, by nature, is so chaotic.
Historical data not reliable
Modelling is largely reliant on historical data to estimate the losses that could be sustained due to a catastrophic event such as a hurricane or earthquake. But real-world events have often broken the mould.
Hurricane Katrina was an event driven by flood losses – a secondary peril – rather than the traditional wind damage usually modelled for. Insurers thought they would have plenty of time to assess the losses after the first Christchurch earthquake, but they were not prepared for the quakes that followed so soon after, or for the losses due to liquefaction.
The unexpected flood damage of Katrina and the liquefaction in Christchurch are both examples of factors we should have understood and anticipated better, but did not.
This month, thought leaders from across the globe will gather in Gold Coast, Australia for the 2017 Aon Hazard Conference to explore the surprises still challenging the insurance industry, including natural catastrophes.
Should we embrace uncertainty?
What we need to do is to embrace uncertainty. Insurance professionals have been exploring this for many years.
The late Peter Taylor had said in his paper at Aon’s Hazards Conference in 2013: “What, if we can’t remove the uncertainty? What if uncertainty has to be accommodated rather than eliminated, like an illness in remission that can be tolerated without ever being cured? In so many areas of knowledge, the certainties of the 20th century have given way to 21st century recognition that we may not be able to know everything – it’s the ‘age of recognised uncertainty’”.
Let’s not wait for the next big event before we act
Dr Len Fisher, speaking at this year’s event, argues that “such dramatic events are inevitable in our highly-interconnected world.”
Of course, sometimes there are warning signs but by the time the risk becomes obvious, it is usually too late for business to act. Businesses and those that insure them need adequate time to prepare. Surprising or unforeseen risks do not afford the luxury of time to reduce exposure and ensure business continuity.
According to Impact Forecasting’s “Global Catastrophe Recap: First Half of 2017” report, global economic losses from natural disasters for the first six months of the year were estimated at US$53 billion. The financial toll acts as a further warning and we have seen the Insurance Development Forum established by the United Nations, the World Bank and the insurance industry to incorporate the latter’s risk measurement know-how into existing governmental disaster risk reduction and resilience frameworks.
Another hazard posing a huge financial threat to business of all shapes and sizes is cyber risk. A growing reliance on web-enabled technologies has dramatically increased the opportunities for hackers to infiltrate computer networks. Organisations are adopting new technologies before they are able to secure them, and this is largely due to the evolution of the Internet of Things and the Industrial Internet of Things.
In this evolving digital age, we are seeing increasing levels of information sharing, supply chain and other automation, and general technical advancement. This brings opportunity, but it also brings cyber risk - any system connected to networks has the potential to be hacked.
A re-imagined look
Thought leaders and industry experts from the insurance industry and academia confront these ideas, make us think differently, and re-imagine a new world of risk management. A re-imagined look at risk will help better prepare (re)insurers to manage risks of the future. A
Mr Peter Cheesman is Head of Analytics for Aon Benfield in Australia.
To find out more about the 15th Biennial Aon Benfield Hazards Conference: Risk Re-Imagined taking place 18-20 September 2017, visit http://aon.io/hazards17
Aon Benfield is the 2016 winner for Reinsurance Broker of the Year at the 20th Asia Insurance Industry Awards.