Key is to cut uncertainty and limit volatility, says Sandra Burmeier
What lies beyond the horizon? What could hit your business tomorrow? Are you and your organisation best prepared for the challenges of the future? Taking these questions seriously can be a rather mind-boggling exercise and may lead to some unpleasant discoveries, but being prepared should prove highly worthwhile in the long run, writes Swiss Re Emerging Risk Management team senior risk manager Sandra Burmeier.
Technological, socio-political and environmental changes can all have an effect on the risks we face. Growing interdependence of risks increases complexity and leads to an increasing accumulation of risk. At the same time business environments are changing: liability and regulatory regimes keep evolving, stakeholder expectations are rising and risk perceptions are shifting. And while some risks may stay constant, changing norms and laws can shift their burden from one party to another.
These developments give rise to emerging risks: newly developing or changing risks that are difficult to quantify and may have a major impact on an organisation. Some of these are still beyond the horizon, i.e. those risks we don’t even know that we don’t know they exist – with obvious challenges about their identification and management.
Emerging risks can reach all areas of insurance, with many cascading effects across areas and lines of business. They need to be monitored and managed carefully to avoid unpleasant surprises which could wreak havoc on the insurance industry’s books. In many cases, however, they already are on the insurers’ books – unintentionally, not quantified and with no additional premium earned for the additional exposure they bring. It is no surprise then that emerging risk management is a concern for the industry.
But how can we manage something that is still emerging? The key is to reduce uncertainty and help to limit the volatility of business results. To achieve this we must try to translate risks associated with high uncertainty into quantifiable risks. In the face of rapid change and growing interdependencies, looking back and extrapolating past experiences into the future – the traditional insurance road to salvation – will no longer be enough to assess tomorrow’s exposure. Foresight and future-oriented imagination are essential to navigate a future in which change is the only constant that remains.
Thinking in scenarios is playing an increasingly important role. While they are not meant to provide exact forecasts, scenarios can shed light on the potential damage from emerging risks. This involves imagining what can go wrong, how many people and what assets could be affected and what the environmental impact could be. The outcome can then be used to attempt to quantify the overall monetary impact. To provide a comprehensive picture, scenarios should consider both catastrophic developments that happen quickly and changes that emerge gradually over many years.
But how can we come up with meaningful future scenarios for something we don’t even know about? Horizon scanning is a good starting point. Most game changing developments announce themselves by a number of small signals which – taken together and viewed with an open and imaginative mind – give a good indication of what might lie ahead. A solid horizon scanning process means screening various sources such as media and the internet, governmental and non-governmental organisations, research communities and scientific journals. Many of the faint signals picked up by such systematic observation will never materialise, but others most definitely will – and the earlier the industry starts adapting to them, the better prepared it will be for future exposures.
Knowledge sharing is also essential in preparing for an uncertain future. When it comes to emerging risks, being the first mover is not necessarily an advantage, providing a strong incentive for sharing information and raising awareness across organisations, industries and markets. Some risks might even be too big for the insurance industry to tackle on its own, requiring action from governments and regulators.
There is no silver bullet, and managing and assessing emerging risks will remain a constant challenge for insurers. Despite the doom and gloom scenarios, however, we should also keep sight of the tremendous untapped opportunities emerging risks represent. If something is a risk for the insurance industry, it is likely to be a risk for our clients as well – which means they might be interested in covers to alleviate the potential impacts of the risk. Given the breadth of the emerging risk landscape, possibilities for solutions are vast, and the insurance industry could and should expand its role, mitigating emerging risks and enabling society to advance further.