By Stephen Clarke and Jeff De Turris
Think about it: If we could tell what the future holds, managing risk would be much easier. But because we can't, risk management becomes essential.
One key to successful risk management is identifying and monitoring emerging risks. Recognizing them as early as possible, assessing the potential loss exposures they present, and taking action can help prepare us for any claims, financial consequences, or negative customer reaction that emerging risks present.
According to a joint study by Oliver Wyman and the Financial Times, only half of senior executives surveyed at large global organizations indicated they integrate emerging risk information into their strategic planning process. This is a surprising statistic in light of the increased emphasis on enterprise risk management (ERM). Standard & Poor's recommends that insurers' risk management programs take into account risks that don't exist but might emerge. The rating agency looks for evidence that insurers are effectively managing emerging risks during and after adverse events.
According to a joint study by Oliver Wyman and the Financial Times, only half of senior executives surveyed at large global organizations indicated they integrate emerging risk information into their strategic planning process.
Lloyd's defines an emerging risk as "an issue that is perceived to be potentially significant but which may not be fully understood or allowed for in insurance terms and conditions, pricing, reserving or capital setting." Identifying and monitoring such risks can be a real challenge. The effort requires staff who can recognize new technologies, phenomena, or scientific discoveries that may not be fully developed and are difficult to grasp.
While you may not think you have personnel qualified to do the job, consider this: Each day, your employees are reading newspapers, journals, magazines, and technical publications that are likely to be full of potential emerging risks that may provide input into your organization's risk research effort. Tapping your own resources, perhaps across the entire enterprise, and making the effort an important part of your organization's culture are key to integrating emerging risk management into your strategic planning.
Most insurers do not have resources that can be devoted solely to managing emerging risks. However, many insurers are beginning to develop a multidisciplinary team responsible for assessing the insurance implications of each emerging issue. The team should consider the vulnerability of your organization to the potential risks and loss exposures that every new issue presents.
While much of the focus on emerging issues has centered on identifying the next "asbestos" before it occurs, emerging risk teams should approach their job with a broader perspective, looking not only for risk but also reward.
For example, nanotechnology is integrated in a wide range of consumer products, medical applications, and processes in use today. Risks associated with this growing technology have been well documented and can involve workers' exposure to nanoparticles and the effects of nanoparticles on the environment. Have you considered the potential impact of such exposures on your organization? Are you aware if any of your insureds develop nanotech materials or use them in the products they manufacture?
Not all emerging issues involve unknown or unusual risks. Issues can arise from hazards that are relatively known but are unique. The issue may be extreme in terms of severity, it may involve unusual litigation, or it may affect risks regionally. One such concern is tainted drywall installed in many homes in the Gulf Coast states following the severe hurricanes of the mid-2000s.
Another challenge is developing risk quantification information. This is difficult because, in many cases, losses haven't occurred or the impacts of certain issues affecting your company haven't been determined. A forward-thinking approach will be necessary, as will methods that go beyond the use of historical data.
Insurers are devoting attention to major issues such as nanotechnology, genetically modified organisms, and climate change. But it's also important to keep abreast of other risks that are not as widespread. Consider the advancements in artificial intelligence over the last several years. What risks will smart cars, smartphones, smart houses, and virtual security guards pose? The move to expand alternative energy, such as extracting oil and gas from the hydraulic fracturing process, can lessen our reliance on traditional fuels but pose new and unknown risks. The use of social media, both corporately and personally, is developing so quickly that it's difficult to keep pace with advances in the technology. Cyber security challenges and other social media exposures are certainly going to become more and more difficult to monitor.
When considering the impact of emerging issues and developing risks, it's human nature to evaluate them from a negative perspective. This is understandable when you consider how some issues have affected the industry over the years, such as environmental and asbestos hazards, increasing natural hazard losses, and terrorism. While much of the focus on emerging issues has centered on identifying the next "asbestos" before it occurs, emerging risk teams should approach their job with a broader perspective, looking not only for risk but also reward.
Many risks are emerging because of the advent of new technologies, processes, and procedures — in many cases spawning new industries. Those industries will have insurance needs, and the company that can most effectively translate the needs into comprehensive insurance solutions can gain a competitive advantage in that market.
Today's economic climate and marketplace conditions have created a challenging environment in which to expand a book of business and improve profitability. When approached from a position of knowledge and understanding, emerging risks and emerging markets have the potential to provide growth opportunities. Integrating emerging risk monitoring to identify potential hazards and prepare for the future is the key to success.
ISO's emerging issues initiative provides participating insurers with assistance in identifying and monitoring a wide range of emerging issues. Each ISO line of insurance also considers the potential insurance implications. In many cases, ISO product changes have resulted, such as the development of a green building coverage option, introduction of new general liability classes that address nanotechnology or alternative energy production, and introduction of low-speed-vehicle coverage options within our automobile programs.
Visit ISO's Insurance Lines Services website for information about the emerging issues we are tracking. Also, the ISO Enterprise Risk Management web portal provides a resource for new and experienced insurer enterprise risk management (ERM) practitioners. You'll find links to relevant content, including documents, presentations, and recent news on subjects pertinent to insurer enterprise risk management.
We plan to expand our emerging issues research efforts to provide information about concerns with a financial focus, such as Solvency II, that are important in terms of insurer ERM strategy. We also intend to increase our focus on identifying potential loss exposures related to certain emerging issues. This will assist insurers in developing their risk management strategies in response to emerging issues that are important to them. We have also begun identifying issues that may develop internationally. Such international issues may be especially important to those insurers that have overseas risks and operate globally.
Stephen C. Clarke, CPCU, is assistant vice president of commercial multilines at ISO. Jeffrey De Turris is assistant vice president of personal lines at ISO.