Editors' Cuts

An Infinity of Risks

Bill Kenealy
Insurance Experts' Forum, January 13, 2012

As I trudged my way through its 64 pages this week, it occurred to me that "Global Risks 2012," the new report from the World Economic Forum, should come with some sort of warning label. Honestly, keep this one away from the children, the clinically depressed or anyone less congenitally optimistic than Tim Tebow.

The report, now in its seventh edition, is a product of the WEF’s Risk Response Network in collaboration with Marsh & McLennan Cos., Swiss Re, Zurich Financial Services and the Wharton Center for Risk Management breaks down risk into five spheres: economic, environmental, geopolitical, societal and technological. For each sphere, the report identifies a center of gravity. For example, in the economic sphere, the center is "chronic fiscal imbalances, which has attendant risks including rapid inflation or deflation, and recurring liquidity crises.

Indeed, economic risks dominated the top of the list in terms of likelihood (fiscal imbalances, severe income disparity) as well as potential impact (imbalances, major systemic, financial failure, extreme volatility in energy and agriculture prices).

What I found particularly interesting/scary is the way risks from separate spheres often intersect or hybridize. For example , a financial risk, extreme volatility in energy and agriculture prices, lies at the intersection of the environmental center of gravity (greenhouse gas emissions) and societal (unsustainable population growth).

Elsewhere, technological risks amalgamated with geopolitical ones with historic ramifications. “The Arab Spring demonstrated the power of interconnected communications services to drive personal freedom, yet the same technology facilitated riots in London," said Steve Wilson, chief risk officer for General Insurance at Zurich. "Governments, societies and businesses need to better understand the interconnectivity of risk in today’s technologies if we are truly to reap the benefits they offer.”

So what do all these chimeras mean for insurers?

Erwann Michel-Kerjan, managing director of the Risk Management and Decision Processes Center at the Wharton School, and a contributor to the report, tells me that the cavalcade of extraordinary events the past decade: from 9/11 to disasters such as Hurricane Katrina, to the financial crisis, have impacted how risk management is practiced and, perhaps more importantly, perceived at the C-level and by corporate boards.

“What risk management ought to be is changing,” Michel-Kerjan says. “Risk Managers used to tell people what not to do.  What I really see emerging is risk managers whose expertise lies in working with others. We also see that more companies are creating a CRO position.”

Technology may have to help insurers get their arms around these risks as many have invested heavily in business intelligence and predictive analytics in recent years to augment the work of their actuaries and underwriters.  Nonetheless, even Michel-Kerjan, who has a background in mathematics and physics, says risk managers need to remain cognizant of the limitations of predictive models.  “We learned the hard way:  Should you trust your models? If you don’t have a model it is difficult. If you do have a model, don’t be blinded by it. By definition it is made up of assumptions.”

Bill Kenealy is a senior editor for Insurance Networking News.

Readers are encouraged to respond to Bill by using the “Add Your Comments” box below. He also can be reached at william.kenealy@sourcemedia.com.

This blog was exclusively written for Insurance Networking News. It may not be reposted or reused without permission from Insurance Networking News.

Comments (0)

Be the first to comment on this post using the section below.

Add Your Comments...

Already Registered?

If you have already registered to Insurance Networking News, please use the form below to login. When completed you will immeditely be directed to post a comment.

Forgot your password?

Not Registered?

You must be registered to post a comment. Click here to register.

Blog Archive

Driving Growth Through Distribution Management

In the current hyper-competitive marketplace, many carriers are focusing on improving their distribution practices as a key technique for driving growth.

The Start of a New Era: Digital Retailers and Insurance

Insurers from all around the world are making great efforts to become digital.

Google and Insurance: One Year Later

Google is getting the approval for selling insurance on their compare site in a large number of states via a number of different insurance partners.

How IT Managers Can Get Close to Policyholders

Four steps CIOs need to take to lead insurance organizations to greater “customer obsession.”

Strategic Initiatives for 2015: Making Sense of the Shifts

Insurers must choose between embracing innovation or just continuing with business as usual and run the risk of becoming a casualty in the new competitive battle.

To Stay in the Game, Insurers Must Aggressively Embrace New Consumer Technologies

Emerging technologies displayed at the CES could be some of the greatest change agents since the introduction of the Internet, offering breakthroughs that could challenge many businesses.