INFUSE Recap: The light at the end of the emerging risk tunnel

To date, the most reliable and common mechanism to mitigate risk has been insurance. However, like a virus, risk evolves and continues to survive and history has shown us it will continue manifest in unique and dynamic ways. According to a new report from Geneva Association, the very nature of risk is changing. There is a significant shift in in today’s cultural, geopolitical, and environmental landscape. Are insurers prepared to adapt to these shifts with their traditional business models?

During the sixth session of our INFUSE webinar series titled ‘Emerging risks: What’s coming next for the industry’, panellists Aditya Sanghvi, Innovation Manager, CFC and Lauren O’Rourke, Exposure Manager, New Syndicates Apollo urged insurers to embrace innovation as a means to address new risks and that this augmented approach will help the industry keep pace and thrive in the next decade.

The panellists prescribed a refined approach to data management designed to spot potential risks quicker. There is a need to adapt underwriting workbenches to write policies more efficiently and reduce loss ratios. In addition, hiring more diverse talent that brings new perspectives to bear and use this broader approach to develop new products that will drive profitable revenue and restore confidence among consumers.

Why are emerging risks so complex? How do exposure managers like Lauren use data to build scenarios and put them through extreme stress tests to predict risks? What strategies does innovation manager Aditya use to create demand for new products like carbon insurance? Find out below.

Emerging risks are interconnected and complex

Risks are complex in nature. Writing comprehensive policies for emerging risks is even harder because they are interconnected with other factors that are not predictable.

For example, to tackle climate change, world economies are working to transition to green energy. However, the technology that drives green energy calls for massive engineering that poses silent risks. During the webinar, Lauren shared an example of how solar farms are an innovative solution yet pose several uncertainties to the insurer while providing coverage.

“Introducing new technology to solve an existing problem puts insurers in great distress. There is massive infrastructure involved with building solar farms. Will this engineering withstand the next hurricane? If yes, for how long? If not, what do we need to exclude in the coverage? This leads to massive data analysis and it’s much harder if the data is in silos.” – Lauren O’Rourke, Exposure Manager, New Syndicate Apollo

‘Building scenarios’ can help facilitate more comprehensive risk assessment

By adopting modern underwriting workbenches, insurers can reduce time spent mining data and retrieve case histories instantly, which helps them build helpful scenarios. Scenarios provide a simulation by scrutinizing possible outcomes when risks cannot be quantified. They provide a pragmatic understanding of how complex and diverse risks will impact an organisation and how immune these systems are to potential disruptions.

Lauren shared an example of how drought can lead to low water levels in the Panama Canal. As a result, only certain vessels can move through that route. This can also impact global supply chains and the pricing of commodities. All these things connect and create a range of different yet interconnected scenarios. Underwriters can then determine what to include and exclude in the policy and close the gaps on risk more efficiently. This also enables a complete level of comprehensive coverage to customers.

How to innovate in the face of new risks?

Despite the challenges, emerging risks pave way for innovation. Insurers continue to rise to the occasion and innovate with new products to meet market demand and have also seen tremendous success in areas like cyber security. Another product that is making waves in the market is carbon insurance. Aditya Sanghvi, innovation manager at CFC, who was part of the team that created the product says that carbon risks were evident, yet nobody looked at providing coverage. His team seized the opportunity and created a product that has found wide acceptance in a short period of time.

Aditya says that a new product should respond to what clients are worried about in the future instead of merely only providing coverage for today. This approach helps the product attain the right market fit. Building a custom underwriting bench that is specific to the product is critical. A new product can have a massive learning curve. Underwriters must ensure they integrate the new product into how they go to market. They need to understand the nuances, regulations, pseudo regulations, data availability and rating factors. A custom underwriting workbench will help establish a solid foundation for risk assessment and help ensure the product not only serves a defined need but does so profitably. Lastly, ensuring the right distribution channels are in place to deliver the product to the market is paramount.

“If done right, new products have the strength to attract capital to a market like the voluntary carbon market, which is doing a lot of good for the planet. So, there is underlying good behind the protection that we’re providing, and it allows investors to come in on a more confident basis to engage the market and put up more money because their capital is protected.” – Aditya Sanghvi, Innovation Manager, CFC

As the webinar closed, the panelists shared their final thoughts on managing emerging risks:

• Lauren reiterated that data management was essential in assessing new risks and the sooner underwriters can adopt automation the more comprehensive the coverage will be with fewer gaps.
• Aditya said that the reason our industry exists is to take on risks and to absorb them. So, no matter which function we’re in or which team we’re on, we must spot new opportunities and push the boundaries.

As the world evolves, so will risk. Insurers have been custodians of creating a secure society and maintaining security and stability during crisis. Dynamic and unique risks will need a proactive approach by monitoring trends, innovating products, and adopting automation. With this approach, insurers can stay ahead and absorb risks deliberately and with a forward-looking perspective and restore consumer confidence.

You can watch a recording of the webinar (and all our webinars) here.