Last week we reported on insurers' facing a riskier world, through the lens of the World Economic Forum's Global Risks 2013 Report, which called attention to insurers' potential exposure to risks such as global fiscal imbalances, water supply issues and greenhouse gases. Since then we've seen some interesting assessments, including a study by AIR Worldwide, which purports to put the catastrophe losses of 2011 in perspective, and a fascinating quick take by several bloggers from major insurance broker and reinsurer Willis (London).
Many insurers were taken aback by the aggregation of insurance losses in 2011, especially given the absence of a major hurricane-related catastrophe, notes Bill Churney, SVP, AIR Worldwide (Boston). However, while those losses were significant, they did not cause the insolvency of a single company. That is, Churney says, "a testament to an improved approach to catastrophe risk management, aided in no small part by the use of catastrophe models."
That said, insurers need to ask questions about how to deal with potential losses as represented by 2011. Churney notes that the AIR report asks questions such as: How frequent will loss years like 2011 be? Are natural catastrophes becoming more frequent and more severe?
"Companies with global exposures and an expanding global reach need to be prepared for the possibility that future catastrophes will produce losses exceeding any historical amounts," Churney cautions.
Natural catastrophe is only one category of changing risks addressed by WillisWire's bloggers. While the risks are identified to addressed to the concerns of various industries, several bear closely on insurers' concerns as underwriters, and also as managers of their own risks. Here are a few:
Weather Risk: A "relentless increase n the likelihood of extreme weather" affects all businesses, and thus affects insurance losses and underwriting considerations.
Opportunity Risk: Missing out on emerging markets in Brazil, Russia, India and China ("BRIC").
Cyber Risk: Two of WillisWire's bloggers address cyber risk, first as a "war on financial" services, whereby foreign governments use proxies to attack financial companies; second as "Death by Cyber," glossed as more general exposure to "significant liabilities and losses associated with a cyber-attack [that] could have devastating corporate consequences."
Reputational Risk: WillisWire's bloggers warn against "insidious new reputational risks," including bad publicity circulated through unexpected social-media coverage, as well as new risks introduced by a horizontalized supply chain, with partners of potentially dubious reliability.
The Abandonment of ERM: "Insurers are rethinking their commitment to enterprise risk management (ERM) as Solvency II drifts further into the distance but this could bring new risks," asserts Dave Ingram, VP, Willis Re. That could lead to several problems, including unknown concentration of of exposures. It also could lead to a counter-intuitive result, according to Ingram, who says, "The irony is that those insurers who were less committed to satisfying Solvency II, or the rating agencies’ calls for ERM, may have developed an ERM program that actually helps them to achieve their business objectives and will be less exposed to this risk.
[For more on the WEF's report, see Insurers Face Riskier World: WEF’s Global Risks 2013 Report .]