Former Secretary of Defense Donald Rumsfeld famously stated:
Reports that say that something hasn’t happened are always interesting to me, because as we know, there are knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tends to be the difficult one.
Broadly speaking, pretty much everyone in the insurance industry could say cyber risk, terrorism, bodily injury compensation and casualty catastrophes are the leading concerns of (re)insurers, but Guy Carpenter has gone a step beyond the generalizations and identified some helpful categories (re)insurers can use to catalog risks by exposure “known-ness” in its Emerging Risks Report September 2014. Doing so allows underwriting teams to break down analytic silos and identify emerging issues across industry segments. Emerging risks are placed into three categories: technical, crystalizing and aggravating.
Technical risks are genuinely new, arising from new technologies and processes—think genetically modified organisms, nanotechnology, E-cigarettes and driverless cars, Guy Carpenter says. Cyber technology is probably the most talked about exposure, but there are many others that (re)insurers need to incorporate into their underwriting evaluations. Being out ahead on your knowledge of technology developments can work like a movie trailer—it’ll give you enough familiarity with the R&D script to discern if you want to buy a ticket to the show.
Crystalizing risks are those that are known to exist but whose implications are becoming more understood or whose effects are increasingly becoming manifest. It’s helpful to think about this category more in terms of emerging loss trends, since the actual exposure is known but the costs associated with loss payouts are still developing. Bodily injury compensation reserves are highly sensitive to adequate understanding of this category.
Aggravating risks are those already identified or even well known whose incidence and effect are aggravated by fluid circumstances. Ebola is, for example, a known exposure, but until this summer it was somewhat of an isolated phenomenon. Now, airlines, hotels and numerous other organizations find themselves wondering about its potential for bodily injury and other liability claims. The report uses terrorism as a case in point, but the concepts discussed can be applied to other exposures.
The report also has a section on modeling, naturally! While analysts can identify and unveil the depth of complex exposures, modeling is key to quantifying loss potential. Great modeling allows reinsurers to maintain financial stability and develop effective risk management programs for clients. Loss reserving is treated in its own section as part of a holistic planning model for a range of emerging exposures.
Guy Carpenter emphasizes the “opportunities” created by emerging exposures. The entire exercise of redefining exposures based on their level of emergence can help drive new research, push underwriters to better evaluate aggregation of risks and encourage the development of new models to quantify potential losses and engender new risk management programs. Those who have plumbed the knowns and unknowns will be ready to adopt new, profitable risks that they might have rejected and avoid risk accounts that have unmanifested large-loss propensities.