Why insurance companies are failing to deal with emerging risks

By contrast, transferring risk out using insurance products was towards the bottom of tactics used by the ERM practitioners surveyed.

Speaking at s Lloyd’s of London event, Understanding the next 10 years of corporate risk, Oliver Carpenter a research assistant at the Centre for Risk Studies said: “We asked corporate risk managers about their views on mitigation strategies – and at the top they answered with increased training around critical operations, balancing staffing, adjusting product offerings.

“These sound great but they’re limited in their ability to manage [the risks]. You can see insurance is somewhere down there at the bottom and maybe you’d expect this to be a little bit higher as a source of risk transfer.

“So Why is it so low? In 2018, we released the big schema for global insurance exposure, and this aimed to map the full range of available insurance categories and classifications system for all the assets insurers protect. It shows how the 554tn dollars of insurance exposure is distributed globally and that there are huge areas of corporate risk that aren’t represented.”

In a nutshell, risk managers aren’t turning to insurance providers, because there simply aren’t policies available to deal with the wide range of emerging threats that companies are facing.

This included areas such as market crashes, economic recession, political shock, organised crime, the gig economy, climate change, natural resource deficiency and consumer boycott.

Generally speaking, of all the emerging risks identified by the group, only half had insurance mitigation strategies available.

The Centre for Risk Studies is examining why there is such a gap in the insurance market and what – if anything – can be done to help providers develop solutions to meet the rapidly changing needs of businesses.

Carpenter identified several things that needed to happen in order for insurers to take on emerging risks. He said: “First we need to ask what is required to insure emerging risk at all. And there’s a few things thing pick up on.

• We need to be able to define the peril, which is not necessarily easy if you don’t well understand it yet.
• Next you need to be able to eliminate the moral hazard – so you can’t increase the exposure of a business to the risk, just because they’re insured.
• We also need a model - we need to be able to quantify it. That’s what the regulators want you to do, to define the risks and quantify them and assign probabilities, but again that’s difficult if there’s no historical event set on which to base this.
• Finally, you’ve got to hold [the risk] to a contractual standard. How do you know if an emerging risk was a cause of a loss at all or if it is all interweaved in the corporate environment that is happening around a company.”

The Centre for Risk Studies is currently trying to quantify emerging risks through the definition of various metrics.

Carpenter says the group is trying to find parametric triggers, some of which may be proxies, to help insurers to hold emerging risks to the contractual standards needed to provide cover.

For instance, the researchers are examining whether measuring the political sentiment of a populus can be used as a proxy to indicate regime shift to the right for example - which could have major implications for business and the potential to cause loss.

Carpenter concludes: “There’s various proxy metrics that we’re working with to better understand and measure and potentially quantify risks with a view to insuring them. It’s possible but there are huge challenges ahead.”