Emerging risks: Risk perception at Swiss Re

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Emerging risksRisk perception at Swiss Re
Sean Russell OCCA Meeting July 4, 2007
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Disclaimer

• Please note that this document, or any part of
  it, may not be disclosed or otherwise made use of
  without Swiss Re's prior written consent. Whilst
  any third party information contained in this
  document has been obtained from sources believed
  to be reliable, no representations are made as to
  its accuracy or completeness. Further, Swiss Re
  expressly disclaims any responsibility for
  liability or loss arising from use of such
  information or from any of Swiss Re's comments
  upon it.

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Overview

• What are emerging Risks?
• Why are emerging risks of concern for
  re/insurance?
• How does Swiss Re detect emerging Risks?
• Some examples of current emerging risks
• How to manage emerging risks

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Emerging risks - definition

• Emerging risks are developing or changing risks
  which are difficult to quantify and may have a
  major impact on insurers book of business.
• Often they are already (unintentionally) present
  in an insurers existing book of business.

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Risk of change
René Oefeli The Emerging Risks Landscape Finland,
9 May 2006
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Common denominator of emerging risks
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Group ER management framework Rationale
(Illustration100 years of asbestos premonition)
French factory report of 50 deaths in female
asbestos textile workers and recommendation of
controls.
1906
US insurers refuse cover to asbestos workers due
to assumptions about injurious conditions in the
industry.
1918
Source David Gee and Morris Greenberg,
Asbestos from Magic to Malevolent Mineral.
UK Merewether Report cites 66 of long-term
workers in Rochdale factory with asbestosis.
1930
1931
UK Asbestos Regulations specify dust control in
manu-facturing only and compensation for
asbestosis, but this is poorly implemented.
First worker's comp asbestos claims filed
1950s
1960s
First GL cases filed and first payments
madeFirst claims paid by Swiss Re, Dec 1966
2006
US Insurance loss as of 2004 USD 55 bn Total
estimated future losses USD 275 bn
according to AM Best according to Millimans
Conclusion Asbestos exclusions were introduced in
the US in 1918 but somehow they got lost in
the following years Data on harmful health
effects of asbestos were reported as early as
1898 , but the insurance industry did not
integrate this knowledge into its risk management
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Risk Management Process
Risk Policy LegislationStrategy
Risk Assessment PerceptionIdentificationAnalysis
Quantification
Risk Control EvaluationSteeringReporting
Risk Management Risk informationObjectives
GoalsRisk communication
Risk TreatmentAvoidancePreventionReductionFina
ncing/Transfer
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PC SONARs history
Systematic Risk Perception started in 1995
Systematic Observations of Notions Associated
with Risk
SONAR
Patent filed
1995 2000 2002

• Risk perception network established to promptly
  detect faint signals
• Purpose
• Identification and evaluation of emerging and
  future risks
• Systematic screening of the risk landscape
• Centralising observations associated with risk
  from different countries, cultures and enterprises

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SONAR perceives early indicators
Early warning
Reaction time
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Landscape of emerging risks
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Silicosis

• Silica is the second most common mineral on earth
• Numerous industrial uses
• Disabling, nonreversible and sometimes fatal lung
  disease
• Disease cannot be cured but is highly preventable
• Studies indicate evidence of carcinogenic
  properties of inhaled crystalline silica

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Obesity

• Center for Disease Control and Prevention (CDC)
  has declared obesity an epidemic
• 1 out of 3 Americans is obese
• 400 000 obesity-related deaths annually in the US
• Increases risk of heart disease, type 2 diabetes
  and colon, breast and endometrial cancers

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Critical partsReuse of single-use medical devices

• Hospitals and external medical providers are
  reprocessing expensive endoscopic tools used for
  minimally invasive surgery. Reprocessed medical
  instruments can expose patients to increased risk
  of infection.

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Botox

• Botox (Botulinum toxin) is a toxin injected into
  wrinkles to permanently paralyze certain muscles
  and help eliminate wrinkles. It has proven to
  reduce the appearance of moderate to severe frown
  lines in 18 to 65 year-old patients.
• Massive use in the North America and Europe.
• No long-term studies available. Ageing
  characteristics of treated facial tissues unknown
  'Michael Jackson facial syndrome' possible.

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Drugs and Cosmetics Violent reactions to
antibody therapy

• In a London clinical trial six healthy volunteers
  suffered multiple organ failure.
• Specialists agree that results of T cell
  activation are notoriously hard to predict.
• Past experience with small synthetic molecules
  can no longer automatically be expanded to such
  molecules.
• Potential impact on insurance product liability
  can in general be triggered more frequently for
  drugs stimulating rather than neutralizing
  components of the immune system.

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FoodPet food contamination in US

• The major manufacturer of cat and dog food for
  many brands found that their food had been
  contaminated with a substance used overseas to
  poison rats.
• The contamination comes from ingredients imported
  from a supplier.
• ...pets are basically considered property at
  this point.... If this changes this ...could
  bring further liability actions into play.
• Potential impact on insurance increase of
  products liability exposure for pet food
  manufacturers. Largest exposure could be in
  veterinarian medicine and pharma for pets.

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FoodBypass approval process for pharmaceutical

• Food additives are not subject under the approval
  process for pharmaceuticals. For some products
  manufacturers can avoid the lengthy process for
  pharmaceutical approvals by declaring them as
  food additives or nutraceuticals
• Nutraceutical refers to foods claimed to have a
  medicinal effect on human health.

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Complex or critical infrastructureCritical
software

• Stable software has become crucial for the
  flawless function of aviation, automobiles, rails
  or infrastructure
• MS Crown Princess came close to capsizing due to
  a faulty steering mechanism.
• Reasons for such failures are often to be found
  in cost pressures, faulty time schedules or lack
  of risk/project management.
• Potential impact on insurance casualty of
  shipping company. If software was at fault the PI
  cover of the software company would be called on.
  Highlights the problems with safety relevant
  software. In cars a failure could trigger PL
  and/or Recall. Property damage (eg. ship on fire,
  defective cargo), business interruption.

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EnvironmentMysterious, massive death of bees in
the US

• In the US, bee keepers are experiencing
  unprecedented die offs of bees some losing as
  much as 80 of their colonies. Some additional
  facts
• In 2000, the total U.S. crop value that was
  wholly dependent on the honey bee pollination was
  estimated to exceed US 15 billion.
• Potential impact on insurance
• Parts of agriculture relying on pollination by
  bees will have loss of yield.
• If chemicals are causing the death of the bees
  the question who is guilty will be raised. If
  this is the result of a natural cause, it has no
  impact on insurance.

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Spreading of infectious diseasesWarning over
global bird flu plan

• A third of countries failed to set out how they
  would distribute medical treatment
• Individual countries have not consistently
  prioritised population groups for vaccines and
  antivirals.
• No countries prioritised population groups to
  receive ventilators, face masks and other
  critical resources
• Half of the countries studied had prioritised
  children, despite a WHO recommendation against it.

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Public healthBuilders sunburn

• The risk of sunburn has been highlighted as the
  new asbestos, causing cancer which could become
  the next big threat to the building industry.
• Contractors across the sector could be facing
  potentially huge employers liability claims
  amounting to millions of pounds in the coming
  decades if they do not warn their employees to
  slap on the suntan lotion.
• Clearly it would be difficult to determine which
  sun caused the skin cancer, the one taken at work
  or the one taken during a vacation.

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Terrorism Building weapons of mass destruction

• Genetically engineered bio weapons developed by
  small teams could become reality within the next
  two to four years.
• Virologist and state funding is no longer needed.
  With the help of a DNA synthesizer it would take
  just over 200 000 to build smallpox genome.
• Virologist question if it would be that easy.
• Potential impact on insurance Product liability
  for labs synthesizing harmful sequences on
  demand, accidental releases from laboratories,
  pandemic with ten thousands getting sick/dead.

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Pervasive ComputingOverview

• Miniaturization of electric circuits makes them
  more susceptible to cosmic radiation
• Loss of sensitive personal data
• Playing video games may result in hand injuries
• Addictive gambling
• Googlization
• Internet creating conflagration
• Robot safety
• Vicious bloggers

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Nanotechnology

• Nanos (means dwarf in Greek)
• Technology to manipulate matter down to 1 100
  nm
• Small size
• high surface to volume ratio
• unique properties (material strength and weight
  reduction, conductivity, new optical properties)
• new entry paths (high mobility in human body and
  environment)

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Nanoparticles -Ubiquitous in industrial
production

• Materials

Pharmaceuticals
Aerospace
Chemicals
Machines
Electronics
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Worldwide revenues in the year 2015More than
USD 1 trillion (1000 bn)

• Nanotechnology revenues worldwide by 2015 (USD
  bn)
• Materials
  
  340
• Electronics
  
  300
• Pharmaceuticals
  180
• Chemicals
  100
• Aerospace
  70
• Tools 20
• Healthcare 30
• Sustainability 45

Source National Science Foundation
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How much of proof do we need to react?

• Challenge early signals vs. impact to insurance
• Do we need to adjust the risk capital?
• How much statistical data are required to trigger
  action? Is a proactive behaviour possible? first
  mover disadvantage?
• No loss no exposure? How can we adjust premiums
  without loss experience?

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How to set priorities?

• Understand
• Time to impact
• Probability
• Severity (accumulation, cross sector impact)
• Measures / down side protection / opportunities
• Premium adjustments
• Capacity steering, limitations

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Balance sheet protectionRisk mitigation levels
Measures to protect balance sheet encompass
1 Risk communication to influence the business
environ- ment favourably, 2 Developing
(under- writing) best practices and
3 Developing rules and adjusting pricing and
risk models.
SONAR No immediate actions necessary (mid term)
SONAR Keep/monitor on watch list, no
immediateactions necessary (short term)
permanent observation
Level 1 Raising awareness (internally
externally)to influence the business
environment(e.g. Nanotechnology)
Level 1
risk communication to raise internal external
awareness with
risk communication to raise internal external
awareness with
n
n
raising awareness (internally externally)
the objective to influence the business
environment
the objective to influence the business
environment
to influence the business environment
(e.g. through legislative measures)
(e.g. through legislative measures)
individual risk
assessment by Risk
individual risk
assessment by Risk
Level 2 Application of underwriting best
practice(e.g. EMF, GMO, SilicaTSE, Chemicals)
n
n
Level 2
Engineering Services
Engineering Services
deviation
possible,
deviation
possible,
application of
underwriting
limitation
of exposure
through
but
must be
limitation
of exposure
through
but
must be
n
n
best
practice
documented in
documented in
wordings (e.g. trigger
definition,
wordings (e.g. trigger
definition,
auditable form
auditable form
exclusions,
product type)
exclusions,
product type)
Level 3Rules and modeladjustments (Asbestos)
Level
3
exclusions
exclusions
n
n
rules model
limits
limits
n
n
adjust
-
-
referral process
referral process
ments
underwriting principles
underwriting principles
n
n
mandatory for
any
mandatory for
any
(e.g. market standards)
(e.g. market standards)
deviations
deviations
pricing and risk model adjustments
pricing and risk model adjustments
n
n
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Possible underwriting measures -Best practice
in underwriting

• Higher premiums offset the uncertain higher risk.
  No structural solution. Insureds pay risks from
  the past
• Higher retentions stimulate risk-adverse
  behaviour and prevention. Not a solution to large
  loss amounts
• Lower insured limits better assessment of the
  severity of occurrence, but not full
  compensation of an insureds damage (via
  insurance).

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Possible underwriting measures -Best practice
in underwriting

• Better risk differentiation stimulates
  risk-adverse behaviour and prevention ? fairer
  solidarity groups
• Exclusions leave the insureds damage
  uncompensated. Sometimes this solution is
  inevitable
• The liability insurance trigger should be changed
  from act committed to loss occurring or even
  - in some countries - from loss occurring to
  claims made

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Managing emerging risksConclusions

• High demand for further systematic observation of
  the risk of change for current and future
  emerging risks
• Promoting risk awareness or risk perception
  internally and externally is vital
• Define necessary underwriting measures (best
  practice in underwriting) in good time
  meaning? impact analysis and ? define
  specific underwriting guidelines

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Additional information

• Swiss Re Publications
• ? www.swissre.com

Prion infection on the rise? Hospitals in need
of modern risk management
Emerging risks A challenge for liability
underwriters
Liability and liability insurance Yesterday -
today - tomorrow
Nanotechnology Small matter, many unknowns
The insurability of ecological damage