New World, New Risks; Time to help save the planet – Comment

This is not a new theme of course because coping with new and emerging risks is essentially what good risk management is all about. Any risk manager who is happy to sit in their silo and use the tried-and-tested methods to deal with what they assume are the tried-and-tested risks is doomed for the scrap-heap. This is not a new fact by any means. How did the first commercial ship owners cope with the rising risk of piracy and loss of cargo from more natural threats? They applied brain power and decided to think ‘outside of the box’, as we now call it.hideThose ship and cargo owners that survived, sought ship builders who could construct stronger and safer vessels, they instituted convoys and armed their vessels better and invented risk sharing and transfer through innovative forms of risk capital management, that came to be known as insurance. So why do most gatherings of risk and insurance managers such as the AMRAE conference in Deauville and interviews with leading practitioners such as that with France Telecom’s Johnny Merlot always seem to wind up with a discussion, at least in part, about the apparent inability of the modern insurance sector to meet so-called new and emerging risks? In the insurers’ defence, it must be conceded that the pace of economic, corporate and technological change has accelerated rather rapidly in recent times and is certainly much faster than when the first modern ship owners tried to work out how to more effectively protect their vessels and cargoes. Change of this nature, by definition, produces new risks. Financial innovation has also occurred at a breathtaking pace in recent times. But, as the recent credit crisis proved so brutally, it has not really changed that much. The risk financiers can come up with as many fancy new labels and products as they like, but, the bottom line remains that financial risk is either held or passed on. It cannot be parcelled up and passed on into oblivion as those involved in the London market excess of loss spiral found to their cost 20 years ago. Mr. Merlot’s reference to the risk of electro-magnetic fields is a good example of how technological development in real-world risk is difficult to match with financial engineering. The hard evidence required to confidently underwrite such a risk simply has not been sufficiently gathered yet to enable most underwriters to fix a price, and certainly one that is affordable to buyers. This is basically because the margin for error is simply too large and therefore expensive. Add to this the big, and even more difficult to assess, risk brought by consumer perception magnified by us, the media, then surely there can be no surprise that risk and insurance managers in cutting edge fields such as telecommunications and pharmaceuticals find it difficult to construct vaguely comprehensive risk transfer programmes to help them carry out their business. To make matters worse for risk managers who work for such companies and the insurers that try to meet their needs, the politicians, lawyers and regulators who set the ground-rules tend to react to the perceptions of the consumers who they are paid to protect rather than the science. So the rules get tougher as those given the task to protect Joe Public seek to cover their rear ends by taking the safest option. The problem spotted by so many risk and insurance managers today—and their partners in the risk transfer industry—is that this combination of rapid technological advance and risk perception among consumers, the rule-makers and ultimately investors is creating a spiral of its own. And, there do not appear to be any solutions to help unravel this spiral currently other than self-insurance. For producers of new and emerging risk this means that their ability to innovate will be increasingly curtailed. For the risk transfer industry it is bad news because it means their ability to grow will be also be hampered. For the wider world it is also bad news because so many of the new technologies and resultant economic advantages and growth that they bring are the kinds of things that the planet needs to shift to a sustainable future. If we are to save the planet in the 21st century by moving on from the 20th century industrial mindset to a more sustainable model then surely we are going to have to invent a new form of risk and insurance management. We at Commercial Risk Europe look forward to trying to work out what solutions will be needed and invite you to join the debate. —Please send any comment, ideas or explanations of why you think we are talking utter rubbish to editor@commercialriskeurope.com. We look forward to hearing from you.

New World, New Risks; Time to help save the planet – Comment

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