15 September 2014

Guy Carpenter flags up critical emerging risks

Guy Carpenter has flagged up cyber-attacks, terrorism and new compensation structures as critical emerging risks for insurance companies.

In a report published on 14 September, the first day of the Monte Carlo Reinsurance Rendez Vous, the broker said that these risks remain hard to model and quantify, but firms must build up their capabilities if they are to create value.

"Uncertainty can be lurking on an insurer's balance sheets in the form of a casualty catastrophe or an emerging and not as yet fully understood risk such as cyber," said Morley Speed, managing director at Guy Carpenter Securities division.

"Whatever the category of emerging risk, the main challenge lies in modeling and quantifying the potential impacts. Only in this way can insurers leverage their key capability, which is the creation of value by risk management," Speed said.

Guy Carpenter divided emerging risks into three broad categories – technological, crystallising and aggravating – and looked into detail at insurers' responses to manage those risks.

Cyber attacks were deemed a crucial technological emerging risk.

Demand for insurance protection against cyber-attacks is booming. In the US alone the market is expected to double in size this year, reaching as much as $2bn in gross written premium.

However insurers still find it hard to determine how much coverage they need to acquire to protect themselves, Guy Carpenter said. This is because cyber-attacks present a set of aggregations/accumulations of risk that spread beyond a given corporation to its affiliates, counterparties and supply chains.

New compensation structures, such as periodical payment orders, where claimants in bodily injury cases opt for an annuity rather than a lump sum, are highlighted as an example of crystallising risk.

This used to be an issue for UK insurers, but is spreading rapidly to other European countries, such as France, Germany and Czech Republic, as policyholders are given flexibility over the structure of compensation and governments force the private sector to bear inflation and other risks.

Terrorism was highlighted as an aggravating risk as a result of growing regional conflicts, the expansive reach of social media for extremists to spread their messages and recruit and the diversity of possible attack modes to cause human and economic loss.