Bobbi Sills examines how the insurance profession can better prepare for systemic risks
From widespread cyberattacks to accelerating climate change and global disease outbreak, risk is never far off the radar, as the events of the past year have proved.
Tackling the complexities of systemic events such as the Covid-19 pandemic is crucial in building resilience against future risk, but how do insurers prepare for the unpreparable and what role does the profession have to play in protecting society?
In February, Lloyd’s of London launched a new global platform called Futureset, dedicated to driving greater societal and economic resilience to the world’s most challenging risks through the sharing of cutting-edge risk insight and intelligence.
Futureset launched with a six-part Systemic Risk Masterclass series, developed in partnership with the CII and the Lloyd’s Market Association.
John Neale, CEO of Lloyd’s, says the profession is ideally placed to coordinate work to support greater preparedness and protection for the growing risks faced by consumers today.
Mr Neale says: “Covid-19 has demonstrated that society cannot remain complacent and must prepare for catastrophes of a similar impact and duration.
“The profession has a vital role to play in protecting society from the potential impacts of systemic risk, by providing confidence in risk mitigation and insurance that allows businesses to innovate, develop and drive economic growth.”
A key area where firms are currently falling short is in the use of predictive analytics to help inform responses to systemic risk, according to Brian Duperreault, CEO of AIG.
Mr Duperreault says: “Insurers already have a good handle on how to cover tangible risks, however the balance sheets are increasingly focused on the intangible risks that are not the main drivers of day-to-day business.”
Paula Jarzabkowski, professor of strategic management at the University of London’s business school, points out that to fill in the gaps in the knowledge and mitigation of systemic risks, the transfer of skills, data and technology is paramount.
Ms Jarzabkowski says: “Businesses must ensure that the technical capabilities they possess and information on the financial products that they are able to deliver well on are more accessible to society.”
The sharing of the profession's data on topics such as claims assessments, pricing signals and risk management could help educate economies and society to better understand systemic risks, while enabling the profession to gain a better idea of how risks are escalating, says Ms Jarzabkowski.
Sharing and collaborating
As Mr Neale also points out, collaboration with government and society is crucial if insurers are to walk the tightrope between failing to remain prudent and clearly establishing to what extent the systemic risk is insurable and where further support is needed.
Mr Neale says: “Systemic risks are challenging to predict and large enough in scale that they often render traditional risk mitigation and transfer methods unfeasible, requiring financial resources that are far in excess of the insurance asset pool.”
Back in July 2020, Lloyd’s published a ‘black swan’ reinsurance framework to support resilience in the face of future systemic events.
Black Swan Re would provide reinsurance for commercial non-damage business interruption cover through industry pooled capital, supported by a government guarantee.
The framework was one of three to be established following scrutiny of business interruption policy wordings, highlighted by the recent Financial Conduct Authority test case.
Despite engagement with 25 governments over implementation, Mr Neale also acknowledges that the need for government backstop is often met with the reality that advisers are simply too overwhelmed to engage
in conversations beyond the short and immediate term.
Julian Enoizi, CEO of UK state-backed terrorism insurer, Pool Re, says the profession must proactively engage in public-private partnerships (PPP), to establish sustainable solutions and societal resilience to systemic risk.
Mr Enoizi knows first-hand the value of centralised risk pooling systems in managing risk and smoothing premiums that can be used for modelling, risk mitigation and risk management.
He says: “One of the great things about pooling arrangements is that they create an economy of scale that can be used to invest in a greater understanding of the model in hand, using the things that the profession does well such as risk financing and risk management.”
The terms of the PPP also mean that insurers do not have to worry about competition rules, notes Mr Enoizi.
Mr Enoizi is also a member of the Pandemic Re Steering Group, launched in April 2020. Chaired by Stephen Caitlin, CEO of Convex, Pandemic Re is following the template set by the UK’s terrorism mutual, Pool Re, to establish a risk-financing mechanism for future pandemics in light of the challenges caused by Covid-19.
In 2021, Pandemic Re has established a project committee and six working groups to address a range of risks facing the profession: customer engagement and distribution; technical insurance; modelling and data; scheme structure/operating models; pandemic preparedness and mitigation; legal, regulatory, and government affairs.
Among the working group leaders is former home secretary Amber Rudd, as well as senior insurance figures including Julie Page, CEO of AON and president of the CII; and Chris Lay, CEO of Marsh.
More than 50 representatives from insurers and reinsurers, leading insurance brokers, management consultants, data modellers, academia and the medical profession have so far been appointed to its workstreams.
With the lessons of the pandemic firmly under the spotlight, insurers must take a collaborative lead in helping to build a resilient society that can weather the storm of whatever is next on the risk horizon.
The session recordings of the Lloyd’s Futureset Systemic Risk Masterclass Series can be found here: www.lloyds.com/news-and-insights/futureset/futureset-events
Bobbi Sills is communications executive of the CII