What's the biggest risk?

Insurers have been gazing into the crystal ball to figure out the big emerging risks of the future, and what they see is very different to the public.

This is the rub of the Centenary Future Risk Report that was released today by the Chartered Institute of Insurance (CII).

The public see income inequality, energy crisis and overpopulation as big threats. Insurers, however, see other risks such as cyber terrorism as a high-likelihood, high-impact event.

The underlying message of the report is that the public needs a better education on risks. Insurers, by working with other organisations and lobbying the government, will play a key role in changing perception.

The need for education

Educating the public is important for a number of reasons, but let’s take one: the vote. The public have the vote and their key issues are taken onboard by the government. This makes it a more conducive environment for insurers to satisfy the most pressing needs of both the public and companies.

For example, there is pressure for the US government to drop the Terrorism Risk Insurance Act, which is a scheme where the state provides reinsurance coverage to insurers in the event of a major terrorist attack.

The reason there is pressure to scrap the scheme is that terrorism, as a threat, has fallen off the public conscience radar, although it remains a priority for insurers. If the scheme were abandoned, many insurers would probably give up on terrorism coverage in the US as the risk is too great for them to bear the burden alone.

Implications for insurers

Broadly speaking, these kind of future gazing reports, released by the CII, are becoming more and more important to the insurance industry.

This is because insurers will now, more than ever, need to understand future risks if they’re to protect their income streams. Improvements in technology mean that capturing and understanding data is far easier for companies than it has been in the past. As a result, companies are harnessing data and self-insuring through captives or protected cell companies. When this happens, insurers lose out on premium.

This trend of self-insurance is also on the up because of the general economic and business environment; insurers are pushing for price rises at a time when companies want cheaper deals. If the developed world undergoes a Japanese-style period of depressed economic growth, this situation could become the norm.

Of course, the big brokers and specialists, such as Aon, will thrive in this environment, as they have expertise in setting up the captives. But insurers have to be smarter than ever at figuring out where they can offer value to these big corporates.

CII director of policy and public affairs David Thomson said one risk on the horizon was trading in financial markets, and what could happen in the event of a technological failure or some kind of trading breakdown. In a world so reliant on complex algorithms that self-trade and are difficult to understand, such problems could send the financial markets into mayhem and wreak havoc on society at large.

How can insurers help corporations manage their risk and have suitable indemnity for such complex and enormous problems? It requires a great amount of thinking and research. The world of tomorrow is one in which insurers will have to think very carefully about where they fit in.