Emerging Risks


Despite regulatory challenges, privacy concerns and a lack of capabilities that could stall their widespread use, drones could have a significant impact on the property/casualty industry.

recent report from IT firm Cognizant suggests that commercial and personal lines insurers that cover property risks are likely to be early adopters of drone technology. Hat tip to Claims Journal which reports on this story here.

For example, a property adjuster or risk engineer could use a drone to capture details of a location or building, and obtain useful insights during claims processing or risk assessments, Cognizant says.

Drones could also be deployed to enable faster and more effective resolution of claims during catastrophes.

Crop insurance is another area where drones could be used – not only to determine the actual cultivatable land, but also during the claims process to understand the extent of loss and the actual yield, reducing the potential for fraudulent claims.

The findings come amid recent reports that several home and auto insurers are considering the use of UAVs.

The Association for Unmanned Vehicle Systems International predicts that within 10 years (2015 to 2025) drones will create approximately 100,000 new jobs and around $82 billion in economic activity, the report notes.

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Cognizant believes now is the time for insurers to consider the opportunity that drone technology presents, especially in the areas of claims adjudication, risk engineering and catastrophe claims management:

With drones poised for commercial use, insurers could use them specifically to help reduce operational costs and gather better-quality information. This could help improve the productivity, efficiency and effectiveness of field staff (e.g. claims adjusters and risk engineers), and improve the customer experience by resolving claims faster, especially during catastrophic events.”

Cognizant goes on to note that drone enhancements such as artificial intelligence, augmented reality and integrating audio, text and video already exist in some shape or form. Insurance carriers should expect to see the adoption of drones increase significantly as these features are integrated into standard drones, and as regulations for commercial use of drones are defined.

It concludes:

As insurance carriers build business and technology use cases and the necessary architecture and services, they must consider not only how and where drone technology fits into their digital roadmap but also how the operating model can be enhanced to deliver optimal benefits for the business and its customers.”

Unmanned aerial vehicles (UAV), otherwise known as drones, appear to be moving closer to commercial application, and property/casualty insurers are getting involved.

On the one hand, insurers are looking at ways to use this emerging technology to improve the services they provide to personal policyholders, at the same time they are assessing the potential risks of commercial drone use for the businesses they insure.

The Chicago Tribune this week reported that several home and auto insurers are considering the use of UAVs, and at least one has sought permission from the Federal Aviation Administration (FAA) to research the use of drones in processing disaster claims.

According to Sam Friedman, research team leader at Deloitte, drone aircraft could be the next mobile tech tool in claims management.

In a post on PC360.com, Friedman says that sending a drone into a disaster area would enable insurers to deliver more timely settlements to policyholders and spare adjusters from being exposed to the hazards of inspecting catastrophe claims in disaster areas.

Commercial insurers also have a huge stake in the drone business. In a recent post on WillisWire, Steve Doyle of Willis Aerospace, says businesses need to consider UAV risk issues such as liability and privacy:

Risk managers for organizations that could potentially gain considerable competitive advantage from eyes in the sky should consider the risk issues now so they are ready to advise their organizations as UAV options broaden.”

Insurance is not the only industry eyeing commercial applications. Agriculture, real estate, oil and gas, electric utilities, freight delivery, motion pictures, to name a few are seen as major potential markets for UAVs.

A recent report by IGI Consulting predicts that U.S. sales of UAVs could triple to $15 billion in 2020 from $5 billion in 2013.

However, the broader commercial use of drones in the U.S. will depend on federal regulators developing appropriate rules. In September the Federal Aviation Administration (FAA) gave the go-ahead for six TV and movie production companies to use drones for filming.

In his WillisWire post, Doyle notes that regulation is a key element to the successful widespread development of the drone industry in the U.S. given the complexities of the liability environment, the crowded skies over metropolitan areas, and the variety of UAVs and their uses.

One thing’s for sure, when UAV use takes off in the U.S., insurers are ready to support this emerging technology both as risk takers and risk protectors.

The recent disclosure of a major data breach at retailer Home Depot has once again put the spotlight on the increasing vulnerability of businesses to cyber threats and the need for cyber insurance.

But companies are uncertain of how much insurance coverage to acquire and whether their current policies provide them with protection, according to a new report by Guy Carpenter.

It speculates that one of the roots of the uncertainty stems from the difficulty in quantifying potential losses because of the dearth of historical data for actuaries and underwriters to model cyber-related losses.

Furthermore, traditional general liability policies do not always cover cyber risk, Guy Carpenter says.

It notes that in the United States, ISO’s revisions to its general liability policy form consist primarily of a mandatory exclusion of coverage for personal and advertising injury claims arising from the access or disclosure of confidential information.

Though still in its infancy the cyber insurance market potential is vast, Guy Carpenter reports. It cites Marsh statistics estimating that the U.S. cyber insurance market was worth $1 billion in gross written premiums in 2013 and could reach as much as $2 billion this year.

The European market is currently a fraction of that, at approximately $150 million, but could reach as high as EUR900 million by 2018, according to some estimates.

Guy Carpenter also warns that cyber attacks are now top of mind for governments, utilities, individuals, medical and academic institutions and companies of all sizes, noting:

Because of increasing global interconnectedness and explosive use of mobile devices and social media, the risk of cyber attacks and data breaches have increased exponentially.”

Cyber attacks also present a set of aggregations/accumulations of risk that spread beyond the corporation to affiliates, counterparties and supply chains, it adds.

Check out the I.I.I. paper on this topic: Cyber Threats: The Growing Risk.

Sporting organizations around the world and their liability insurers have to be keeping a close eye on the latest developments in a multi-million dollar settlement which will see the National Football League (NFL) pay out an uncapped amount to compensate retired football players suffering from certain severe concussion-related neurological conditions.

A federal judge approved the preliminary revised settlement yesterday after the original $765 million settlement proposed by the NFL was rejected by U.S. District Court Judge Anita B. Brody in January over concerns that the amount would not be enough to cover the claims from more than 20,000 retired players over the 65-year life of the settlement.

Concerns have been growing over the risks of sports-related concussions in recent years since the filing of the first lawsuits by injured professional football players against the NFL in 2011.

Young people participating in a range of sports including soccer, basketball and ice hockey are also affected. The Centers for Disease Control and Prevention estimates that 173,285 sports- and recreation-related traumatic brain injuries (TBI), including concussions, among children and adolescents are treated in U.S. emergency rooms annually.

The New York Times reports that despite being uncapped, the new settlement does allow the NFL to contest an unlimited number of requests for awards by retired players as a way to prevent fraudulent claims.

Retired players will receive packets explaining the terms of the settlement over the coming weeks and players will be deemed to be in favor of the deal unless they opt out, which would preserve their legal rights, the NYT says. They can also object to parts of the deal.

A fairness hearing on the settlement is scheduled for November 19 in Philadelphia.

The settlement provides for a $75 million baseline assessment program that will offer all retired NFL players baseline neuropsychological and neurological evaluations to determine the existence and extent of any cognitive defects.

The 65-year monetary award fund will award cash to retired NFL players who already have a qualifying diagnosis or receive one in the future.

The court order details potential awards for qualifying diagnoses of up to $3.5 million for neurocognitive impairment, $3.5 million for Alzheimer’s Disease and Parkinson’s Disease, $5 million for amyotrophic lateral sclerosis (ALS), and $4 million for players who die with chronic traumatic encephalopathy.

The awards may be reduced based on a retired player’s age at the time of diagnosis, the number of NFL seasons played, and other offsets outlined in the settlement.

Business Insurance reports that the settlement approval notes that players who receive awards from the NFL fund are not required to release claims against the NCAA (National Collegiate Athletic Association) or any other amateur football organizations for concussion claims.

A 2013 article by then National Underwriter reporter Chad Hemenway provides invaluable insight into sports-related traumatic brain injuries and how the legal fallout may change the way sports are insured.

Check out I.I.I. facts and stats on sports injuries.

American businesses lose an average of 2.8 million work days each year due to unplanned absences, costing employers more than $74 billion, so it’s with interest that we read of a significant increase in absence due to obesity and skin cancer in a just released study by Cigna.

According to Cigna’s analysis of 20 years of short-term disability claims, claims related to obesity increased by 3,300 percent between 1993 and 2012.

In 1993, obesity ranked 173 out of 267 diagnostic drivers of absence, accounting for 0.04 percent of claims that year. By 2012, obesity had jumped 133 places to number 40 on the list, accounting for 0.70 percent of claims.

Hat tip to Business Insurance which reports on this story here.

Cigna also reports that new claims and absence related to skin cancer increased more than 300 percent in the 20-year period.

Between 1993 and 2012, skin cancer jumped from 91 to 27 on the list of diagnostic drivers of absence, and its share of claims had increased to 0.9 percent in 2012, up from 0.2 percent in 1993.

The analysis also shows a 45 percent increase in work absence due to the surgical treatment of herniated discs, the most significant increase in short-term disability claims among sedentary occupations over the 1993 to 2012 period.

Cigna notes that the most frequently approved short-term disability claims both 20 years ago and today, remain musculoskeletal disorders, which make up 25 percent of all non-maternity absence.

In a press release, Dr Robert Anfield, chief medical officer for Cigna’s disability insurance unit says:

The aging workforce and a trend towards growing waistlines has made some medical conditions more dominant factors for short-term disabilities than they were 20 years ago. For example, arthritis and tendonitis-related absences have both increased more than 50 percent since 1993.”

However, the study found significant changes in short-term disability rates for obesity, cancer, depression and herniated discs that uncover the impact of medical advances on absence and productivity.

Check out I.I.I. facts and statistics on disability.

Check out an I.I.I. study on obesity, liability and insurance here.

The number of countries with downgraded political risk ratings grew in the last year, as all five emerging market BRICS countries (Brazil, Russia, India, China, South Africa) saw their risk rating increase, according to Aon’s 2014 Political Risk Map.

As a result, countries representing a large share of global output experienced a broad-based increase in political risk including political violence, government interference and sovereign non-payment risk, Aon said.

The 2014 map shows that 16 countries were downgraded in 2014 compared to 12 in 2013. Only six countries experienced upgrades (where the territory risk is rated lower than the previous year), compared to 13 in 2013.

Aon noted that Brazil’s rating was downgraded because political risks have been increasing from moderate levels as economic weakness has increased the role of the government in the economy.

This is of particular concern given this year’s World Cup and the 2016 Olympics.”

Russia’s rating was also downgraded due to recent developments with the Ukraine and the annexation of Crimea.

Aon said:

Political strains and focus on geopolitical issues have exacerbated an already weak operating environment for business and exchange transfer risks have increased following the risk of new capital controls. Russia’s economy continues to be dominated by the government, so economic policy deadlock has brought growth to a standstill and with it an increase in the risk of political violence.”

India, China and South Africa also saw their ratings downgraded.

In another key takeaway Aon noted that Ukraine is now rated a very high risk country, as the implications of developments following the annexation of Crimea by Russia and government collapse warranted a further downgrade in political risk.

Exchange transfer risks, which are already very high will be further increased by restrictions in the financial system, Further, the willingness and ability of the country to settle its debts may be affected.”

The map measures political risk in 163 countries and territories, in order to help companies assess and analyse their exposure to exchange transfer, legal and regulatory risk, political interference, political violence, sovereign non-payment and supply chain disruption.

Hat tip to Insurance Journal which reports on this story here.

Emerging risks that risk managers expect to have the greatest impact on business in the coming years could be on the cusp of a changing of the guard, according to an annual survey released by the Society of Actuaries.

It found that the risk of cyber attacks and rapidly changing regulations are of growing concern to risk managers around the world, and may be slowly replacing the risk of oil price shock and other economic risks which were of major concern just six years ago.

Some 47 percent of risk managers saw cyber security as a significant emerging risk in 2013, up seven points from 40 percent in 2012.

The SOA noted that this perceived risk predates recent cyber security events (read: the December 2013 Target breach) that have opened up new corporate data security vulnerabilities. The online survey of 223 risk managers was conducted in October 2013.

Regulatory framework/liability regimes was also perceived to be an emerging risk of impact by 23 percent of risk managers, an increase of 15 points from just eight percent in 2012.

The survey noted that as the regulatory framework takes shape post-financial crisis, risk managers are currently trying to implement voluminous and changing regulations on short time frames with: limited additions to staff; and regulators who often have limited understanding of risk tools.

Just 33 percent of risk managers said economic risks – such as oil price shock, devaluing of the U.S. dollar, and financial volatility – will have the greatest impact over the next few years, versus an all-time high of 47 percent in 2009.

In fact, the economic risk category is at an all-time low in 2013, the SOA said.

Hat tip to The Wall Street Journal’s CFO Report which reported on the survey here.

Climate change is among the five most likely and most potentially impactful global risks, according to the just-released World Economic Forum (WEF) 2014 Global Risks Report.

The report assesses 31 risks that are global in nature and have the potential to cause significant negative impact across entire countries and industries if they take place.

An analysis of the five risks considered most likely and most impactful since 2007 shows that environmental risks, such as climate change, extreme weather events and water scarcity, have become more prominent since 2011 (see chart above).

This suggests a pressing need for better public information about the potential consequences of environmental threats, the WEF says.

Concern about socio-economic risks such as income disparity, unemployment and fiscal crises has become more prominent over the years.

The report reveals that fiscal crises and structural unemployment and underemployment are among the most impactful risks while the latter also feature among those most likely to occur. This has knock-on effects on income disparities, which is regarded as the overall most likely risk, the WEF notes.

Cyber attacks and the breakdown of critical information infrastructure also feature among the most prominent risks in this year’s report.

The WEF notes:

This arguably reflects the increasing digitization of economies and societies, where rising dependence on information and data, as well as the systems to analyze and use them, has made attacks more likely and their effects more impactful.”

WEF note: Global risks may not be strictly comparable across years, as definitions and the set of global risks have been revised with new issues having emerged on the 10-year horizon. For example, cyber attacks, income disparity and unemployment entered the set of global risks in 2012. Some global risks were reclassified: water supply crises and income disparity were reclassified as environmental and societal risks, respectively, in 2014.

The report is published in collaboration with Marsh & McLennan Companies, Swiss Re, Zurich Insurance Group, National University of Singapore, Oxford Martin School, University of Oxford, Wharton Risk Management and Decision Processes Center, University of Pennsylvania.

A global pandemic is the most important extreme risk for the insurance industry to worry about in the long term, according to a survey of global insurance industry executives conducted by Towers Watson.

Rounding out the top three extreme risks of concern are a large-scale natural catastrophe and a food/water/energy crisis, the survey found.

Other top 10 extreme risks named in the Towers Watson survey include cyber-warfare, an economic depression, a banking crisis and a default by a major sovereign borrower.

Votes were compiled in a wiki survey which enabled participants to add their own ideas. Over 30,000 votes were cast.

Meanwhile, a new report by AonBenfield says pandemic risk remains the most important mortality exposure for the insurance industry and is placed above other forms of catastrophic event including natural catastrophes, nuclear explosions, and terrorism.

In Pandemic Perspective, AonBenfield points out that according to historical data, pandemics are large enough to destabilize the insurance market more than once every 200 years, with three global pandemics recorded in each of the last three centuries.

This suggests that the majority of people working in the insurance industry today are likely to face at least one pandemic during their careers. Insurers should be aware that now is the time to anticipate and educate themselves on pandemic risk, and begin to model it.”

Check out I.I.I. facts and statistics on mortality risk.

High taxation has become the number one threat to global business, soaring up the rankings from 13th to 1st place in the last two years, according to the third Lloyd’s Risk Index.

Other top risks concerning more than 500 of the world’s most senior business leaders in 2013 are loss of customers/cancelled orders, cyber risk, increased material costs and excessively strict regulation.

Interestingly, the survey found that U.S. businesses feel even more unprepared to deal with the risk of high taxation than their European counterparts.

While both regions put high taxation as their number one risk, U.S. respondents rank their preparedness at 37 out of 50, compared to European businesses at 21 out of 50.

But does the increase in volume on the subject of corporate taxation reflect reality? Not necessarily, Lloyd’s says.

It cites data showing that corporate taxes have actually declined or remained static in the past few years, despite the financial problems of most major economies.

Still, personal tax rates in some economies have risen, which particularly affect global businesses competing for international talent, it adds. Indirect taxes are also on the increase.

Lloyd’s says:

The reality for businesses appears to be that government ambiguity about business taxes, whether about extending jurisdictions, amending legislation or changing rates, may actually be more damaging for business confidence than the reality.”

In a press release Lloyd’s chief executive Richard Ward warns that focusing on near-term issues at the expense of longer-term strategic decision making can leave organizations over-exposed to future business challenges:

With business tax in the spotlight and rising up the political agenda, executives are understandably concerned. Yet the danger is that an emphasis on near-term, operational issues comes at the expense of significant, strategic decisions that have previously exercised business leaders.”

First published in 2009, the Lloyd’s Risk Index is run in conjunction with Ipsos MORI.

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