This week we caught up with Christopher Mackinnon, Lloyds General Representative in Australia talk with us about understanding emerging risk and risk management. Christopher will be a Keynote speaker on day one of the RMIA National Conference.
Your keynote will outline the Understanding Emerging Risk. Are you able to outline one or two of currently emerging risks for us here?
Lloyd’s defines an emerging risk as an issue that is perceived to be potentially significant but which may not be fully understood or allowed for in insurance terms and conditions, pricing, reserving or capital setting. It is important to understand that in some cases the threat itself is not emerging, but our vulnerability to the risk it poses is.
Take for example the threat of Solar Storm – Not in itself an emerging risk, with major storms having been recorded in detail as far back as the Carrington Event in 1859 – However the threat these storms now pose to an interconnected, technology dependant society is increasing exponentially.
Human Pandemic is another good example – The Spanish Flu pandemic in 1918 killed nearly 100m people. Modern medicine, response coordination and communications have significantly improved the risk, but global society, and international movement of people increases the threat for the fast spread of disease dramatically. Spanish Flu took three months to go global, Swine Flu took justy three weeks.
How would you describe the culture of risk management at Lloyds?
We are constantly striving to better understand the world around us so that we can assist our customers to manage and mitigate risks, and make sure that our Markets pricing fairly reflects the risks posed by various sectors or perils.
The Emerging Risks team at Lloyd’s is responsible for identifying and assessing these new and/or developing risks. We work with research partners to reduce the uncertainty surrounding these risks, and we collaborate with practitioners at Lloyd’s and in the wider insurance market to understand the challenges and opportunities for insurance.
We make our findings public for the benefit of our market and our customers on the www.lloyds.com website, with Emerging Risk Reports categorised into thematic areas.
How would you describe holistic and contemporary risk management?
A famous Donald Rumsfeld quote relating to “things we know we know”, “known unknowns” and “unknown unknowns” sums this up nicely.
Highly developed and well proven modelling techniques allow us to assess the threat of the “known knowns”, and even many of the “known unknowns” with a high degree of accuracy.
The challenge we face with emerging risk is the “unknown unknowns”. Lloyd’s carries out horizon scanning activities, using a combination of statistics, value at risk models, and development of various disaster scenarios.
What’s the most difficult part of translating theory to practice?
Our view is that academics should be encouraged to speculate, provided it is clear that is what they are doing. However, modellers set themselves high standards and are often uncomfortable giving their opinions when little is known.
This is ironic because they are often best placed to have a view – The vacuum they leave behind will often be filled by the voices of those far less knowledgeable.
What are the biggest risks that Lloyds faces at the moment?
The emergence of a new societal threat in the form of cyber risk is creating the urgent need for appropriate risk-mitigation and risk-transfer mechanisms.
With the significant growth of “The Internet of Things” and technology generally, we are seeing an evolution in risk – autonomous vehicles, industrial control systems, drones, smart phones, data and privacy – all of which requires careful consideration
From an insurance perspective, we need to ensure that cyber cover insurance is not unintentionally given away “free” as part of standard policy wordings. This is not to discourage the inclusion of cyber coverage – only to ensure that the risk is clearly identified and understood, and that potential costs are reflected in the premium. Only by pricing the risk appropriately can insurers offer a sustainable risk-transfer mechanism for cyber threats.
Another major risk we face is that more people are living in cities today than at any point in history. This is driving economic growth around the world, but it is also concentrating wealth in vast urban centres, which makes these city economies – as well as national and global economies – more exposed to the impacts of manmade and natural disasters
Our recent report, Lloyd’s City Risk Index 2015-2025 identifies that 301 cities around the World now generate half of the world’s GDP, as that is predicted to be over 60% by 2025.
Identifying these risks, modelling and measuring their impacts, and investing in greater resilience – from better infrastructure to increased insurance protection – are the first steps in the process of risk management.
How do you balance commercial decisions with ethical considerations?
Lloyd’s operates on the basis of agreed Minimum Standards, established under relevant Lloyd’s Byelaws relating to business conduct.
All managing agents are required to meet the Minimum Standards. The requirements represent the minimum level of performance required of any organisation within the Lloyd’s market to meet the Minimum Standards.
Our view is that an ethics based culture should be promoted through an ethics programme which works to embed ethical values into business behaviours, strategy, decision making, processes and operations, as well as manage the risk of ethical misconduct.