Dark Risks in an Expanding Universe of Exposures

Published in Insurance Insider's Data Room 

In this age of extreme connectivity we are all joined up to the same underlying exposures, which are increasingly man-made and difficult to observe directly. A January 2016 World Economic Forum paper, which introduced the concept of the fourth industrial revolution, outlines how we are on the brink of a connected technological disruption that is set to alter the way we live, work, and relate to one another.

We do not yet know how the transformation will unfold, but there are major implications for the risk community and how we observe and manage a new range of unknown - or, as I refer to them “dark risks.”

I will explain what I mean by “dark risk matter and energy”, which I use as a metaphor that borrows liberally from the latest scientific thinking on the composition of matter in the visible universe. In this metaphor, the fourth industrial revolution has the potential to reshape the nature of risk as we know it by concentrating peak casualty exposures in a kind of “dark risk” matter that cannot be seen by today’s analytics and risk modelling observatories.

Is that the reality, however, or are there potentially visionaries out there – risk exposure pioneers - that are willing to think the unthinkable almost like modern day versions of third industrial revolution scientists such as Albert Einstein or Edwin Hubble?

Scientists have not yet observed dark risk matter and energy directly. It doesn't interact with everyday risk matter in ways that we can accurately measure today and it's invisible to risk modelling and other forms of actuarial analysis, making dark risks difficult to detect.

I believe there is every reason to be optimistic that the unaccounted for dark risk matter and energy that is inflating today’s accelerating exposure universe could be observed, measured and tracked.

In my opinion, new collaborative approaches to working and building up skills in managing complex multi-stakeholder systems in an increasingly interconnected world are required. Insufficient historical data, the length of the indemnity period, and multiple losses that threaten to become systemic are major challenges as is a theoretical misunderstanding of what business interruption coverage provides to an insured today.

At the same time supply chain disruptions can create complex coverage issues. It is common business practice today for companies to have several tiers of suppliers. Sub tier events are difficult for an insured company to observe making it a challenge to follow and control the disruption. The time element part of a supply chain policy is not designed to meet exposures that happen at third party premises. The other factor to consider is that suppliers’ extension clauses commonly apply to first tier or direct suppliers only, for physical damage events and insured perils only, subject to restricted perils.

Modern data analytics and integrated risk modelling strategies can also play a significant role allowing underwriters to perform portfolio management against a known universe of companies. A connected risk management strategy can perform market share analysis, analyse interconnected relationships between companies better and quicker while measuring counterparty exposure, supply chain, sector and systemic risk.

The key to all this is data and collaboration. Today’s 21st pioneering risk scientists will only be able to make sense of today’s unknown perils by working together across silos in a (re)insurance version of the CERN project combining enlightened mutual interest with scientific risk analysis into the nature of dark risks and energy.