A high-level executive briefing on the perils of connected risk to the global insurance markets was convened today at Lloyd's of London.
Hosted by Russell Group, a leading risk management software and services company, the forum heard from experts at the cutting edge of insurance, reinsurance, business risk analysis, cyber attack prevention and protection.
Over 100 senior industry figures, including from Lloyd's syndicates, risk management firms, the Bank of England, HM Treasury, Fortune 500 companies and top international business and sector-specific media including The Wall Street Journal, Financial Times and New York Times were drawn to the event at the historic Old Library at Lloyd's.
Defined as the systemic exposure of commercial organisations, their partners, suppliers and clients to cumulative and cascading financial, operational and reputational vulnerabilities, connected risk is widely regarded as an existential threat to both the insurance industry and beyond.
Suki Basi, CEO of Russell Group, explained that connected risk is caused by an inherent weakness in the inter-connected architecture of today's business-to-business relationships. 'These are increasingly digital and allow a single negative event to exponentially spread disruption, paralysis and wreak severe economic damage both within and between organisations,' claimed Basi.
The key drivers for connected risk are the ways in which political, environmental, supply chain, cyber and credit risks combine to cause financial, operational and reputational loss.
'In an increasingly connected world, corporates and their networks need to prepare for more unpredictable 'black swan' events', said Basi, 'which are caused when a local event produces a 'butterfly effect' and unleashes a cascade of further events through the network, impacting numerous corporates along the way.
'This exposes a raw nerve in corporates' sophisticated global supply chains and/or delivery systems as they are now vulnerable to extreme events and systemic risk.'
Speakers addressing key concerns for the insurance markets included Dr Adriano Bastiani, Head of Casualty Facultative for Global Clients North America at Munich Re, and cyber experts Jamie Bouloux, CEO of EmergIn Risk and Luca Berni, an Analyst in the Cyber Threat Intelligence Team at Control Risks.
During a wide-ranging briefing and lively audience discussion, the event identified business interruption as a key business risk contingent to increasingly interconnected enterprises. Similarly, both a lack of understanding and communication was revealed between corporate risk managers and their (re)insurer counterparts.
Using recent examples, compelling case studies including Hanjin and Ransomware highlighted the devastating effects of connected risk on the automotive, shipping and aviation industries. Meanwhile, a geomagnetic solar space storm scenario that knocks out global communications and power networks was shown to cause an estimated $2 trillion in worldwide losses.
Russell Group's CEO warned that, as corporates become more connected, they become more diversified and carry more risk. 'The events highlighted today will tend to be more multi-class, which will place strains on exposure management and pricing through the siloed insurance classes which are not set up to analyse beyond all risk, therefore balance sheets will be exposed to this connected risk as it has not been mitigated.'
The crux of mitigating such risk is clean data leading to accurate, up-to-date risk profiles. Basi said 'Once organisations, their connections, locations and risk profiles are known, we can begin to analyse with more confidence, be more consistent in knowing exposure, pricing the business and modelling scenarios. Consequently, we begin to optimise capital, have the financial resource to create new products and deliver better return on equity.'
The question was raised whether the threat posed by connected risk warrants the formation of an industry-agnostic body to research its causes and provide solutions for minimising its damaging impact.