The (re)insurance industry finds itself at a crossroads, writes Lorie Graham, Senior Vice President & Chief Risk Officer, American Agricultural Insurance Company (AmericanAg). A confluence of interconnected risks – a polycrisis’ – is reshaping the landscape, demanding innovative approaches to ensure stability. The term ‘polycrisis’ describes the convergence of multiple crises, where disparate challenges interact, resulting in an overall impact that exceeds the sum of the individual parts.
This article delves into how the (re)insurance industry is adapting and harnessing the power of recent technologies to navigate this complex terrain. Our thanks to Lorie for sharing this with us for the benefit of other ICMIF members.
Understanding interconnected risks
Gone are the days of managing risks in isolation. (Re)insurers are actively mapping the intricate web of dependencies within their portfolios. Climate change, for instance, is no longer viewed solely as a weather peril. Its potential impact on social unrest, economic disruptions, and even cyber threats is also being meticulously considered.
By integrating these diverse factors into risk models, the industry is gaining a holistic understanding of future threats.
Scenario planning augmented with AI provides a compass for uncertainty
In the face of an unpredictable future, scenario planning has become a critical tool. This proactive approach allows us to identify potential vulnerabilities and prepare for a range of eventualities, thereby minimising losses and ensuring long-term sustainability.
Artificial intelligence (AI) is emerging as a powerful ally in risk assessment. By integrating vast amounts of data encompassing new and evolving risk variables, AI-powered scenario analysis can paint a far more comprehensive picture of potential threats. This allows (re)insurers to not only anticipate and mitigate potential impacts with greater accuracy, but also delve deeper into the complex relationships between seemingly disparate risks. For instance, AI can analyse how a cyberattack on a critical infrastructure point might cascade into a supply chain disruption, ultimately triggering production delays and increased claims costs.
While AI offers undeniable benefits, responsible deployment is paramount. Imprudent adoption can lead to flawed results. To ensure effectiveness, (re)insurers must establish a robust governance framework for AI use. This framework should prioritise human oversight and employ rigorous validation processes to assess the outputs. Additionally, data security is a critical concern. A clear policy against uploading proprietary information to open AI platforms is essential to safeguard confidential information and mitigate potential breaches.
Prioritising responsible use allows (re)insurers to leverage the power of AI with confidence, ensuring its outputs enhance, rather than undermine, human decision-making. The key lies in using AI to augment human expertise, not replace it. This collaborative approach unlocks a deeper understanding of evolving risk landscapes, enabling proactive mitigation strategies and informed decision-making.
Navigating the regulatory maze
The rise of complex risks has also intensified regulatory scrutiny. In the face of a rapidly escalating risk landscape, the drumbeat of regulatory scrutiny has intensified. Reporting requirements are now a constant dance of adaptation, not just for the evolving expectations around climate change, but also for a multitude of emerging threats. Global inflation is pushing boundaries, investment markets are experiencing volatile swings, and supply chain disruptions continue to ripple through the system. Social inflation, with its escalating litigation costs, adds another layer of complexity. The relentless march of digital transformation introduces its own set of challenges, blurring traditional risk boundaries and creating fertile ground for cyber threats. And as if that weren’t enough, the frequency and intensity of secondary perils, like wildfires, tornados, flooding, and hailstorms, are on the rise.
Navigating this complex regulatory environment requires a multi-pronged approach. First, monitoring regulatory changes provides the ability to respond to changing reporting requirements. Second, collaboration with regulators through industry associations can help shape future regulations in a way that balances risk mitigation with fostering innovation. Finally, leveraging scenario analysis can provide insights that we might otherwise have overlooked.
Innovation with a focus on risk appetite and tolerance
While the challenges are undeniable, this period of complex risks also presents an opportunity. By proactively addressing these issues, our industry can develop innovative solutions, build a more robust risk management framework, and ultimately emerge stronger and more resilient.
Within most risks lie seeds of opportunity. Forward-thinking (re)insurers understand this, and they are exploiting these opportunities to develop innovative products and services. This approach goes beyond simply chasing potential returns. These (re)insurers are conducting comprehensive risk assessments to understand the impact on their dynamic risk appetite, which allows them to seize innovative opportunities with a clear understanding of the associated risks.
As (re)insurers, we may choose to adjust our risk appetite and risk tolerance to pursue innovative opportunities that involve higher, but meticulously managed, risks. By proactively adjusting risk tolerance under favorable conditions, we can stay ahead of emerging trends and adapt in a world of uncertainty.
The (re)insurance industry’s ability to adapt to and embrace complexity will be crucial in navigating the polycrisis. By promoting research, harnessing the power of AI, and fostering a culture of innovation, we can emerge stronger and more resilient in the face of an ever-changing risk landscape.
