Ben Telfer: 

Today, we’re delighted to be joined by André Gerling, who is an Executive Director at Willis Re. As many of you are aware, Willis Re is one of the ICMIF Supporting Members. André actually joined a previous Intelligence Committee meeting and presented on this topic. So we’re delighted that he’s here today to present on this webinar. André, thank you for joining us and over to you. 

André Gerling: 

Thanks, Ben. Thanks everyone for dialling in. And it’s great to see such interest in the topic of emerging risks. And as Ben already pointed out, we had the initial presentation at the Intelligence Committee meeting in Cologne in December 2019. And probably worth mentioning that for that meeting, there was also a survey done on the participants on emerging risks, which already showed that there’s basically one mixture of risks, sources and scenarios that come to people’s minds when it comes to emerging risks. 

So what we’ll do today is basically a holistic run through everything, every source that might generate risks that could affect, well, insurance companies but also humanity and the environment in any shape or form. And later on, we will then focus on three main risks that were identified by us. But fortunately, also reconfirmed by the latest World Economic Forum, so we weren’t completely off track. And in the end of the presentation and also when we look a bit closer to the main three risks that we have identified, we will focus on this specific situation of a mutual insurance company, and how you are positioned in this context. 

We will focus first of all on all the big and threatening risks to insurance but also to humanity. So, for each and every of those threatening risk scenarios, you can be almost sure that Hollywood has taken care of them. So, in the initial presentation, we had a couple of movie references. So what you will miss this time is you will miss the warm round of applause, if you recognize all of them. 

However, the benefit of you dialling in here and now and not in being there in December is actually that we have included the latest research that was done and published by the World Economic Forum last week. And this will include the latest view globally on emerging risks, and we will compare how that has moved over time and whether there are significant changes that you should keep in mind. 

We will first of all have the actuarial approach to emerging risk, which is basically defining what it is, categorizing where they might come from, listing the emerging risks as such and ranking them in terms of probability likelihood scale in order to focus on the most relevant ones. And later on, we will see what the impact on insurance is, whether there are opportunities in there as well not just threats and focus on your position as a mutual. 

First of all, looking to the research base of this. And this is also, for you hopefully quite relevant when you want to dig a bit deeper into the scenarios and get a bit more explanation on the risks as such. There are two publications within the wider world of Willis Towers Watson. So one is the Thinking Ahead Institute that results from, or is from a think tank that was found by the former Towers Watson part of our group. They will look at emerging risks more from an asset side. 

If you’re interested in the impacts on your asset part of the balance sheet, this is a very good source to get a bit of a feel, what might be on the way. And the liability parts is what the Willis Research Network is focusing on. So that is the legacy Willis part of Willis Towers Watson and they look mainly into the effect on the liability side, especially with respect to climate. Both publications can be found online. If you wish, you can drop me an email and I can send them to you as well. But they’re all publicly available and you can use them and go through them. 

First of all, definition of emerging risks. I digged a little bit and found on the internet two definitions that I find quite interesting. So basically, if you look at the consultants definition of emerging risks, it’s last scale events or circumstances beyond one’s direct capacity to control that impact in ways difficult to imagine today. That’s not very definite statement, so you might get the feeling that consultants will just want to sell you some consulting hours to explain you a bit further what they actually mean by that sentence. 

However, if you look into what Lloyd’s of London was putting there, is an issue that is perceived to be potentially significant but which may not be fully understood or allowed for an insurance Terms and Conditions pricing reserving or capital setting. And that is quite interesting because it gives you a feel that if you are negotiating with insurers and reinsurers in some shape or form with respect to emerging risks, they might have spent a considerable amount of their time in measuring the impact and deciding on how they want to manage those risks going forward. 

In that respect, it already shows that it’s quite crucial to get a feel for what’s coming and also get a feel for how that might impact you because it will become relevant in negotiations going forward. And I think the latest examples for that are definitely climate and cyber, that are already tackled in some shape or form by exclusions by specific limitations, especially from reinsurers. But we’ll dive a bit deeper into that later on. 

The six main sources of risk are, and that is the categories we’ll go through very briefly later on, is basically financial, political, social, economic, environmental and technical risks that might affect you. So these categories are potentially overlapping. We’ll go through a couple of potential scenarios so you get a feel for what those categories mean. And these are roughly the categories that are also used by the World Economic Forums, not only in our own publication, but also in other publications. So it’s basically a general setup. 

However, you can of course have, say for example, environmental risks that materialize in economic, political, social, financial effects. So they are not just junked. Going through it, and this is basically where you should start if you still want to go through the challenge finding the movie references to Hollywood. The financial risks, so you can mainly boil it down to liquidity and solvency. So, if you look at financial risks, the main sources of emerging risk threats are coming from scenarios like a banking crisis, like an insurance crisis or a crisis or sovereign default and the effects that follow from it. 

We will not dig into these scenarios here, but you can find detailed descriptions of what might happen and what is considered in the overall review of the scenarios in the publications mentioned before. Next source of risk is economic. So that is basically, if you want to summarize it a shock to either growth, prices, or trust in general. So if you have a shock to growth, you can have either a depression, which is basically a short painful construction, but usually a contraction, but usually you have a swift recovery. So that’s basically if you want to call it a blip. 

But more painful because it’s much slower and could go on for years, stagnation of growth. So you just have not that necessary development over time, which will conflict with the general idea of capitalism if you want to boil it down to that. Second thing is shock to price levels. So a hyperinflation, a rapid hyperinflation, probably even more damaging could be a deflation. Whatever happens in both cases you have incorrect prices, which cause problems in the economic system, but also, of course, in the financial system. And then probably the most dramatic thing that the institutes came up with is a collapse in trust, especially a collapse in trust of the monetary system, which would, ultimately worst case scenario lead to an abandonment of fiat money. 

Basically, you can’t really use a currency anymore and that causes to the collapse of economic systems as a whole. So the worst case would be a complete breakdown of capitalism. These risks listed here can be quite extreme. So we will later on not also rank them by the potential impact and scale but also by the probability of them happening, so it should all be pretty comparable later on. Next thing is political risks, which basically cause whole countries or regions or even the world to collapse in a way that global markets will not function anymore. And the breakdown of markets and social environments is the result of that. 

It’s basically global trade collapse, which is not too unlikely given the latest shift towards protectionism from a very global view of political systems. It could be World War III, it could be anarchy, very extreme political extremism or extreme terrorism that could lead to that. So these sources of risk in those scenarios are considered. Environmental risks which are pretty much in the focus of every publication right now, if you read the words emerging risk, but environmental risks are not only natural catastrophes. Of course we’re considering extreme natural catastrophes like magnitude 10 earthquake and something like that or a super volcano. But it could also be humanity cause environmental risk. Biodiversity collapse is one of the main risks that has been named by the World Economic Forum as well. A general change in global temperature but also exogenous risks. 

I think the alien invasion is probably a bit farfetched. But other cosmic threats like solar storms, whatever could fall onto the earth is considered as a potential very, very adverse scenario that could cause significant amounts of disruption. And we got the social risks, sorry. That was one too far. We got the social risks, which basically affect the smooth functioning of society. That could come from various sources. That could be extreme longevity, which will certainly have a massive impact on on life insurance and health insurance companies. Could also be food, water, energy crisis, is one thing that’s relatively high on the top of the list, if you look to the World Economic Forum. Could be pandemics. I mean, pretty much in the news lately. 

Although the coronavirus currently is not necessarily in the sweet spot of pandemic disease, so doesn’t have a high mortality currently, although it has a very high infectivity, and could develop into something that’s potentially very harming or even more harming than it already is. And also a health progress backfire, which basically means it doesn’t follow the current trend of improved health, and could go the other way. And another thing that could cause significant social disruption with everything that follows from it is organized crime that could lead to basically killing the smooth functioning of a society. 

And last but not least, the technical sources of risk. So that could, of course be emerging technology that’s quite high on the hit list of people that have to come up with something that might be potentially harming, so it’s cyber warfare biotech cat. And some publications also mentioned the technological singularity. So it’s basically if you want to compare that is pretty much what Terminator was explaining. So it’s humans that design a super intelligence and they will basically take over the world. Again, a bit farfetched. However, this also refers to current technology. So it could be coming from nuclear contamination following technical failures, could be infrastructure failure, could be IT infrastructure failure. 

There’s various things that you can think of. And so this is something that’s also quite a wide category of things that could potentially go wrong. So these sources of risk, and the scenarios belonging to those sources have been listed, categorized and ranked. So what we did in our Thinking Ahead report was developing various scenarios for those categories. So if you look at the left-hand side of this table, you see a P. This is all the scenarios for political risk, I would say. Then we got F, F1, F2, F3, so that’s financial risks and so on, and so on. The various scenarios are described in detail later on. What we did was we assigned a likelihood of this happening. So a one in this column, a likelihood of one refers to a one in 10 year event, a two is a one in … Was it 20 years event? 

If that’s a three, this would be a one in 100 years, or a four is much higher than one and 100 years, say, for example, the alien invasion would be very unlikely, so it would be a four. Next thing is the uncertainty whether this thing would eventually happen in the near future. And in what shape and what outcome might result from it. So if we are pretty sure what the effects would be, for example, the banking crisis, we had a couple of banking crises so we have a rough idea what the outcome might be, so the uncertainty around that is relatively low. Could be bigger or smaller, but the impacts of it are quite foreseeable. Whereas if you look at the alien invasion, again it’s a great example for something very unlikely and very far away. 

That has a very high degree of uncertainty. We don’t really know what’s going to happen if the aliens invade the earth. They could be super friendly and cure all diseases, but they could also destroy the earth. The impact is rated in two stages. First of all, is the intensity of the impact. Is it something that’s endurable, something that’s causing damage, a lot of damage, but it could be overcome? Is it crushing? So really, really causing various parts of the social environment, the economy, the financial system, the political system, et cetera, et cetera to be damaged. So that would be a two, for example. Well, again, hyperinflation, depression, something like that and also biodiversity collars that would really crush much more than just the environment as such, or is it existential? 

Would it basically wipe out humanity? Or does it have the potential to wipe out humanity? And then you have the scope of the impact, so is it a local event? That’s a one. Is it potentially a global event affecting the whole earth? Is it trans-generational? So is it global but lasting for longer than 20, 30 years? Or is it 10-generational and would affect everything that comes after us? So with these rankings and levelling, what we did was ranking all the scenarios in a way that we say the number in the rank gives you a feel for which is the most likely and also scary and threatening scenario that we should consider. And by far number one of that ranking is the global temperature change. 

The second scenario is a global trade collapse. And the third scenario was cyber warfare. So these are the three main scenarios or the three most threatening scenarios that came out of that ranking, which caused us to focus on basically climate change or climate risks, political risks and cyber risks, especially when we focus on a couple of scenarios later on. So this is purely our own internal research. And the method methodology already said is quite comparable to what the World Economic Forum has published. So in order to reconfirm what we did we showed this map which is the overview of emerging risks that was published in 2018, for the World Economic Forum 2018. And they have more or less on the left-hand side comparable categories, not exactly the same, but pretty comparable. 

And they rank those scenarios by likelihood and impact. So pretty much same setup as we did. On the top right corner, these are the scenarios that have a relatively high likelihood but also relatively high impact they’re causing. So you see in the top-right corner, it’s extreme weather events, natural disasters, and climate change in general and the adaption and mitigation of it. So they see this as well as quite a substantial source of risk. They have cyber-attacks up here in the top-right corner and then the next areas that are of concern are pretty much social societal, so which would be large scale migration, would be water crisis, et cetera, et cetera, and also a couple more environmental risks. 

We thought it’s probably a good idea to look what they have published in 2020 and see how that compares to two years ago, because a lot of things have changed. I think the perception, especially of climate risk has changed quite a lot. Cyber has developed rapidly over time. So this was published a couple of weeks ago, before the World Economic Forum, 2020. We see that as all these climate dots have moved further up in both directions. So we now have the five main risks identified by the World Economic Forum are more or less related to environmental risks, so it’s a quite significant move upwards here. And we see a lot more technology risks, cyber-attacks, data fraud, data theft and the breakdown of information infrastructure. So these are major concerns now that haven’t been there or not to that extent, two years ago. 

We see that especially the cyber threat is developing quite rapidly and is coming more and more to the attention of what the economic participants or participants often the economy in general, but with respect to insurance, also insurers, reinsurers and especially regulators. And the political risks have moved down a little, which is quite interesting because … I mean, two years ago, we were in massive discussions with respect to Brexit. There was quite some movement towards localization or rather than globalization that was starting of the US and China trade talks. 

That was potentially quite threatening if you look to the horizon, and this has cooled down a little bit. So political risks, geopolitical risks have moved down a little bit. But still the highest ones up here is, or one of the highest ones is the interstate conflict. So that is still quite a threatening thing on the agenda. So we’ll look into those three areas in a bit more detail and see what is important to know, what is important to consider and what insurance companies should focus on. 

If we start with a focus on climate change, we will start with a couple of definitions and a general setup of climate change and then dig a bit deeper, because there’s a lot of information flying around not only on climate, but also a political risk. And we try to filter that a little bit, so we will not cover all potential topics with respect to those scenarios, but try to focus on the ones most relevant for you as a mutual insurance company. 

First of all, climate change is not new, it never had a beginning, and it will never have an end. It’s just it’s always been changing, but it’s been changing a bit quicker than it was in the recent past. And especially, it’s more and more coming to the minds of well, insurance companies, insurance executives. So we see that there’s a change in behaviour and a change in market response, which could be pretty much boiled down to the word adaption to climate change. So even since the climate was changing over time over the last 10, 20, 30, 50, 100 years, whatever, the behaviour of market participants towards that change has changed significantly. 

You see that on headlines where insurance companies stop investing or selling policies to coal firms and stopping selling insurance policies to companies purely due to the fact that they are polluting the environment, is something relatively new. And it has become relevant, irrespective of the actual physical risk related to climate change, but also towards the behaviour of companies dealing with climate change. So a couple of semantics in the beginning, which are always quite helpful to have, there’s climate change versus global warming. So in order to clarify what that all means, global warming refers only and simply to the rising surface temperature of the earth, whereas climate change includes global warming and all other side effects like extreme events, glaciers, heavy rain storms, droughts, etc.

If you want to find a real good name of what we’re focusing on, I would say human caused climate change is probably the best expression for what is the current main concern, human caused climate change. Although I’ll still say climate change because it’s shorter. Right, so, first of all, does it exist, human caused climate change? It does. And I don’t want to discuss that. I just won’t mention it because that will probably alone fill three hours of presentation. What we see is there’s robust actuarial trends that the climate change is happening and the current CO2 levels are higher than ever in the last 800,000 years. 

This has been boiled down mainly to the effect of greenhouse gases, especially like CO2. And of course, the concern basically is probability of certain peril shifting. But the general question is, should we take action in order to at least try to turn that around? And the answer is yes, but the reasons are quite diverse. So you basically have various drivers why you should take climate action, boiling down to you have to, you should, and you want to. You have to is regulatory, so more and more compliance guidelines, government’s guidelines and also regulatory requirements force you into taking climate actions. 

We list the TCFDs here on the principle, but it should basically also be under regulatory. TCFD is basically financial disclosures that ask insurance companies to measure the effect of climate change on their companies and on their business models. This has been started earlier by the PRA in the UK, so regulator in the UK. But we’ll have a bit of a closer look to that later on, because that has caused a lot of hasty action lately in the market because people needed to assess the effect of climate change on their books, which led to a couple of surprises. Then again, it’s principle, that’s why you have corporate responsibility. 

You want to be seen as taking action, especially as an insurer that is exposed to all these physical effects of climate change. And so by principle, we as the insurance industry should be leading this drive towards climate action. And then its resilience because you want to future proof your business. It’s affecting you, so you want to understand it. And also you want to act in the market and have a view on the effects of climate change because others will have a view and they might be wrong and you want to be right. So you need to, from your own position in negotiations, you want to have a feel for what the actual monetary impact is and the general impact is. It’s really good to be on the front foot here and drive climate action but also drive understanding of the effects of human caused climate change. 

If you focus on the physical risk coming from climate change, there are certain perils that are impacted by climate change, so you can, given that you are from everywhere in the world, I guess, you might pick the perils that are relevant for you but to list them tropical cyclones, extra tropical cyclones, thunderstorms, sea level rises, wildfires, snow melt, ice, and floods in any shape or form will be in some way or another be affected by climate change. So these risks will not necessarily all get bigger, but they might change or will change. But that’s not all of it, already mentioned it. So we will have the physical risks. This basically we just described changing climate conditions. So, the shape, the frequency and the severity of weather events will shift. 

But you also have the transition risk, which basically means that there are certain changes in the economic environment and the social environment that are resulting from people and economies and political systems adapting to climate change. So you might have heard of a couple of initiatives where large investors disinvest from high carbon economies or coal producers and et cetera et cetera. So this will certainly have an impact on your asset side if you’re heavily invested in those type of companies investments. So, you will have a direct effect if large investors are dis-investing from those classes, might well be that your investments drop as well. 

This could also lead to defaults of certain loans if those industries cannot refinance themselves, and struggle to continue doing business. And then that’s a liability risk, which is quite an interesting one. So we’ve seen a couple of court cases where people or smaller companies, farmers, etc, started suing polluters. So could be suing a company that is in some shape or form causing pollution or environmental damage. But there was also for example, in Germany there was a group of farmers that sued the German government for not fulfilling the goals. So there will be an uptick in court cases with respect to climate. And at some point, there will be substantial liability risk or actually really penalties or large payments that have to be done because of those court cases if they’re at some point, successful. 

When we were in Cologne, in December last year, there was actually a paper just published somewhere in the US where there was a … I think it was a legal consulting company that mentioned that those court cases are more and more likely to be decided in favour of the claimant. So, in order to position yourselves well against those risks, the casualty line of business is probably the one that is first affected or massively affected by those climate change based court cases. So in summary, the impact is not only on property and property damage in general, it’s also on your asset side on potential effect on the loans that you’ve given out. And it’s also affecting the casualty part of your portfolio or the liability policy portfolio. 

Coming to the TCFDs, the climate related financial disclosures that was an initiative or basically general financial disclosures with respect to climate change have been started by Australia, that was the first country that started them. A bit later, the UK picked that up and came up with a very, very strict guideline, how to assess the effects of climate change on you as an insurance company, focusing on physical risks, transitional risks, liability risk as we just defined them. So there are a couple of stress tests that you need to fulfil. So there was UK to start. We’re expecting France to be next on the list. And Germany, other countries certainly to follow. 

But to give you an idea of what that meant, we formed a task force within Willis Towers Watson to handle all those requests we have received with respect to climate related financial disclosures. This taskforce, I’ve checked earlier today are by now Willis Towers Watson group-wide, about 80 to 100 people that look into the effect of climate change in general on insurance companies. So that was an uptick that we had, especially given from the methodologies we had to develop for UK alone. So there’s certainly a lot of work on the line that needs to be done. And the responses need to be handled quite quickly, so the need to develop methods to formally assess those climate effects was certainly there and will continue to be there in the near future. 

If you haven’t started looking into that, I would suggest that’s probably an area where you should focus on a little bit, because the regulator’s will quite likely ask you to do something like that more or less strict. But in that direction, that’s probably something that is on the line. So in general, I mean, we had the discussion in Cologne, where we thought this is probably food for thought in general, can the growth of shareholder value as part of capitalism in general, is that sustainable, can that go on forever or given that we have some form of limited resources, isn’t the core idea of a mutual company better way to generally handle insurance? 

You’ll probably agree that this is a very nice topic for an evening with a beer in your hand to discuss over dinner or something like that. But we’ll come to more direct impacts on mutual companies later on. However, joint initiatives with respect to well, dealing with investments, dealing with pooling of climate related risks is certainly something that could be handled within community of mutual communities or mutual companies. And also the required research with respect to one research and handling those financial disclosures, if required, is certainly something where a cooperation is certainly better than going all the way on your own and trying to solve that on your own. 

Focus on cyber with a quick run through the general cyber threat, but we will then pretty quickly focus on silent cyber because we feel that for those who want to actively write or underwrite cyber business, you will focus on the topic enough, I guess. But the effect of silent cyber on general portfolios is something that is quite important given the current amount of research that reinsurers are putting into that certain topic. 

In summary, companies as well as insurance companies are quite concerned when it comes to cyber because it is rapidly emerging. It’s rapidly developing. And we’ve seen that when we looked at the World Economic Forum ranking early on. Within two years, there’s quite some shift in perception how that risk is developed. Main concern of companies in general, not only insurance companies so that’s from an access survey they did in 2019 is a shutdown of essential services and critical infrastructure, so that was a main concern, followed by identity theft and cyber extortion. So since it is quite quickly emerging, we thought that really assessing the underlying source of that risk is … or the actual modelling of that risk is something we should really focus on. 

We tried to do that, but found out that since the risk as such is almost impossible to quantify, of course, there are a couple of cyber models flying around in the market. But it is really, really hard to do something in terms of monetary assessment that is completely up to date, and that gives you a good feeling for what your actual exposure to those risks is. So instead of that we really set or focused on an approach that’s basically forming an own view of risk of all the exposures that might affect you to give you a feel, where can it hit, where can it hurt my portfolio, where can it affect me really? That is probably the best way of approaching that, but we’ll come to that in a minute. 

This is something you’ll probably always see when someone is presenting cyber in some shape or form to you. So I call that the marketing slide. So you basically have various graphs that show that everything is exploding, dramatic growth is quadrupling, etc. And with all those numbers, it’s always usually they want to show the opportunity in it and there is certainly opportunity in cyber. But there’s also significant threats and I think that is the one thing if you don’t want to focus on underwriting it as a standalone business, the threat is it affects policies where you’re giving affirmative cover of cyber but it also affects policies where you don’t give the effective affirmative cover of cyber losses. 

And the major implication of cyber is the aggregation potential and the potential or the potential absence of diversification is pretty hypothetical, because we haven’t seen that. And there are various reasons why it’s not so easy to create something that’s affecting the whole world, et cetera, et cetera, but theoretically it’s thinkable. So these super cat losses coming from cyber are really threatening, and that makes this type of risk almost when it comes to mitigation of that risk, comparable to nuclear war type threats, rather than really cat events. Because if it’s really accumulated globally, it can be pretty big. 

However, and this is probably the last reference to movies, and I really like that Gartner Hype Cycle, which basically shows what sort of technological developments are on the list and how they have developed over time. Usually, once they pop up, you have a bit of panic. That’s usually peak of inflated expectations. And then they call this a trough of disillusionment, so basically it drops a little bit. You see it’s not as fantastic and world changing as you probably envisaged. And then a slope of enlightenment at some point you reach some sort of equilibrium state where say, “Okay, this is the new situation and we can all deal with it and we’ve grown used to it.” 

Basically, the quick summary is don’t panic. I think it’s quite manageable. And we’ve seen over the last couple of years that most of the cyber portfolios we have monitor now over a certain period of time are quite manageable. But that’s also due to the fact that they’re always quite small. So no one has gone wild in underwriting active cyber risks. And we’ve not seen too many impacts on silent cyber as well. However, they are quite thinkable and people have made up their minds in order to assess those type of risks. 

That’s the one thing that is pretty comparable to the climate change disclosures. There are some regulators globally that ask for stress tests when it comes to silent cyber and the effect on your overall portfolio. So you should treat cyber as a peril, not really a line of business. And try to find out if something like these silent cyber scenarios happen, which lines of business are affected in your portfolio and what the actual impact of that is. Quite interesting when it comes to silent cyber is that the impact on SME business is quite often more significant than for global industrial writers because they have less risks and usually they got a per risk insurance that covers them from the big peaks they might encounter. 

Whereas if you imagine say the classic example for SME business or also for private lines is you have some form of box that sits within some device that almost everyone has in his home. So, for example an iPhone charger. You could basically attack smartphones via the charger, via the electrical net rather than the internet and cause those chargers to basically overheat the iPhone or overheat the smartphone which basically causes an electrical fire. Which basically means if you have 500,000 homes insured in your portfolio, it’s theoretically thinkable that you have a fire in every fifth home from one single attack. So that’s again quite a farfetched scenario, but it’s thinkable. 

In that case, you would not necessarily have a per risk insurance for each and every house and probably you have some form of sideways limitations to that cover if you have. And most of those losses unless you have some form of clash cover in place or an aggregate cover in place will remain net on your book. So something to keep in mind. And also if you have a clash cover, you should make sure that you don’t have a cyber exclusion because clash losses might quite likely be caused by some form of cyber-attack, especially since cyber is not nicely defined everywhere. And it might at least cause reinsurers to try to turn down a claim. 

Especially when it comes to reinsurers and how they tackle those silent cyber exposures, there are quite a lot of reinsurers running around in the market trying to formally exclude silence cyber from policies. So if you agree to those exclusions of silent cyber from your policies because you think it’s not very likely that silent cyber losses might happen in that line of business, you should probably go through that list here and do the foremost stress test. Am I really not affected by silent cyber, and why is the reinsurer even asking to exclude it. So the whole Lloyd’s of London is trying to exclude silent cyber from almost any coverage, especially going forward. 

For 2020/2021 renewals, they will try to convince you that it’s a good thing to execute silent cyber, and I will do this assessment before you agree to that. However, we had a lot of discussions with clients when it comes to the effect of cyber in general or digitalization in general. If you look at pricing, there are a lot of mitigating effects, so you have a good side of the digitalization that basically means you have an increase in frequency by silent cyber, but you also have quite a significant decrease in frequency which comes from smart home technology that allows you to monitor your home better, et cetera, et cetera, computer control systems and the reduction of human errors. 

So there’s a lot of opportunity in there as well. And I don’t want to talk all negative about the impacts of digitization. It’s just a couple of risks that should be kept in mind. So when it comes to the mutuals as such, two things I would probably erase. One is, be careful when it comes to reinsurers or other partners trying to exclude silent cyber in supplements and exclusions because you might have more exposure to those risks than you think. And the second thing is, as a mutual you could probably quite nicely cooperate globally in order to find solutions, reasonable solutions for your mutual members. Because the risk as such as global and the exposure to those risks is differing from country to country. 

You could help on giving cover, however, trying to assess that super cat level together in a joint initiative rather than separately. So basically, linking up and not only knowledge wise, but also coverage wise, would basically help you putting a cap to what might go wrong, because a super cat level for an individual insurance company can be quite threatening. And political risks, and probably Ben will look at his watch, so I’ll try to speed up a little bit. The political risks have developed a little bit down when we look at the World Economic Forum. So we put it at the end, but also we will not cover it in so much detail than the last two. 

However, it’s quite interesting to see that the biggest concern when looking at the same survey that AXA did for cyber, they did it for political risk as well. And the main threat seems to be the rise of nationalism, of populism and tensions between nation states and sanctions, et cetera, et cetera and what might follow from that, and also the impact of the global market and the ability to trade in the global market following things like Brexit, et cetera. However, this is not necessarily the main source of financial losses, so if you look at the main source of financial losses, we also did a survey for the exposure to political risks, which asked a lot of small, medium and large corporations and companies whether they have experienced losses due to political risks and where they come from. 

Most of these losses were actually coming from political violence. So the actual financial loss was greater coming from political violence. However, most respondents ranked the trade sanctions as top concerns and they were citing US and China trade wars and Brexit also especially and were quite worried. However, it is seen to be a rising threat because the more barriers and boundaries are put up globally, and the more disjunct treatments of various countries they are it might make business quite difficult when identifying potential sanction areas, partners, companies, et cetera. 

This basically raises the question, is global better than local? Is global more powerful than local? And you as a mutual you should say, “Okay, it’s great. I’m mostly local. So I’m all right. I don’t really have the global problem, so that should put me in a position where I’m better off than the big globals.” However, there are certain limitations that that prevent you making full access to the global capital and the global economic community, which basically means, for example, if you look at the limitations that German insurance companies had, they were actually banned from using third country reinsurers, which made it quite difficult. So that were kind complete continents excluded from offering reinsurance cover to German companies, for example. 

I think India was impossible, Korea was impossible unless they had a regulated entity somewhere in Germany. So that limits your access to the global market to the global reinsurance market. And that might also have an impact on prices. Also, sanctions can or do lead to quite difficult negotiations between, for example, US and European firms everywhere where your sanctions differ from the sanctions that a reinsurer needs to adhere to. And that usually cause a lot of questions and actually I’ve seen a lot of very, very long standing relationships breaking up because of that. And Brexit and the logistical requirements that are linked to it is, for those in Europe an immense pain for every market participant. 

It’s not like you’re completely out of that game by being more local than the globals. However, there’s a lot of opportunity as well for you to play a role even more powerful than you could do earlier. So, summarizer. You’ve probably seen that slide, quite often in various presentations, and I never put it up to show that the world is changing quickly. So it’s basically a look at 5th Avenue, New York City at 1900, where you need to look very hard to spot the car. And 13 years later, you really need to look quite closely to spot the horse rather than the car. So there were quite some movements within 13 years, if you look at the general view of the street or the environments or any people on the road in New York City. 

However, what I found quite interesting on that picture is that I think in 1910, 1911, the New York government was still discussing the dirt and the amount of horses on the roads and trying to find solutions, so it basically means the adaption of that change is quite key and that leads to the main discussion points of the positioning of mutuals versus globals. Or from my point of view, I think, mutuals are quicker, are more agile. They can turn around their business quicker, they have less legacy systems. Usually they have got less baggage, they are quicker in terms of digitalizing their portfolios and their customer database, et cetera, et cetera. And they are globally linked whenever necessary. 

However, there’s one big, big threat coming from the globals, and that is, they are way better resourced, and the huge R&D budgets they’re putting up in order to assess those risks like climate, like cyber, they form an opinion on that. They really build up knowledge internally. And I mean, it’s quite difficult to turn a ship like a global around but once it has the right direction, it’s very difficult to stop. So I think from our point of view, we’ve just discussed that internally in quite some detail. The cooperation and the gathering or combined gathering of knowledge and the build-up of knowledge is quite crucial. So if you can really work together and address those risks together, you can probably come up with the same R&D team looking into those topics than the globals can. 

However, if you consider companies like AIG, Allianz AXA, they will probably have 80, 100, 120 people looking into climate change alone. So those massive R&D budgets are something that is really threatening, especially when they build up knowledge that you don’t have access to. So I think the cooperation is the absolute tiebreak here. 

Thank you very much. 

Ben Telfer: 

Thank you very much, André. Yes, we’ve got a couple of minutes for some questions. Appreciate you summarizing so much content in just under an hour. I’m sure you could have spoken for days on the three risks that you covered in detail. 

André Gerling: 

So we should make this a series, right? 

Ben Telfer: 

Yes, we could easily make this a series. So just a quick couple of questions, André. When looking at the impact of climate change, is it really only the physical risks that affect insurers? 

André Gerling: 

No, it’s all risks. It’s basically the physical risks that are probably on the top of everyone’s agenda. But I think the immediate impact on insurers is probably more the transitional risk, especially on the asset side of insurers, and the liability risks on the liability side of the insurers rather than the direct impact on the general frequency and severity of cat events. So, especially on the asset side in terms of investments, and especially on the liability side in terms of claims coming up now and companies being sued because of not taking climate action. So that’s absolutely, I think the contrary, the physical is something that feels well managed and the impact will probably be developing slowly, whereas for transition, and for liability risk, the impact will come quite quickly. 

Ben Telfer: 

And I think one more question. Do you identify a change in the ranking order of these emerging risks between developed insurance markets in say, the US and Europe, and then emerging insurance markets in say, Latin America or Africa? 

André Gerling: 

That’s an interesting question. If you look at the difference between the Thinking Ahead Institute and the World Economic Forum, the Thinking Ahead Institute was more focused on the asset side of a balance sheet which basically means they were focusing on companies with large investments, et cetera, et cetera. So they ranked the climate, political and technological risks higher. Whereas if you look at the World Economic Forum, they have a holistic societal and political view, first and foremost on the whole topic, and they rank the societal risks a lot higher, because what is causing a risk to the society in general is not necessarily causing a big financial loss immediately. 

You see a certain difference, the societal risks are certainly more threatening higher especially when it comes to water crisis, food prices, et cetera, et cetera. That is certainly something that would affect the emerging markets like … especially, say, Central Africa, parts of Asia and small parts for some parts of Latin, indeed. 

Ben Telfer: 

And on those differences, it brings me quite nicely into something that I was just going to end this webinar with. ICMIF is conducting a small survey to ICMIF members to see how we can benchmark emerging risks facing their business, and overweight time horizons. And this is something that will present back to work with members later in the year. So hopefully, we can see if there’s any differences between mutual and cooperative insurers, and then other insurers. So that links in nicely. 

Anyway, thank you very much, André. Thank you very much for your time, for sharing this. If anybody else has any more questions, please send them into me and I’ll pass them on to André. I know he’s very happy to answer them.  

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