Emerging risks at Swiss Re - TrainexEmerging risks at Swiss Re. Page 2 Overview Introduction to...

Emerging risks at Swiss Re

Overview

Introduction to emerging risks

Nature of emerging risks

– Common denominator

Emerging risks

– Nanotechnology

– TSE/vCJD

– Avian influenza

EPA RA MeetingDr. Annabelle R. HettSan Francisco, 2 May 2006

Introduction to emerging risks

Emerging risks are developing or already known risksthat are difficult to quantify and may lead to claims with a high loss potential

Novelty/change

Uncertainty

Insurance relevance– Cumulative loss potential– Long-tail– Multi-line– Frequency and severity difficult or impossible to assess

“Headline articles” – Increasing public awareness


Key: avoid surprises in a rapidly changing environment


Emerging risks and early indicators

Time

Indicators/signs

strong

weak

Room for action

Anticipation of opportunities and identification

of risks

Action and reaction

The earlier risks and/or opportunities are identified, the greater the operating

field for action

The earlier risks and/or opportunities are identified, the greater the operating

field for action

Influentiality


Changes in the risk landscape


Thresholds for catastrophes –2004

(source: sigma No 1/2005)


Reasons for the changing risk landscape

Changes in the risk landscape due to– growing interdependency of risks– increased complexity and inter-linkages

Changes in the business environment due to– changing liability regimes– increasing expectations of stakeholders– heightened consumer safety awareness and

improved analytical methods to detect harmful substances or defects

– increased cost pressure on suppliers and producers, leading to shorter development periods (time to market) and commensurate premature products


Asbestos: early warnings and measures

1898

1906

1911

1911 and 1917

1918

1930

1931

1935-49

UK Factory Inspector Lucy Deane warns of harmful and “evil” effects of asbestos dust.

French factory report of 50 deaths in female asbestos textile workers and recommendation of controls.

“Reasonable grounds” for suspicion that asbestos dust is harmful based on experiments with rats,.

UK Factory Department finds insufficient evidence to justify further actions.

US insurers refuse cover to asbestos workers due to assumptions about injurious conditions in the industry.

UK Merewether Report cites 66% of long-term workers in Rochdale factory with asbestosis.

UK Asbestos Regulations specify dust control in manu-facturing only and compensation for asbestosis, but this is poorly implemented.

Lung cancer cases reported in asbestos manufacturing workers.

Source: David Gee & Morris Greenberg“Asbestos: from ‘Magic’ to Malevolent Mineral”.Late Lessons from Early Warnings: The Precautionary Principle 1896–2000. EEA Environmental Issue Report, no. 22, 2001, p.61.

Asbestos: early warnings and measures

1955

1959-60

1962/64

1969

1982-89

1998-99

2000-01

Doll establishes high lung cancer risk in Rochdale asbestos workers.

Mesothelioma cancer in workers and public identified in South Africa.

Mesothelioma cancer identified in asbestos workers, in neighbourhood “bystanders” and in relatives in the UK and the US, among others.

UK Asbestos Regulations improve controls, but ignore users and cancers.

UK media, trade union and other pressure calls for tightening of asbestos controls on users and producers and recommends substitutes.

EU and France ban all forms of asbestos.

WTO upholds EU/French bans against Canadian appeal.Source: David Gee and Morris Greenberg, “Asbestos: from ‘Magic’ to Malevolent Mineral”. Late Lessons from Early Warnings: The Precautionary Principle 1896–2000. EEA Environmental Issue Report, no. 22, 2001, p.61.

Source: David Gee & Morris Greenberg“Asbestos: from ‘Magic’ to Malevolent Mineral”.Late Lessons from Early Warnings: The Precautionary Principle 1896–2000. EEA Environmental Issue Report, no. 22, 2001, p.61.

Claims history: 50bn USD

Estimated future losses: 275bn USD

Source: Milliman's 2001 asbestos report

Emerging risk value chain

Group framework for consistent and co-ordinated identification, assessment, prioritization, evaluation, communication and translation of findings on emerging risks and novel,

unprecedented scenarios and accumulationsGoal: avoid surprises in a rapidly changing environment

Risk perception: use of internal and external sources

Systematic identification

Triage: use of defined set of criteria

Identification Implementation

Business implementation

Downside risk

protection

Product development

Risk dialogue / risk communication

Assessment

Gathering relevant risk information

Qualitative risk analysis

Quantitative risk analysis, if applicable

Risk benchmark

Evaluation

Prioritising risks

Outlining appropriate responses/measures

Decision on action plan for a specific risk

The SONAR process

Input

Perception/Observations/Comments by internal and external sources

Swiss Re Group,External networks

SONAR team

Issue managementOpportunity modellingProduct development

Risk communication / dialogue

Markets

Swiss Re experts

Triage

Analysis

SONARWatch list

Risk assessmentRisk managementProduct managementeg EC EMRI


Systematic Observations of Notions Associated with Risk

Actions

iterative process

Prepare for the unexpected: ensureadaptability and long-term thinking

20162006

By 2016:Some scenarios may no longer be relevantProbabilities and severities may changeEmergence of new risks and scenarios

Consequently:Emerging risk landscape has to be monitored continuouslyRisk management strategies have to be reviewed


Emerging risk landscape

Ageinginfra-structure

Tele-medicine

Foodcontaminants

Indoorpollution

weatherSpace

CO2 trading

Spread ofdiseases

Invasionof

privacy

Privatisation

Offshore & Internet Calderaeruption

Intercontinentaldata trans-mission

market

Electrosmog

Resistance toantibiotics

Cyber risk

Media risk

RSI

Endocrine dis-ruptors

Dirty bombs

Implants

Loss of reputation

Organisedcrime

Contingent

Pervasivecomputing

Customiseddrugs

BusinessInterruption

Cloning Deterioratingsafety standards

Drinkingwater quality

Mega Tsunami

PowerSystembreakdownBotox

Nano-technology

Stress at work

Alcohol

Tocic mold

Boguspart

Nature of emerging risks -What do they have in common?

Nanotechnology

Silicosis

REACHPandemics Obesity


SARS

Pandemics

SARS was not unique!


Not a question of if, but when and how severe!

Nanotechnology

By tailoring the structure of materials at the nanoscale, it is possible to engineer novel materials exhibiting entirely new properties

Highly mobile particles and materials in the human body and the environment

All industry segments affected

Worldwide revenues expected to exceed USD 1 trillion by 2015

Uncertainty

Novel properties

• Coated surfaces• Specific properties• Large volumes

New materials – we cannot learn from the past

• No long-term experience• Few exposure assessments• Few toxicology assessments• No classification


Silicosis

Silica is the second most common mineral on earthNumerous industrial uses Disabling, nonreversible and sometimes fatal lung disease

Disease cannot be cured but is highly preventableStudies indicate evidence of carcinogenic properties of inhaled crystalline silica

First claims in Asia

ODs in PL


REACH

REACHrequires a complete Risk Assessmentfor all chemicals marketed orimportedin the EU

REACHcovers especially old substanceswhich have already been marketed for decades

REACH will enable the EU to withdrawsubstances from the market orrestrict their use, if negative side effects to humans or the environment are identified

REACH will make this information accessible to the public

Registration, Evaluation and Assessment of Chemicals

Obesity

Center for Disease Control and Prevention (CDC) has declared obesity an epidemic

1 out of 3 Americans is obese

400 000 obesity-related deaths annually in the US

Increases risk of heart disease, type 2 diabetes and colon, breast and endometrial cancers


Common denominator of emerging risks

High uncertainty

Little information available

Frequency and severity difficult to assess

Difficult to quantify

Risk transfer difficult

Difficulties for risk communication

Danger of turning into phantom risks

Regulatory involvementoften necessary


Risk perception differs among stakeholders

Pricing difficult

NanotechnologyThe insurance perspective


Introduction

nanos: Greek term for dwarf

Technology to visualize, characterize, produce and manipulate matter of the size of 1 – 100 nm.

Small size

– High surface to volume ratio

– Unique properties (material strength and weight reduction, conductivity, new optical properties)

– New entry ways (high mobility in human body and environment)


1000 000 nm

<100 nm.

What makes nanoparticles different from other particles?

0.001

0.01

0.1

1

10

100

0 200 400 600 800 1000 1200

Diameter (nm)

Surf

ace/

Volu

me

perc

enta

ge


Courtesy of Prof. Paul Borm

Engineered nanoparticles


Engineered particles

Coated surfaces

Specific properties

New materials – we cannot learn from the past

No long-term experience

Few exposure assessments

Few toxicology assessments

No classification

Uncertainty

Large volumes

Specificity

Uncertainty

NanoparticlesUbiquitous in industrial production

Materials Pharmaceuticals Sustainability

Chemicals ToolsElectronics


Estimated worldwide revenues exceed USD 1 trillion by 2015

Nanotechnology revenues worldwide by 2015 (USD bn)

Materials 340

Electronics 300

Pharmaceuticals 180

Chemicals 100

Aerospace 70

Tools 20

Healthcare 30

Sustainability 45Source: National Science Foundation

Behaviour of nanoparticles in the human body

Inhalation of nanoparticles

Absorption throughthe skin

Absorption via the alimentary canal

Effects of nanoparticles in the body (eg blood-brain barrier)

Acute or chronic toxicity? Accumulation, eg in the brain?

0

1

2

3

4

5

6

Control 14 nmCB

100μM FeCl3

100μM FeCl3/14 nm CB

Neutrophils in BAL

Wilson et al 2002 TAP 184; 172-179

Interaction between particles and metals in vivo

Unexpected reactions of particles


Courtesy of Dr. Vicky Stone

Nanotechnologyenvironmental opportunities & risks

Opportunities

Sensors (humidity etc)

Clean energy

Nano catalysts (pollution reduction)

Filtration (air, water)

Remediation

Fuel cell membranes

Risks

Particles treated to avoid agglomeration

Passage through soil, transport of contaminants (heavy metals)? reaction with other substances?

Ground water: drinking water quality/pesticide problem

Absorption by plants (entry into food chain)?

Removal difficult, filters insufficient


Regulatory environment


FDA: “Substantially equivalent”

EU (Scientific Committee for Cosmetic Products and Non-Food Products intended for Consumers): “TiO2 is safe” (regardless of size)

MSDS: Recommendations according to bulk material

No disclosure obligation –exposure in products difficult to assess

No standardisation/norms available

Basis for:– Comparison of scientific

data – Regulatory attempts– Labelling issues– Legal setup

Public perception

There is considerable public anxiety about new technologies that could affect the level of liability claims

“Fear of” – Huge defence cost for insurance industry

Public has the power to slow down/stop further developments in emerging technologies (gene technology)

Effective, early risk communication is essential to gain trust of the public and ensure the successful introduction of nanotechnology in the market


Insurability of risks

AssessabilityProbability and severity of losses must be quantifiable to calculate premium

Causation (in liability insurance)There must be a causal relationship between the action or omission of the insured and the resulting damage/injury/financial loss

Economic feasibilityInsurers and reinsurers must be able to charge a premium which is commensurate with the risk

RandomnessTime of insured event must be unpredictable and occurrence independent of the will of the insured

MutualityExposed parties must join together to build a risk community in which the risk is shared and diversified (ideally a large number; avoid anti-selection)


Focus on assessibility

Assessibility requires the quantification of risk

– frequency

– severity

Quantification can be problematic for

– revolutionary risks

– risks that manifest themselves with delay (long-tail)


Evolutionary vs revolutionary risks

Evolutionaryrisk

Revolutionaryrisk


Focus on causation

Insurance requires a causal relationship between the action or omission of the insured and the resulting damage/injury/financial loss.

Anxiety about new technologies can affect the level of liability claims resulting in defence cost for insurance industry.

Subjective risk perceptions can jeopardize the principle of causation.


“Real risks” vs “phantom risks”

“Real risks”

Scientifically proven cause/effect relationship

“Phantom risks”

Risk perceived to be a threatEPA RA Meeting

Dr. Annabelle R. HettSan Francisco, 2 May 2006

Swiss Re’s action on emerging riskseg nanotechnology

Enhance risk dialogue among business, regulatory agencies, academia and the insurance sector

– Brochure/several briefings

– Top Topic since 2004

– Series of internal and external events/international conferences

– EC EMRI to develop UW guidelines

Member of international organizations and expert groups (IRGC, ICON, EC etc) to support

– Risk assessment/risk management

– Regulatory environment


TSE/vCJD


BSE - an underestimated risk

Cattle Human

20021986 1990 1994 1998 2000

1. BSE casein UK

Ireland

PortugalSwitzerland

France

DenmarkSpainGermany

NetherlandsBelgiumLuxembourg

Liechtenstein

GBRpublished

ItalyCzech R.JapanGreeceSlovakiaSloveniaAustriaFinland

Israel

2004

Canada

US (Import case)

USA

Cats Humans

1990 1996


Bild Mensch

„BSE“ in hospitalsAnother underestimation?

All human vCJD cases detected so far were Met/Met on codon 129 of the PRNP gene

European population:30% Met/Met50% Val/Met 20% Val/Val

Surgical instruments– Neurosurgery– Appendix,

TonsillectomyTransplantation

– Cornea– Dura mater

(meningeal)Hormones

– hGH– Gonadotropine

Prions cannot be removed with today’s sterilization processes

Multistage procedure needed (disposable & reusable instruments)Conversion of autoclaves to 134°C (more time, personnel, cost, new validation)


Bild Mensch

Who, when and how many?

Number of carriers without symptoms unknown

Model-Data only as good as the data processed:

– Infectious dose?

– Incubation period?

– Transmission via blood?

– Genetic pattern?

Also “Non-BSE-Countries” affectedEPA RA MeetingDr. Annabelle R. HettSan Francisco, 2 May 2006

Implementation

Risk mitigation measures differ from hospital to hospital and from country to country

Hospitals

– Perception of risk differs

– Cost pressure

– Implementation is time consuming

Legal base only in SwitzerlandOther countries : only recommendations

– Inplementation different/questionnableEPA RA MeetingDr. Annabelle R. HettSan Francisco, 2 May 2006

Pandemics


SARS was not a new…

SARS

... but a wake-up call


There is no doubt that the next “SARS XY” is coming ...

Time to impact/origin

Frequency and severity unknown:

– virulence of the new influenza virus

– speed at which it will spread, duration of pandemic

Who will be affected most? (age group)

Effectiveness of antivirals (does antiviral medication give a false sense of security)?

Panic reaction of public and financial markets (impact on financial markets)?

… but many factors remain uncertain:


What will be the next small mutation?


Pandemics – one of many unknowns in the risk landscape

Global impact, but exact extent unknown

Difficult to quantify and model

No way of predicting the pattern of spread

No reliable comparison with past events

Very broad range of scenarios

Indirect losses difficult to assess


Many things are difficult to predict…

Life expectancy in the US


What can we learn from past pandemics?

Pandemics in the United States, 1892-1957

In 1918, the age-specific mortality was unusual, withthe highest number of deaths among young adults aged 25–40

– Immunity of elderly people?

– ”Cytokine storm”?


Effects of a pandemic

EconomyDecline in real GDP from lower consumer spending

Decline in real GDP from lost days at work

Equity markets

Credit spreads

Real estate prices

Insurance industry Life and health

Property and casualty

- product liability/recall

- workers’ compensation

- professional indemnity

- directors’ & officers’

Special lines (agro, special risks)

Asset management

Credit risk

Disruption of production

Interruption of the supply chain

Loss of key persons

Travel/quarantine restrictions

Medical treatment/prophylaxis

Water/air condition control

Internal/client communication

Crisis management

Companies


Decisions on riskRare events, uncertainty

InsuranceDeals mainly with the effects(Extent of the event is relevant)Probability only taken into account where there is no change to the system (in “mass business” – not the case for catastrophes)

AuthoritiesDetermination of the risk (probability diagram)Definition of the level of protection aimed atAcceptance - assessment

Aim: risk financing

Aim: protecting the population

Different goals that should complement each other!


Typische Szenarien in der Schweiz

sehr gering gering mittel gross katastrophal vernichtend

Adaptiert nach:Risikoprofil der Schweiz, 1999

Wahrscheinlichkeitin den nächsten25 Jahren

Auswirkungauf die Schweiz

Sehr wahrscheinlich30% bis 100%

Wahrscheinlich3% - 30%

Wenig wahrscheinlich0,3% bis 3 %

Unwahrscheinlich0,03% bis 0,3%

Sehr unwahrscheinlich0,003% bis 0,03%

Integrationsghetto ZusammenbruchZahlungsverkehr

Krise im Gesund-heitswesen

Hochwasser

Chemieunfall

Talsperrenbruch

KKW-Störfall

Extremismus/Terrorismus

RegionalesHegemoniestreben

OrganisierteKriminalität

Treibhauseffekt

ZusammenbruchInformationsinfrastruktur

Verlust Kulturland / Artenvielfalt

Verknappungstrateg. Güter

Abhängigkeitvon Suchtmitteln

Wassser-knappheit

Infor-mations-krieg

Erd-beben

Überalterung

Massenvernichtungsmittel

Sturm

Verlust nationale Kohäsion

Verknappung Energie

Trocken-heit/Hitze

Krank-heiten/Epidemien

Wirtschafts-pol. Druck

Risk management –a demanding discipline

Human perception of risk is subjective and the conclusions reached (estimate of risk) are usually wrong

Risk management and decision-making are analytical processes, often spanning more than one discipline:

What could go wrong?

What would be the consequences?

How could it be prevented?

What would be the secondary effects?

How could they be rectified?EPA RA MeetingDr. Annabelle R. HettSan Francisco, 2 May 2006

Risk management process

Risk policyLegislationStrategy

Risk assessmentPerceptionIdentificationAnalysisQuantification

Risk handingAvoidancePreventionReductionFinancing/transfer

Risk controlEvaluationSteeringReporting

Risk managementRisk informationObjectives & goalsRisk communication


Sharing knowledge –Swiss Re’s Center for Global Dialogue


Back-up


Challenges to BCM

Under normal circumstances…

Events limited to a specific geographical area (even with terrorist attacks or natural catastrophes, eg earthquakes)

Certain parts of the business or resources affected (buildings, IT)

Alternatives available, including safe havens/recovery sites

”One-off” event or long return period

and in the case of a pandemic

Systemic disruption, many or all parts and locations affected simultaneously

Practically all aspects of production affected; understaffing/bottlenecks (medicines, IT, rubber)

Limited possibility of a “helping hand“ (eg London/Zurich); nowhere is safe

Spreading around the world in waves


Implications

Under normal circumstances…

Outside help possible

Alternative locations (disaster recovery sites) make sense

Redundancies increase operational resilience, or ability to cope with disruptions (parallel telephone networks, servers)

and in the case of a pandemic

Ability to help oneself is uppermost

Huge coordination effort (are all locations affected?)

Cutback in output in order to minimise number of exposed workers

Teleworking as a possible solution (for service providers)

Critical functions must be able to survive several “waves“


The (re)insurer’s toolbox

Adjustment of insurance cover conditions

Risk selection and pricing

Reinsurance

Securitisation and other means of innovation

Public/private partnerships


Reinsurance and innovative solutions for transferring risks

Reinsurance

– Reinsurers were formed as a response to new and sizeable risks emerging during the Industrial Revolution.

– Reinsurance allows primary insurers to cover more risks and enables an insurer to reduce its average and probable maximum losses.

Securitisation as an example of an innovative solution

– Insurance-linked securities (ILS) can potentially benefit from the huge scale of financial markets.

– ILS are an efficient means of transferring peak risks (eg natural catastrophes, extreme mortality events).


Public/private partnerships

Government backstop protection can extend the scope of cover provided by the insurance sector.

Government programmes cover catastrophe risks in various countries.

Yet, some government interventions hamper insurance availability:

– When a government caps premium rates at an artificially low level, insurers exit the market.

– Sympathetic juries handing down large compensatory and punitive awards prompt insurers to stop writing the liability coverage that businesses need.


Conclusions

Insurers and reinsurers enable risk taking

Risk and opportunities are two sides of the same coin –risk attitude is subject to the individual assessment of both

Key success factors to manage emerging risks include:

– Transparency about risks, stakeholders and trade-offs; systematic gap analysis

– Chief Risk Officer at board/government level with portfolio approach to risks (integrated risk management)

– New, innovative solutions to transfer and mitigate risks


Risk perception basics


Differences in risk perception

There is significant variation in risk perception depending on:

– knowledge and education

– cultural background

– experience

– global region(Swiss Re Delphi Study, 1999)


How is risk perceived ?

People see what they are able to seeand what they want to see


www.aspencountry.com

Avoid well-known patterns


Risk perception at Swiss Re

Risk perception network established to promptly detect faint signals

Purpose:

– Identification and evaluation of emerging and future risks

– Systematic screening of the risk landscape

– Centralising observations associated with risk from different countries, cultures and enterprises



The SONAR process

Input

Perception/Observations/Comments by internal and external sources

Swiss Re Group,External networks

SONAR team

Issue managementOpportunity modellingProduct development

Risk communication / dialogue

Markets

Swiss Re experts

Triage

Analysis

SONARWatch list

Risk assessmentRisk managementProduct managementeg EC EMRI



Actions

iterative process

Emerging risk value chain- Identification

Identification Assessment Evaluation Implementation

Risk perception: use of internal and external sources

Systematic identification

Triage: use of defined set of criteria– identify impact on main value drivers– potential business impact– time to impact– ability to influence the risk EPA RA Meeting


Satellite model for Corporate SONAR

Group emerging risk landscape

Risk Steering

ERMCorporate SONAR

Group watchlist

Output

Asia, Americas, Europe / Africa*

Products&ClientMarketsLife & HealthWatchlistAsia, Americas, Europe / Africa*

Corporate Functions

WatchlistRisk Management, FinanceCommunication & HR, IT*

Financial ServicesAsset Mgmt & CreditWatchlistAsset Mgmt, IRT, Credit Sol, Capital Mgmt & Advisory*

Rüschlikon & WorldWatchlist

Products &Client MarketsProperty & CasualtyWatchlist

*incl external sources

ProductsClaims & Liability MgmtWatchlist

Advisory Panel, conferences, Future Institutes, WEF etc


SONAR - watch list available on Swiss Re’s intranet


Emerging risk value chain- Assessment


Gathering relevant risk information

Qualitative risk analysis

– eg including initial risk dialogue, scenario planning measures

Quantitative risk analysis, if applicable

Risk benchmark (assessment of potential insurance impact and comparison with other risks)EPA RA Meeting


Emerging risk value chain- Evaluation

Prioritising risks

Outlining appropriate responses/measures

– eg further risk dialogue, monitoring

– eg identify potential business implementations

Decision on action plan for a specific risk



Evaluation & implementation: EC EMRISourcesSONAR: Casualty & Property Center, Risk Engineering Services, Claims & Liability Management, Networks, Market units, Clients

Review Board(CSC)- decides on

recommendations and U/W guidelines

Core Team

- defines relevant topics- defines topic teams- develops recommen-

dations and U/W guide-lines

Topic Teams

- develop recommen-dations and U/W guidelines

- contact business units

DivisionalUnderwriting Officers- provide input to draft

recommendations- implement recommendations

and U/W guidelines

Business Units (Client Markt. & Products)- provide input and feedback to

draft recommendations- implement recommendations

and U/W guidelines

Identification and evaluation process

Review process

Implementation process


EC EMRI: Expert Circle Emerging Risks

Emerging risk value chain- Implementation


Downside risk protection

– Risk mitigation (e.g. underwriting guidelines)

Product development

Risk dialogue / risk communications

– raise awareness with publications, conferences, media information

– Stakeholder dialogue with industries

– Governmental/ regulatory affairs


Emerging risks at Swiss Re - TrainexEmerging risks at Swiss Re. Page 2 Overview Introduction to...

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