In his introduction to the common theme on this year’s IUMI conference, “Managing Emerging Risks and Exposures – Think the unthinkable“, Association President Dieter Berg said that it was not so much about thinking the unthinkable, as managing the unthinkable.
Berg told the 500-plus audience that among IUMI’s top priorities for 2018 were to grow the association’s global footprint. “We hope to strengthen the close cooperation with IUMI members and affiliate members. We are fairly active on the Eastern part of the world, and this strategy worked well. In 2016 we established an office in Hong Kong, our first outside Hamburg”, Berg noted.
May 2018 also saw the launch of the IUMI local conference in Asia in Singapore, a successful project that he said would be continued.
Another priority was to extend IUMI’s global expansion strategy to Africa. “We have to get a stronger presence in this continent. So we decided to develop an Africa strategy by focusing on sub-Saharan Africa. We prioritized Nigeria, Kenya and South Africa. The French-speaking countries will be our second step”, said Berg. Hilton Derek Adam, who has more than 30 years with Munich Re and is Head of Marine, Africa, for the reinsurer, will be IUMI ambassador to Africa.
Moving on to the IUMI Education programme, Berg noted that there was a war for talent in the world and that insurance had to fight to attract the best.
With half an eye to its global expansion plans, IUMI has launched a new form of membership, “Associated Membership”, which would suit certain organizations in emerging economies. It has a reduced fee. The associate membership is available for a maximum of three years, with a restricted role within the Association. Secretary General Lars Lange said during the same session that there was already one application to hand, from Myanmar.
The proposal for a new form of membership was backed unanimously by the council during the morning session.
Moving on to the main theme of the conference, Berg observed that when he was travelling around the market, he sensed some uncertainty on how to deal with the new risks.
The first question that rose from the theme title was clearly: “What is the unthinkable?” After a brief look at the sayings of philosophers such as Murphy and Rumsfeld (“What Can Go Wrong, Will Go Wrong” and “There are known knowns, known unknowns and unknown unknowns”) Berg decided it would be more profitable to look at historical precedent. He noted that there had been many “unthinkable” losses in the not-so-distant past – Deepwater Horizon, East African piracy, Costa Concordia, and Tianjin were all multi-billion dollar losses, while NatCat losses from Katrina & Rita in 2005, the Thai floods of 2011, Superstorm Sandy in 2012, and the three hurricanes Harvey, Irma & Maria in 2017, all had aspects of “unthinkability” about them.
Berg said that accumulation risk and emerging risk were two different categories. Accumulation risks were known to exist, but with one event spreading to multiple lines, or with a greater concentration of values in single at-risk location. This meant that the ultimate loss was underestimated. Emerging risks, on the other hand, were new and developing exposures that were defined by a higher degree of uncertainty.
Berg illustrated this with a five-pronged emerging risk landscape:
- Technological
- Political
- Economical
- Social
- Environmental.
Within technology, accumulation risks here were “imaginable” if only in the sense that Lloyd’s had postulated their occurrence. There was also an RDS of an offshore platform complex loss, which could be $10bn.
On the emerging risks side of technology, there would be autonomous vessels, deep sea mining (where Berg said there was a huge cost of equipment and high environmental liability risk). There was also the emerging risk of artificial intelligence – if a machine takes a decision not foreseen by its designers there would be insured risk, but there would also be an operational risk for insurers themselves.
Insurance competition from the tech giants could also be a threat. The sharing economy would bring new opportunities – companies like Uber and Air BnB required completely new insurance policies.
Unthinkable political accumulation risk could include evolving terrorism e.g. a dirty bomb, which could have a far greater insurable impact than an earthquake over the same geographic footprint. Or a politically motivated cyber attack.
Finally there was a risk of geopolitical conflicts. The shift of power from west to east might constitute a threat to the global economy.
Unthinkable political emerging risk could include regulatory uncertainty, with the risk of legal and jurisdictional change impacting the exposures of marine insurers and of the industry as a whole.
Berg said that it had been a ‘Decade of Change’, with the emergence of populist and isolationist government, free-trade agreements being in danger. Trade wars could include trade embargoes & sanctions of states.
Unthinkable economic risk scenarios could include “Emerging market crisis 2.0”, with rises in interest rates and a rise in dollar value, an increasing oil price all potentially being massive problems.
Recalling the impact of the Hanjin bankruptcy in 2016, Berg said that the insolvency of a large global logistic carrier could equate to systemic risk for global trade.
Emerging risks in the same sector could be a new debt crisis, a re-emergence of Euro zone instability, digital transformation leading to mass unemployment.
Unthinkable social risks included political/social instability, violent social unrest, emerging social risk, increased environmental activist, the decommissioning of oil rig, a loss of confidence in the global financial system, and an increased lack of acceptance of global trade.
Unthinkable environmental risks on the accumulation side included natural catastrophes, extreme weather, an earthquake on West Coast of USA , a typhoon and tsunami in the port of Japan. Man-made disasters included an Arctic shipping accident, Arctic drilling leading to an oil spill, and massive increases of clean-up costs because of tougher regulatory requirements. “If the legal requirement is back to 95% rather than back to 90%, then the increase in cost is exponential”, said Berg.
Emerging risks in the environmental sector included fracking, Subsea methane hydrates, oil sand. With climate change there could be increasing costs from storms, rainfall, flooding, while climate change liability could increase because of regulatory change, for example diesel engine exhaust emissions.
“There is a clear risk for shipowners here,” said Berg.
In assessing how insurers should respond to this, Berg said there was a four-stage process – “Identify, monitor, react, innovate”.
“It is less about thinking the unthinkable, it is more about managing the unthinkable”, he concluded.
From the chairman of the nominating committee, Tim Pembroke, QBE UK, the names for the 2019 executive Committee were announced. Richard Turner from RS&A takes over from Dieter Berg as President, Mike McKenna from the US, Frédéric Denefle for France, Jan-Hugo Marthinsen from Norway were newly elected members. These names are nominations only and are to be elected at Wednesday’s council meeting.
Elsewhere during the morning session host association SAIA’s chief executive Vivien Pearson said that the SAIA had been working on this conference for the past nine years. It was the first time that the conference had come to Africa in 144 years of IUMI’s history
However, Ms Pearson said that organizing a conference such as this had not come without its challenges. “One of them earlier this year was the threat of Water Day Zero. Fortunately Day Zero did not materialize, this time”, Pearson said. She noted that the dams were now 70% full. “But Africa remains a water poor country”, Pearson concluded.