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Identification & Management of Emerging Risks Nick Beecroft Manager, Emerging Risks & Research

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What is an ‘Emerging Risk’?

► Lloyd’s defines an emerging risk as: an issue that is

perceived to be potentially significant but which may not be

fully understood or allowed for in insurance terms and

conditions, pricing, reserving or capital setting.

► In practical terms, the defining feature of an emerging risk is

high uncertainty concerning the essential features of the risk

(likelihood and impact)

► The aim of emerging risk management at Lloyd’s is to reduce

uncertainty through research and scenario development.

Research

(thought

leadership)

Scenario

development

Exposure

management

Innovation

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Lloyd’s emerging risk survey 2014

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Plausible but extreme

► Implies an extrapolation of

observed occurrences: the

‘known unknowns’

► Events remain the most

powerful force in framing

analysis

► Insurers are required to be

resilient to losses incurred

against 1:200 events

– For emerging risks, we

must be comfortable in

accepting expert

judgment as the basis of

this assessment

Lloyd’s Realistic Disaster Scenario

2-tonne bomb blast, Rockefeller Centre, New York City

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Enterprises driving the global economy

Wal-Mart

Shell BP

ExxonMobil

PetroChina

Volkswagen

Toyota

Berkshire Hathaway Pfizer

Johnson & Johnson

Roche

GlaxoSmithKline

AT&T

Apple

Amazon

Chevron

Gazprom

Sinopec General

Motors

Allianz

Oracle

AXA

Tesco

Nestlé

Auto

Aerospace Energy

Consumer

Biotech

Technology Financial

Globalisation & systemic risk

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Conclusion

► The focus of emerging risks management is to reduce uncertainty – not to predict the future

► The foundation of this analysis is the concept of ‘plausible but extreme’ events

– Key problem lies in challenging assumptions based on experience & behavioural bias

► In the absence of data and historical evidence, expert judgment is paramount

► A common theme in emerging risks is complexity driven by the pace of globalisation

► Insurers’ requirement to quantify risk forces us to ask some of the most difficult questions about likelihood and impact

Underwriting slip, RMS Titanic, Lost 14 April 1912 Tohoku Earthquake, Japan, 11 March 2011

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