A new report from Guy Carpenter & Co. identifies cyber, technology, longevity and casualty catastrophe as key areas of emerging risk for the (re)insurance industry and discusses the importance of analytics and modeling in quantifying and managing those exposures.

Cyber Risk

As the global economy becomes increasingly dependent on cloud computing and electronic commerce, the susceptibility to cyber risk increases exponentially, Guy Carpenter said in the report.

The cyber insurance market is projected to increase from approximately $2 billion today to $5 billion over the next five years, driven by new purchasers as well as existing buyers purchasing more limit.

Cyber risk poses a serious threat to governments, corporations and individuals around the world. Lack of historical and scientific data still hinders the creation of probabilistic models for cyber risk. In addition, a single breach potentially can have a wide-spread, cascading impact, presenting both a significant challenge and opportunity for the industry, the report said.

Technology Risk

Guy Carpenter believes we are entering a new phase of technological advances that will bring new exposures not present in any historical database. As a result, it advised that (re)insurers will need to develop models based on estimates and assumptions rather than experience.

Some examples the reports gives of emerging technological risks include:

  • Nanotechnology and chemical technology breakthroughs, such as those involved in making stronger and enhanced materials.
  • Growing commercial applications for drones and other advances, such as autonomous vehicles, that remove human input from machine operations.

Longevity Risk

Medical advances and a focus on healthy lifestyles are prolonging the average life span, increasing exposures for employers that provide pensions, governments that provide social insurance and public assistance, and (re)insurers that provide lifestyle protection coverages such as annuities and disability protection.

Guy Carpenter cited United Nations data that found aggregate expenses of the elderly will double between 2010 and 2050, as well as a 2012 study from the International Monetary Fund that revealed that if individuals live three years longer than expected, the cost of aging could increase by 50 percent.

Casualty Catastrophe and Reserving

Casualty- or liability-based catastrophes have become increasingly frequent and severe over the past decade, exposing (re)insurers to new risks that might not be covered by reserves. Such catastrophes can take any number of forms, including adverse reserve development or large events that impact multiple insureds across several different lines of business, Guy Carpenter said.

“Potentially systemic risks can result in a chain reaction that can impact several accident years’ reserves simultaneously and even expose a company to insolvency. Most commonly used reserving techniques rely on historical data, but for emerging risks, that information may not yet exist,” warned Vic Jenkins, head of Technical Innovation for the EMEA.

“Rapid scientific advancement will only continue, and the (re)insurance industry should be anticipating the risks of new technologies, developing new products in response to those threats and problem solving for how to manage these exposures.”

The full report, “A Clearer View of Emerging Risks,” is available at www.GCCapitalideas.com.