The contours of risk are changing, becoming more connected and interdependent. There are several examples, but an apt one is the current pandemic that exemplifies how risks are becoming global, complex and difficult to address. Recent research reveals that 73% of general public and 83% of risk experts believe that populations world over are more vulnerable today than five years ago. Climate change, known to induce extreme weather events, coupled with rising intensity and frequency of hurricanes, wildfires and flooding has caused large insured and uninsured losses. But, after decades of experience, the insurance industry has a better understanding of the principles, associated risks, perils, hazards to tackle the consequences of such natural disasters, though it still needs to grapple with the scale involved. The same cannot be said of digital technology risks and attendant opportunities, threats, perils and hazards. For instance, the industry comes up short on appreciating the risks with artificial intelligence and related impacts.
The International Risk Governance Council defines emerging risks as “new risks or familiar risks that become apparent in unfamiliar conditions.” Emerging risks surface from shifts in technology, society, environment, economies, regulation or politics. Such risks can develop slowly (like demographic changes or societal proclivities) or be fast changing (like mobility solutions, alternative currencies currently or AI in future). Frequently, the risks emanate from unclear or changing framework conditions, such as from regulation or litigation. Due to lack of robust and sufficient data, emerging risks are not amenable to be quantified nor are they fully understood, despite the high impact potential. To facilitate early identification in the risk landscape, multiple tools are employed by risk managers to discern likelihoods of occurrences.
While infectious diseases did appear regularly on leading industry risk reports over the past decade, the scale of response needed for a coronavirus pandemic were much less understood. As the aftermath unfolds and lends cognitive clarity to the new societal order, what is clear is that some emerging risks are developing faster than expected, alongside advances in digitization accelerated by COVID-19. Respondents to World Economic Forum’s Global Risks Survey rated “digital inequality” both as a critical threat to the world over the next 2 years and the seventh most likely long-term risk. In digital markets of the future, individuals will face wider gaps in livelihood opportunities and digital autonomy, as inclusivity is curtailed by growing digital dependency, information manipulation and regulatory gaps.
The rapid changes in the digital landscape are a harbinger of greater uncertainty and newer threats. AI and automation could spawn serious after-effects, such as privacy violations, erratic automated processes and discriminatory model outcomes. Whether it be from infrastructure failures, model decisions, financial crimes or data privacy violations, public perception of risk will be ambivalent unless deliberate steps are taken to eliminate biases in implementation. A case in point is how algorithmic bias dominated UK media last year, when it transpired that the technology used to generate proxy grades disproportionately lowered the grades of pupils living in poorer areas outside of private schools.
Insurers are designing products to tackle new risks. Parametrix Insurance, in association with Lloyds, launched a business interruption policy for small businesses, that uses a parametric trigger. The policy automatically pays out if a customer’s critical IT services are disrupted. Another incubatee, Coincover offers cryptocurrency traders, loss protection using a limit that changes in line with price of covered crypto-assets.
2020 trumpeted the need to reconsider assumptions used to categorize and consider risks, trends and how people and organizations think and respond. Emerging risks are a vital element therein. Good risk management needs to look beyond the annual review process cycle while adopting a cultural shift that leans towards better resilience and preparedness.
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