During the centuries-long history of the insurance industry, many threats have come and gone, shaping the policies of the day as they do.
From high-seas piracy to the great fire of London and, more recently, skyrocketing oil prices and the high costs of extreme weather events, the industry has innovated and reshaped its offerings in order to continue to mitigate risk.
The recently released Global Risks 2014 report, prepared for the recent World Economic Forum in Davos, Switzerland, highlights changes that the world is likely to see in the near future in terms of global risk.
But when the risks are in many cases uninsurable, what can the Australian insurance industry possibly have to learn? Plenty, our experts say.
“The main message is that there must be an understanding of the fact that risks are globally interconnected and have a very significant effect on the customers of the Australian insurance industry,” says Kai Dwyer, Zurich Australia’s Customer and Distribution General Manager.
“Those of us representing Australian businesses for their insurance needs have a responsibility to be informed and to understand the environments that these businesses operate in. We must understand the interconnectedness of risk.
“Australian businesses can and do feel consequences of an event in another country, such as the tsunami in Japan or the flooding in Thailand.”
Key to understanding the current risks is appreciating how intertwined the economic and political fortunes of different nations are.
Water crises, for instance, are rated as the third most important risk. In 2010, drought in Russia led to restrictions on agricultural exports.
In turn, this jacked up the prices of staple grains across North Africa and the Middle East, aggravating the political tensions that sparked the Arab Spring protest movements.
The report states that while there is growing concern over climate change acting to exacerbate drought and flood, that is not the only factor driving concern over water security.
As global population swells and people become wealthier, their demands for water also increase, thanks to increasing desire for water-intensive products such as meat and dairy.
While the earth’s total population quadrupled in the 20th century, the demand for water soared ninefold.
Costa Zakis, General Manager of Marsh Risk Consulting, says the major risks must be broken down and analysed for their potential effects and consequences on the industries in our territory.
“For instance, many organisations have exposure to an extreme weather event, whether in Australia or elsewhere,” Zakis says.
“It’s about understanding what the risk means to a specific business and this flows through to how the business structures its own risk management and how we structure their insurance strategies.”
Dwyer and Zakis both agree that mitigation of consequences of major global risks are the collective responsibility of organisations, government and the insurance industry.
For instance, Dwyer says governments are responsible for creating well-informed debate around the risk topics and for creating transparency around the consequences of such risks.
“Societies deserve a structured dialogue around these issues and governments must efficiently allocate resources to help management face the challenges,” Dwyer says.
“Organisations need to educate themselves in order to make informed decisions. They need to identify the risks they face.
“They should seek out suppliers with expertise and knowledge to help them understand the global interconnected risk environment.”
Only when an insurance agent understands the risks being faced by a client business can they begin to figure out, in partnership with that business, how they can innovate together to mitigate the risks, Zakis says.
“Some insurance specialists are doing great work on the topic of risk and are identifying new opportunities to minimise risk,” he says.
“Risk isn’t always bad and there is great opportunity, for the insurer and for the business, in having an open conversation around what specific risks can mean to that business.
“Looking at a business through a different lens, through a lens of global risk, helps with creativity,” Zakis says.
“They’re big issues that cannot be solved by one person or one organisation, and in many cases they can’t even be solved by one country.
“But when you drill down into them you figure out how you can make things work in this new environment, and that’s where innovation happens.”
Top Ten World Economic Forum’s 2014 risks
- Fiscal crises in key economies
- Structurally high unemployment or underemployment
- Water crises
- Severe income disparity
- Failure of climate change mitigation and adaptation
- Greater incidence of extreme weather events
- Global governance failure
- Food crises
- Failure of a major financial mechanism or institution
- Profound political and social instability
Risk under the magnifying glass
In order to better understand a business’s exposure to global risks, Zurich utilises an online tool called the Zurich Risk Room.
It has been developed not only to help clients understand their own risks, but also help Zurich, itself a multinational, to come to terms with its own.
“The better we are at understanding the international risk environment, the better we are at looking after our customers and the interests of our shareholders,” Zurich Australia’s Customer and Distribution General Manager Kai Dwyer says.
“The Zurich Risk Room helps to understand and measure risks in specific environments. It discretely measures the interdependency of multi-variant risks within all countries and compares them from country to country.”
The Risk Room is made available to Zurich clients not because there is an insurance product waiting at the end of the process, Dwyer says, but because it helps organisations better understand and analyse risk factors.
Once that understanding has been reached, various solutions, including insurance strategies, become clearer.