Emerging risks:
Risk perception at Swiss Re
Sean Russell
OCCA Meeting
July 4, 2007
Disclaimer
Please note that this document, or any part of it, may not be
disclosed or otherwise made use of without Swiss Re's prior
written consent. Whilst any third party information contained
in this document has been obtained from sources believed
to be reliable, no representations are made as to its
accuracy or completeness. Further, Swiss Re expressly
disclaims any responsibility for liability or loss arising from
use of such information or from any of Swiss Re's comments
upon it.
Page 2
Overview
Page 3

What are emerging Risks?

Why are emerging risks of concern for re/insurance?

How does Swiss Re detect emerging Risks?

Some examples of current emerging risks

How to manage emerging risks
Emerging risks - definition
Page 4

“Emerging risks are developing or changing risks which
are difficult to quantify and may have a major impact on
insurers book of business.”

Often they are already (unintentionally) present in an
insurers existing book of business.
Risk of change
Technological advances & scientific knowledge
discovery of new threats, proof of cause-effect
relations, improved methods of measuring/detecting
emissions
Legal standards
Economic circumstances
transition of liability from ‘fault’
to ‘strict liability’
higher concentration of values,
stability of economics (local and
global), intensity of insurance
Social aspects
René Oefeli
The Emerging Risks Landscape
Finland, 9 May 2006
Page 5
enhanced awareness, deep-pocket philosophy,
loyalty of the employee vs employer, public trust,
collapse of social security systems
Common denominator of
emerging risks
High uncertainty
Difficult to
quantify
Little information available
Risk transfer
questionable
Frequency and severity
difficult to assess
No industry
position
No one wants to make
the first move
Difficulties for risk
communication
Page 6
Danger of turning into
phantom risks
Regulatory involvement
necessary
Group ER management framework
Rationale (Illustration100 years of asbestos premonition)
Source: David Gee and Morris
Greenberg, “Asbestos: from
‘Magic’ to Malevolent Mineral”.
1906
French factory report of 50 deaths in female asbestos textile workers and
recommendation of controls.
1918
US insurers refuse cover to asbestos workers due to assumptions about
injurious conditions in the industry.
1930
UK Merewether Report cites 66% of long-term workers in Rochdale
factory with asbestosis.
1931
UK Asbestos Regulations specify dust control in manu-facturing only and
compensation for asbestosis, but this is poorly implemented.
1950s First worker's comp asbestos claims filed
1960s First GL cases filed and first payments made
First claims paid by Swiss Re, Dec 1966
* according to AM Best
** according to Millimans
2006
US Insurance loss as of 2004: USD 55 bn *
Total estimated future losses: USD 275 bn **
Conclusion
Asbestos exclusions were introduced in the US in 1918 – but somehow
they got “lost” in the following years
Page 7
Data on harmful health effects of asbestos were reported as early as 1898 , but
the insurance industry did not integrate this knowledge into its risk management
Risk Management Process
Risk Policy
Legislation
Strategy
Risk Control
Evaluation
Steering
Reporting
Risk
Management
Risk
Assessment
Risk information
Objectives & Goals
Risk communication
Perception
Identification
Analysis
Quantification
Risk Treatment
Page 8
Avoidance
Prevention
Reduction
Financing/Transfer
P&C SONAR’s history
Systematic Risk Perception started in 1995
Systematic
SONAR
Observations of
Notions
1995
2000
Patent filed
2002
Associated with
Risk

Risk perception network established to promptly detect
faint signals

Purpose:
– Identification and evaluation of emerging and future
risks
– Systematic screening of the risk landscape
Page 9
– Centralising observations associated with risk from
different countries, cultures and enterprises
SONAR perceives early
indicators
Early indicators
Events
Early warning
Reaction time
Page 10
Claims, losses
Landscape of emerging risks
Ageing
infrastructures
Food
contaminants
Indoor
pollution
Spread of
diseases
Space
weather
Page 11
Telemedicine
Media
risks
Cyber
risks
RSI
Cloning
Deteriorating
safety
standards
Endocrine
disruptors
Dirty
bombs
Implants
Stress at
work
Contingent
Business
Interruption
Alcohol
Toxic mold
Drinking
Mega
Intercontinental
water quality
Tsunami
data transmission
Resistance to
Botox
antibiotics
Electrosmog
CO2 trading
Business
Loss of
ethics
reputation
Off-shore &
Power
Invasion
internet
Organised
Customised system
of privacy
markets
crime
break
drugs
Privatisation
Pervasive
Caldera
Bogus parts
computing Nanotechnology
erruption
Silicosis
Page 12

Silica is the second most common mineral on earth

Numerous industrial uses

Disabling, nonreversible and sometimes fatal lung
disease
Obesity
Page 13

Center for Disease Control and Prevention (CDC) has
declared obesity an epidemic

1 out of 3 Americans is obese

400 000 obesity-related deaths annually in the US

Increases risk of heart disease, type 2 diabetes and
colon, breast and endometrial cancers
Critical parts
Reuse of single-use medical
devices
Hospitals and external medical providers are reprocessing
expensive endoscopic tools used for minimally invasive
surgery. Reprocessed medical instruments can expose
patients to increased risk of infection.
Page 14
Botox
Botox (Botulinum toxin) is a toxin injected into wrinkles to permanently
paralyze certain muscles and help eliminate wrinkles. It has proven to
reduce the appearance of moderate to severe frown lines in 18 to 65
year-old patients.
Massive use in the North America and Europe.
No long-term studies available. Ageing characteristics of treated facial
tissues unknown – 'Michael Jackson facial syndrome' possible.
Page 15
Drugs and Cosmetics
Violent reactions to antibody
therapy
Page 16

In a London clinical trial six healthy volunteers suffered
multiple organ failure.

Specialists agree that results of T cell activation are
notoriously hard to predict.

Past experience with “small synthetic molecules” can no
longer automatically be expanded to such molecules.

Potential impact on insurance: product liability can in
general be triggered more frequently for drugs stimulating
rather than neutralizing components of the immune
system.
Food
Pet food contamination in US
Page 17

The major manufacturer of cat and dog food for many
brands found that their food had been contaminated with
a substance used overseas to poison rats.

The contamination comes from ingredients imported from
a supplier.

“...pets are basically considered property at this point...”.
If this changes this “...could bring further liability actions
into play.”

Potential impact on insurance: increase of products
liability exposure for pet food manufacturers. Largest
exposure could be in veterinarian medicine and pharma
for pets.
Food
Bypass approval process for
pharmaceutical
Page 18

Food additives are not subject under the approval
process for pharmaceuticals. For some products
manufacturers can avoid the lengthy process for
pharmaceutical approvals by declaring them as food
additives or nutraceuticals

Nutraceutical refers to foods claimed to have a medicinal
effect on human health.
Complex or critical infrastructure
Critical software
Page 19

Stable software has become crucial for the flawless function of
aviation, automobiles, rails or infrastructure

MS Crown Princess came close to capsizing due to a faulty steering
mechanism.

Reasons for such failures are often to be found in cost pressures,
faulty time schedules or lack of risk/project management.

Potential impact on insurance: casualty of shipping company. If
software was at fault the PI cover of the software company would be
called on. Highlights the problems with safety relevant software. In
cars a failure could trigger PL and/or Recall. Property damage (eg.
ship on fire, defective cargo), business interruption.
Environment
Mysterious, massive death of
bees in the US

In the US, bee keepers are experiencing unprecedented
die offs of bees some losing as much as 80% of their
colonies. Some additional facts:

In 2000, the total U.S. crop value that was wholly
dependent on the honey bee pollination was estimated to
exceed $US 15 billion.

Potential impact on insurance:
– Parts of agriculture relying on pollination by bees will
have loss of yield.
Page 20
– If chemicals are causing the death of the bees the
question who is guilty will be raised. If this is the result
of a natural cause, it has no impact on insurance.
Spreading of infectious diseases
Warning over global bird flu plan
Page 21

A third of countries failed to set out how they would
distribute medical treatment

Individual countries have not consistently prioritised
population groups for vaccines and antivirals.

No countries prioritised population groups to receive
ventilators, face masks and other critical resources

Half of the countries studied had prioritised children,
despite a WHO recommendation against it.
Public health
Builders sunburn
Page 22

The risk of sunburn has been highlighted as “the new
asbestos”, causing cancer which could become the next
big threat to the building industry.

Contractors across the sector could be facing potentially
huge employers’ liability claims amounting to millions of
pounds in the coming decades if they do not warn their
employees to slap on the suntan lotion.

Clearly it would be difficult to determine which sun caused
the skin cancer, the one taken at work or the one taken
during a vacation.
Terrorism
Building weapons of mass
destruction
Page 23

Genetically engineered bio weapons developed by small
teams could become reality within the next two to four
years.

Virologist and state funding is no longer needed. With the
help of a DNA synthesizer it would take just over $200
000 to build smallpox genome.

Virologist question if it would be that easy.

Potential impact on insurance: Product liability for labs
synthesizing harmful sequences on demand, accidental
releases from laboratories, pandemic with ten thousands
getting sick/dead.
Pervasive Computing
Overview
Page 24

Miniaturization of electric circuits makes them more susceptible to
cosmic radiation

Loss of sensitive personal data

Playing video games may result in hand injuries

Addictive gambling

Googlization

Internet creating conflagration

Robot safety

Vicious bloggers
Nanotechnology
1000 000 nm

Nanos (means ‘dwarf’ in Greek)

Technology to manipulate matter down to
1 – 100 nm

Small size
1000 nm
– high surface to volume ratio
100 nm
– unique properties (material strength and weight
reduction, conductivity, new optical properties)
– new entry paths (high mobility in human body and
environment)
<100 nm
Page 25
Nanoparticles Ubiquitous in industrial
production
Page 26
Materials
Pharmaceuticals
Aerospace
Electronics
Chemicals
Machines
Worldwide revenues in the year 2015:
More than USD 1 trillion (1000 bn)
Nanotechnology revenues worldwide by 2015 (USD bn)
Materials
340
Electronics
300
Pharmaceuticals
180
Chemicals
100
Aerospace
70
Tools
20
Healthcare
30
Sustainability
Page 27
45
Source: National Science Foundation
How much of proof do we need
to react?
Page 28

Challenge: early signals vs. impact to insurance

Do we need to adjust the risk capital?

How much statistical data are required to trigger action?
Is a proactive behaviour possible? first mover
disadvantage?

No loss no exposure? How can we adjust premiums
without loss experience?
How to set priorities?
Understand:
Page 29

Time to impact

Probability

Severity (accumulation, cross sector impact)

Measures / down side protection / opportunities

Premium adjustments

Capacity steering, limitations
Balance sheet protection:
Risk mitigation levels
Measures to protect
balance sheet
encompass:
1 Risk communication
to influence the
business environment favourably,
2 Developing (underwriting) best
practices and
3 Developing rules
and adjusting
pricing and risk
models.
SONAR: No immediate actions necessary (mid term)
SONAR: Keep/monitor on watch list, no immediate
actions necessary (short term); permanent
observation
Level 1
Level 1
Raising awareness (internally & externally)  risk communication to raise internal & external awareness with
raising
awareness
(internally
& externally) the objective to influence the business environment
to influence
the business
environment
to influence
the
business
environment
(e.g. through legislative measures)
(e.g. Nanotechnology)
Level 22
Level
Application of underwriting
application
ofunderwriting
best practice
(e.g. best
EMF,practice
GMO, Silica
TSE, Chemicals)
Level3 3
Level
Rules and model
rules & model
adjustments
adjust-(Asbestos)
ments
Page 30

individual risk assessment by Risk
Engineering Services

limitation of exposure through
wordings (e.g. trigger definition,
exclusions, product type)

exclusions

limits

underwriting principles
(e.g. market standards)

pricing and risk model adjustments
deviation possible,
but must be
documented in
auditable form
referral process
mandatory for any
deviations
Possible underwriting measures
-‘Best practice’ in underwriting
Page 31

Higher premiums offset the uncertain higher risk. No
structural solution. Insureds pay risks from the past …

Higher retentions stimulate risk-adverse behaviour and
prevention. Not a solution to large loss amounts

Lower insured limits: better assessment of the severity
of occurrence, but not ‘full’ compensation of an insured’s
damage (via insurance).
Possible underwriting measures
-‘Best practice’ in underwriting
Page 32

Better risk differentiation stimulates risk-adverse
behaviour and prevention  fairer solidarity groups

Exclusions leave the insured’s damage uncompensated.
Sometimes this ‘solution’ is inevitable

The liability insurance trigger should be changed from
‘act committed’ to ‘loss occurring’ or even - in some
countries - from ‘loss occurring’ to ‘claims made’
Managing emerging risks
Conclusions

High demand for further systematic observation of the
‘risk of change’ for current and future emerging risks

Promoting risk awareness or risk perception internally
and externally is vital

Define necessary underwriting measures (‘best
practice’ in underwriting) in good time
meaning:
 impact analysis and
 define specific underwriting guidelines
Page 33
Additional information
Swiss Re Publications:
Liability and liability insurance:Emerging risks – A challenge Prion infection on the rise? Nanotechnology – Small
Yesterday - today - tomorrow for liability underwriters
Hospitals in need of modern matter, many unknowns
risk management
 “www.swissre.com”
Page 34
The insurability of ecological
damage