A group of insurance and technology companies have come together under a World Economic Forum platform to form a coalition looking at how to understand and address the risks posed by the fourth industrial revolution.
Drones, driverless cars and other innovations will place a burden of hundreds of billions of dollars of uninsured risk on societies. To assess and take charge of these risks, the insurance industry has teamed up with technology companies and senior government representatives in a World Economic Forum-led initiative, ‘Mitigating Risks in the Innovation Economy’.
In the past, when new risks emerged, the insurance industry was able to adapt and offer the necessary protection to society. However, the age of globalization combined with the digital era has led to unprecedented technological advances and breakthroughs globally. These developments will bring a radical shift in the nature of risks to society, and the insurance industry is expected to struggle to use its old playbook to address these emerging risks.
Accelerated digitization and growing open and connected digital environments are creating new vulnerabilities and potential consequences that are less predictable than ever before. The key challenge will be finding the balance between the risks and rewards of new technologies.
As the world stands on the brink of the Fourth Industrial Revolution, the large benefits that these technologies bring must be embraced while preparing for a potential array of unforeseen implications.
The World Economic Forum working group lays out the risks and goals, including:
- Closing the gap in existing governance frameworks to manage risks from innovations
- Determining the liabilities, roles and responsibilities involved with these risks
- Setting up a data-sharing mechanism to manage the risks
“No one currently knows the magnitude of the risk exposure of society to new, uninsured technologies,” said Victoria Shirazi, project lead of the Mitigating Risks in the Innovation Economy project at the World Economic Forum. “A technology failure that was once both small and contained can cascade into potentially catastrophic losses. This initiative will help societies prevent, respond to and recover from these new risks.”
The insurers point to potential risk scenarios of emerging risks with vastly varying estimated costs:
- A cyber-attack on the US Northeast electrical grid could result in economic losses as high as $222 billion
- A disruption of the cloud could result in economic losses ranging from $15.6 billion to $121.4 billion
- A compromised software upgrade for globally interconnected systems could put between $4.5 trillion and $15 trillion of global GDP at risk over five years due to losses to global GDP output
The majority of these and other innovation-related risks are uninsured: the insurance gap is as high as 83 percent in a cloud service disruption scenario and 93 percent for a mass vulnerability setting. Other risks are yet unknown.
“As technologies emerge on their own, the risks are becoming so big and complex that businesses and governments will not be able to handle them”, said Inga Beale, chief executive officer of Lloyd’s, and a backer of the initiative. “With this initiative, we want to address that.”
Insurers and insurance brokers involved in this initiative include Allianz, Lloyd’s, Marsh & McLennan, Sompo Holdings, Swiss Re, Willis Towers Watson, XL Catlin and Zurich Insurance Group; technology companies include Cisco, Hitachi, IBM and Siemens; and senior officials are also participating from the European Commission, India, Japan, Netherlands, Singapore, Switzerland, United Kingdom and the United States.
Consumers face two stark realities that the group needs to resolve, said Matthew Leonard, partner at Oliver Wyman, and member of the initiative: “First, people do not fully understand the risks they are running; and second, those who seek to mitigate their risk with insurance are faced with a decided lack of choice and/or affordability.”
The members of this initiative have committed to further multi-stakeholder actions to be developed and piloted in 2018, starting at the World Economic Forum Annual Meeting in January. The report and joint initiative were prepared by the Forum in collaboration with Oliver Wyman. Throughout the process, the insurance industry will also explore how it can best fulfil its new capacities, such as risk advisory and analytics.
“Given the emerging risks associated with applications of many new technologies that do not yet have social conventions and existing legal frameworks to stipulate the ‘rules of the game’, it is imperative for the insurance industry to work with governments, tech partners and other stakeholders to create a common taxonomy and clear definitions of risks and liabilities; collect and share available data to allow for efficient risk pooling, pricing and sharing; and unleash the potential of risk mitigation by utilizing every aspect of the industry’s value chain,” said Abel Lee, head of insurance and asset management at the World Economic Forum.
“The world is changing as new technologies proliferate and the nature of risks facing individuals and the economy is morphing at an increasingly rapid pace, “says Prashanth Gangu, partner at Oliver Wyman and member of this initiative. “Society needs to be ready for events bigger than the more than $100 billion loss estimates from Hurricanes Harvey, Irma, Maria, caused by risks in the global cyber-physical system, either errors in code, malicious hackers or AI gone wild.”
[Image: PwC report, ‘Insurance 2020 & beyond: Reaping the dividends of cyber resilience’]