National Underwriter - August 15 2011

Many risks are evolving and spreading more quickly as a result of globalization. We have faced natural catastrophes and pandemics for centuries, but risks have been heightened by our increasingly in-terconnected and interdependent world and are spreading faster and further, jumping from one industry or country into several countries or sectors.

DAVID INGRAM EXECUTIVE VICE PRESIDENT WILLIS RE INC.

KAREN CLARK

PRESIDENT & CEO

KAREN CLARK & CO.

The world is getting more risky because of ever-growing concentrations of exposures: Growing concentrations of property values in coastal areas allow hurricanes to cause more damage. Massive databases of personal information controlled by a small number of companies mean that one security breach can impact hundreds of millions of people. Major financial institutions focusing decisions on complex and opaque computer models means that one faulty model assumption can bring large segments of the financial system down.

Clark is founder of the first catastrophe modeling firm, Applied Insurance Research (AIR Worldwide).

DON MANGO

HEAD OF GLOBAL ADVISORY | GUY CARPENTER

It’s definitely becoming more risky. If you look at what’s hurt U.S. insurers in particular, it’s been a frequency of severity— not named storms, but flooding and tornadoes. And it’s a preponderance of earthquakes throughout the world: It was not a single earthquake that hurt Christchurch. It was the fact there were so many. Weather and geological phenomenon becoming more volatile is the No. 1 risk.

No. 2 is there’s much more interconnection—economic linkages, in particular. Based on recent travels to Europe and China, I can tell you the U.S. creditor nations were far more worried than the United States about the United States possibly being downgraded or defaulting. This is right out of the old adage, “If you owe your bank $1 million, you have a problem. If you owe your bank $100 million, they have a problem.” The days of unilateral economic policy are going away.

Third are the knock-on effects of seemingly isolated events. One example was Deepwater Horizon. Beyond the immediate damage to the rig, industry shutdown all around the Gulf had orders of magnitude more impact. You had thousands of miles of coastline that were impacted by tourism, and shutdowns of fishing industries in Louisiana, Alabama and Mississippi.

The upshot: Don’t look at just the immediate proximate cause. The width of the effect is growing in our world. The damage to

From a legal perspective there does not appear to be any shortage of risk that will continue to drive insurance needs. For example, cars are safer in very significant ways, but the opportunity for massive financial risk from manufacturing and design decisions is perhaps greater today than ever. The recent Toyota “sticking-accelerator” problem led to class-action lawsuits and recalls.

Environmental disasters continue to present huge risk, leading to lawsuits not just for the harm to local communities, like love Canal, but also to huge geographic regions, as was the case with the Exxon Valdez and the more recent Bp oil-spill disasters.

At many levels society is safer, but with a world economy and the expansion of markets, the risks that must be managed are often more complicated and expensive.

Japan from the Tohuoku quake was severe, but the supply-chain disruption for a wide range of industries was shocking.

Just-in-time manufacturing really is translating to extremely fragile supply chains that can be halted from very far-off geographies or very far-flung industry or political events that just weren’t contemplated in risk management.

The world is becoming much riskier. Supply chains are longer and more complicated than ever. In the old days, the supply chain went from the Northeast to the South. Then it went to Mexico. Then it went over to China. Now it’s in India, it’s Vietnam, it’s all over the world.