The Emerging Risks Team at Lloyd’s has just published a new report on Behavioural Risks. The report looks at a whole variety of typical biases in human thought processes – and suggests that knowledge of them can help us manage risk better.

Biases with hindsight is discussed in the classic book “Judgment under uncertainty: Heuristics and Biases”, written in 1982 by Daniel Kahneman, Paul Slovic and Amos Tversky.

They suggest that rather than learning from our past behaviour, instead we will tend to view things through rose tinted spectacles – overstating our own abilities.  Summarising the work of a 1975 experiment by Freschoff and Beyth, they say of people reviewing the past:

“They not only tend to view what has happened as being inevitable but also to view it as having appeared ‘relatively inevitable’ before it happened.  People believe others should have been able to anticipate events much better than was actually the case.  They even misremember their own predictions so as to exaggerate in hindsight what they knew in foresight”

This does not suggest we cannot learn from the past – far from it!  But knowing about this bias along with all the others described in our report can help insurance professional be more objective about “facts”.

The report includes a case study on emerging risks management, which I believe is particularly susceptible to these biases (due to the great uncertainty around probability and impact in this field). We hope it will provoke some debate and also provide a useful background to Paula Jarzabkowski’s ethnographic study of the Lloyd’s market.

Recently a posting with the title “an offering “ caught my eye. This post was simply a link through to a series of climate change lectures by Professor David Archer. He works at the University of Chicago and he recorded the lectures he gave this Autumn on climate change. I’ve started watching these and am really enjoying them; although the content is not new to me it is fantastic to see the facts presented so clearly.

Note the post was called “an offering” – this seems typical of climate scientists. Not presumptious at all; he didnt call it “a gift”. But as far as Im concerned that is what it is.

I havent watched them all yet; but from what I have seen anyone with remaining doubts about climate change should watch these lectures. In the face of this much evidence how can people continue denying?

The IPCC is a respected body,  it does not carry out science, it reviews the work of others and publishes a summary.  Its summaries represent a global scientific consensus.  In order to manage the vast volume of papers they have to review the IPCC have to impose a cut off date. This means that the latest IPCC report is based on science that is now three years old.

In many respects this is not a big deal.  The science back then was already very clear; climate negotiators already know what they have to do.  To reduce the risk of the worst predictions political leaders must agree to rapid cuts in greenhouse gas emissions; starting in the developed world and quickly involving everyone.

But to ignore the science of the last three years would be unwise.  Sadly, as has so often been the case over the past 20 years the emerging science is “worse than they expected”. One reason for this in my view is that the IPCC consensus process leads to excessively cautious pronouncements – the scientists are so scared of making statements that turn out to be overly pessimistic that they will only opine when they are really sure of their work.  Whats wrong with that?  You might ask.  Well, I suggest it means that the IPCC reports are not a “best estimate” but are really an optimistic statement – and this is bourne out because each new report contains even worse predictions.

However, climate negotiators dont need to wait until the next IPCC report (2013) for the latest science.  A large group of world famous scientists have produced a new report “The Copenhagen Diagnosis” which contains their latest views on risk.

The news isn’t good.

Greenhouse gas emissions are now 40% higher than 1990, higher than all the scenarios considered to date. Greenland and West Antarctic Ice sheets are loosing ice at an accelerating rate (see our 360 report on this), the Arctic Sea Ice is dissapearing much more rapidly than thought.  Sea levels are rising much quicker than expected, upper limits are now set at 200cm by 2100 compared to 59cm as previously thought!  

Is there hope?

Yes.  We can change and accept lower energy allowances.  Groups are starting to imagine what the society of the future will look like; and to many in the frenzied work environment of the early 2100 century they are quite appealing.  The future doesnt have to be bleak;  we need leadership and vision to choose a future we want – rather than have one imposed which, trust me, we don’t. Our thanks as ever go to the tireless scientists who have worked to ensure the climate negotiators have the best science on which to make their deal.

The report highlights that climate change is being felt already in Brazil.  In Southeast Amazonia, river flows have slowed or even stopped altogether on some occasions impacting navigation and trade; and causing forest fires leading to airport closures.  The link between climate change and economic impacts is clear. 

Over the coming decades a variety of impacts are likely to arise; many of which we are only beginning to understand.  The Amazon may dry out under some projections; if this happened it is likely to affect the climate around the world.    Extended dry periods would reduce the efficiency of hydro power stations – the dominant source of electricity in Brazil.  Strong winds, like those produced by Hurricane Catarina the first recorded tropical cyclone in the South Atlantic, may damage electricity transmission lines.

Only yesterday, the BBC reported that a severe storm caused widespread power cuts which lasted more than five hours, and left up to a fifth of Brazilians without power.

 Agriculture is responsible for 30% of Brazil’s GDP.  The majority of crops will see a reduction in yield as their potential cultivation area is reduced when conditions become unfavourable for them, though sugar cane may see an increase in yields.  This will create a strong impetus to genetically engineer crops to become tolerant of the new conditions; this brings its own risks as discussed in our Emerging Risks report on Synthetic Biology

The city of Recife is shown to be one of the most vulnerable to sea level rise, with over 80% of its buildings within 30m of the sea.  Yet the report warns that adaptation will only come if the public become engaged with the issue and highlights a number of ways this could be achieved.

We hope this new report, and the conference will lead to further debate on climate change between academics, businesses, policymakers and the public in Brazil.  To tackle climate change we must work together; that message is as true in South America as anywhere.

The CCRIF is the Caribbean insurance pool which pays out when certain parametric earthquake or hurricane indices reach a threshold.  The pool provides fast liquidity to islands that can see multiples of their GDP wiped out in a single event.  The pool purchases reinsurance and the Lloyd’s market (via Hiscox) has been involved.

CCRIF explain that their intention is to help Caribbean islands increase their knowledge on natural catastrophes and climate change.  It is interesting to see this development in advance of the landmark Copenhagen meeting on Climate Change later this year which, it is hoped, will bring a major change in the politics of climate change.  Many stakeholders have submitted proposals to this meeting and at least two of these relate directly to insurance.

The proposals by AOSIS (Alliance of Small Island States) and the MCII (Munich Climate Change Initiative) both believe that insurers have a key role to play in helping the developing world adapt to climate change.  First they believe that countries must adapt and thereby attempt to offset the growing risk (for example by building flood defences, changing building methods, increasing risk management education); but they both admit that adaptation will not remove all risk and some of the residual risk can be pooled by insurers and reinsurers. 

The new CCRIF announcement is a good example of the education on risk (sometimes called “capacity building”) that adaptation will require.  They also state they will assist with disaster reduction schemes, which makes a lot of sense; by reducing the risk the pool will go further.

Deep and rapid cuts in greenhouse gasses are essential.  Yet there will be many years of unavoidable change (probably at least 100) and the global efforts to adapt will bring opportunities to those adept at managing risk.  Insurers have a lot to offer and need to be ready to act.

 According to organisers the meeting brought “together the scientific, engineering, legal, and policy communities along with members of the public”.  This seems an excellent step forward in this exciting but potentially risky field.

So what is synthetic biology?

This is the subject of the latest report from the Emerging Risks team at Lloyd’s (Synthetic Biology: Influencing Development, pdf, 1.2mb).  In a nutshell it’s the next development in genetic modification techniques….

…the ‘Traditional’ Genetic Modification (GM) method cuts DNA from one organism and pastes it into the genome of another, thereby creating a new organism.  It seems odd to use the word ‘traditional’ but in fact these techniques have been around since the 1970s.  The new field of synthetic biology doesn’t need to copy existing DNA; it can create its own—first on the computer and then physically—literally from a primordial soup of raw materials. 

Synthetic biological techniques could be transformative.  Some dreams which are not too far from reality include: engineering bacteria to produce biofuels or cheap drugs; and altering plants to be heat, salt and drought tolerant.  Such successes could be critical in the fight against climate change, water and energy shortage and population growth.

But there are risks, or at least there could be without responsible innovation and appropriate regulation.  A key concern is that, as the techniques rapidly become simpler and cheaper, terrorists will be able to use the new techniques to grow bio-weapons. 

Another concern is that it is almost impossible to predict how an ecosystem will react to a new organism—genes may be swapped unintentionally (this has already happened with some GM plants); and the same goes for human health—we don’t know how these new substances will affect us.

Our new report suggests that the next steps should include:

• mapping uncertainty and then filling the knowledge gaps with a particular focus on understanding health and environmental risks, considering whether existing regulations are appropriate or whether international coordination is called for
• considering extreme high impact, if low probability scenarios as part of risk management
• and tracking the uses of synthetic biology, including mandatory labelling in food.

While it’s still early days, it does appear that a number of insurance lines could be affected in future, so insurers should monitor developments in this field carefully.

Another of our suggested actions is that focus groups should be run involving all stakeholders; so it’s good to see that the symposium mentioned above involved the public.  It will be interesting to see what they conclude.

Download the report: Synthetic Biology: Influencing Development (pdf, 1.2mb)

The current strain of flu that’s causing concern is of the H1N1 type; different to the H5N1 strain (or ‘bird flu’) that made the news several years ago.  The new strain is from a mixture of a swine virus, human flu and, in fact, bird flu.

According to the World Health Organization the majority of people will not have immunity unless they work with pigs.  Once a strain is isolated work on a vaccine can begin but this is likely to take several months to prepare. 

In the meantime antivirals (which help to suppress the full effect of the virus) can be prescribed; it appears that oseltamivir and zanamivir are effective.  A key concern is that a virus will have immunity to antivirals; but at the moment this appears not to be the case, which is fortunate.

The current WHO ‘preparedness phase’ has now been raised to level 4.  The WHO is not recommending travel or trade restrictions.  They have already concluded that containment of the outbreak will not be possible because it has already been identified in many locations. They stress that a pandemic is not inevitable but that it is now more likely.

The excellent on line encyclopedia wikipedia once again shows its worth with an article  that shows suspected cases around the world. These are being mapped live (below) and include unconfirmed cases ranging from the US, UK, Spain to New Zealand.

View H1N1 Swine Flu in a larger map

Note that only 45 cases have been laboratory confirmed with another 1807 cases only “influenza like”.  According to the Centres For Disease Control and Prevention there are small number of confirmed cases from the east to west coast of the US (see graphic).

Restricting the view to just Mexico we see 152 deaths out of 2761 cases, which is appears to be a “case fatality rate” of over 5% (compared to 2.5% for the 1918 “Spanish flu” virus which killed tens of millions, though lower than bird flu which is still at a worrying 60%). 

The case fatality is the percentage of people who are ill with the flu who go on to die from it.  It is likely that a number of cases are unreported (whereas deaths are likely to be tracked accurately) so the true case fatality rate is probably lower than the basic statistics suggest; time will tell.  As you can expect there is some conflicting information on numbers with wikipedia showing 50 confirmed cases in the US and the CFC showing 40.

In the event of a major pandemic the insurance industry will potentially have to cope with an variety of claims, while it is still reeling from its own business continuity problems. Life and health insurers will be directly impacted but less immediately obvious losses could arise, from medical malpractice to event cancellation.

One of the key issues raised is that a major pandemic is thought likely to cause a global recession – given the current financial state of the world’s economy a pandemic could not be worse timed.  At present however, there is good reason to hope the impact of this flu will be manageable; we will continue to monitor the situation.

Adaptation is the term used in climate-change circles to refer to actions taken to make infrastructure and processes more resistant and resilient to climate related harm.  Resistance means that whatever the hazard, it will be kept at bay for longer (eg a flood proof membrane to keep flood water out); and resilience means you bounce back quicker after an event (for example by putting kitchens and living spaces upstairs rather than downstairs for buildings in a flood plane).

Repetto’s report notes that many past studies have assumed that developed countries will adapt to climate change, and therefore for low temperature increases caused by climate change, the impacts will be contained. He goes on to show that assumptions don’t appear to match the way human beings and policymakers actually behave. He cites reasons for humans’ less than rational behaviour such as: the perverse incentives of state run insurance, where premium rates are less than the risk requires; or behavioural economics, which includes concepts like ‘anchoring’, where people struggle to move away from previously held beliefs.

He notes that many disaster plans are based on past events rather than forecasts from climate models and have repeatedly been shown to fail because of this.

His final chilling sentences read:

“Without national leadership and concerted efforts to remove these barriers and obstacles, adaptation to climate change is likely to continue to lag. It will be largely reactive rather than anticipatory and preventive, responding to damaging impacts once they have occurred. To say that the United States can adapt to climate change does not imply that the United States will adapt.”

Lloyd’s 360 project, working with Risk Management Solutions, produced a paper (pdf) in September last year on the benefits of adaptation. It showed that sea level rise of just 30cm could double average losses for some exposed properties; but that certain forms of adaptation could bring the risk back down to below current levels.

Repetto’s paper reminds us that even though adaptation can make sense it often happens too late, or not at all.

Repetto’s paper is on this website: www.climateactionproject.com

Google explain their work  and provide a link to this paper (pdf) from Ginsberg et al which gives more details (including a brief mention of other similar studies, some of which use Yahoo! data). 

At first look this result might seem quite obvious.  If a region is in the depths of a flu epidemic it’s hardly surprising that more people than average will search for information about relevant symptoms.

The real power of Google’s research is that the information contained in the queries appears to have predictive power.  In other words they can spot an impending epidemic before it happens. 

According to Ginsberg et al the new Google methods can give useful information some two weeks prior to the traditional monitoring methods by the Centre for Disease Control and Prevention (CDC).  They stress that traditional methods still have their place and are not calling for their new methods to replace them. 

However, they hope that their approach could be very useful for medical authorities in planning for an epidemic before it occurs.  I imagine this would enable the early ordering and deployment of antivirals, for example.

They consider how their approach might fare during a pandemic and stress that their method has not been tested in this scenario.  It may be that heightened public awareness of the flu at such a time will invalidate their method (searches by the ‘concerned well’ may swamp those with early genuine symptoms).  However, if their method is useful in such a scenario it could save many lives. 

Lloyd’s Emerging Risks team have produced a report on Pandemics (pdf, 408kb) and are continuing to monitor this subject for developments.

In any case, Ginsberg et al state that seasonal flu, which occurs annually, is still responsible for up to half a million deaths every year, so any reduction in mortality from this cause would be welcome.