In Lord Levene’s address to the conference he cited the report adding “Now if your business stores its IT files in Asia or the Gulf of Mexico, and a flood or storm strikes, your systems could fail in London. Suddenly, the wet and windy South of England is exposed, through a computer connection, to a natural catastrophe.”  Indeed, Jaak Aaviksoo, Minister of Defence for Estonia went on to highlight his country experiences when they suffered a nation-wide cyber attack in 2007 over a dispute with Russia over the moving of a war memorial.

The digital risks report itself focuses on some of the trends and emerging risks posed by the revolution in digital and communications technology with the aim of raising the profile of these risks within the insurance industry and amongst risk managers in affected businesses.  Key topic areas included:

• the rise in the number and sophistication of cyber crime attacks;
• highlighting the legal and liability issues surrounding internet or ‘cloud’ computing;
• the risks and opportunities of ‘Web 2.0′ and the unprecedented level of sharing of information that the internet makes possible;
• raising the potential risks due to the increasing trend of using Global Positioning System or GPS within industry and transport; and
• reiterating the fact that this new virtual world is still grounded in the physical world and that natural or man-made disasters could have significant impacts on the digital economy.

Beyond those reports referred to in our report, there are several others that highlight other facets of this interesting and increasingly pertinent risk topic, including several strategy reports that summarise the current infrastructure and threats.  Insurers with cyber-liability and other digital risk exposures will find the following reports worth reading:

• Council of Science and Technology’s report on “A National Infrastructure for the 21st Century“
• The Technology Strategy Board’s (TSB) Network Security Innovation Platform (NSIP) recently published their interim strategic assessment  focusing on the challenges information risk poses to the UK.

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 Aon 2009 Terrorism Threat Map from Aon Crisis Management (2 June) shows a trend towards fewer terrorist attacks in the Middle East but increased activity in Pakistan, India and Afghanistan, with Thailand and Nepal also showing more incidents.

Produced in coordination with security consultancy firm Janusian, the map represents a snapshot of terrorist groups’ intent and capability and provides a graded indication of the current threat of attack in each country.

Terrorist groups with more traditional ideological leanings seem to be experiencing a resurgence, said Craig Preston, executive director at Aon, citing the communist Shining Path movement in Peru and a revolutionary anarchist movement in Greece as examples.

The global recession could produce a new generation of terrorists from disaffected communities and usher the return of class-based politics, he said: “This raises the prospect of new terrorist groups forming in the developed world on the far right and far left of the ideological spectrum.”

Although another major terrorist attack in a Western country by Islamists is possible, and there are signs of more sophisticated plots, the threat has subsided, Aon believes, as a result of improved intelligence and security.

“In general, operating conditions for terrorists have become more difficult in Western countries as well as in some Middle Eastern countries, such as Saudi Arabia,” Preston said. “Also there’s a shift of focus among terrorist groups towards establishing new fronts in places like Pakistan and Somalia.”

>Download the map (pdf) from the Aon website or ask for a copy of the 2009 Terrorism Threat Map from Aon

However, some scientists believe that some nano-materials may cause health or environmental impacts.  The Royal Commission report on novel materials has made an urgent call to bridge the knowledge gap of the potential environmental and health impacts of nanotechnologies in a systematic and strategic way. They say “we strongly recommend a more directed, more coordinated and larger response led by the Research Councils to address the critical research needs…”.

There is also a call to amend regulations, such as REACH, so that they can be effectively applied to nano-materials.  This is very much in line with the report published by Lloyd’s Emerging Risks team on Nanotechnology.

Our report proposed some systemic failure scenarios, a theme also recommended by the Royal Commission who call for  “Evaluation of methodologies for predicting the likely fate and effects of nano-materials based on their physical and chemical properties as well as their novel properties, and where possible, the development of exposure scenarios.”

If the Commission’s governance recommendations are followed there will be considerably more clarity around responsibilities.

For example they call for DEFRA to require mandatory reporting where food contains nano-particles; they also suggest that companies should have a legal duty to report any suspicion that a material presents a risk to the public or the environment.

Such clarity can only be useful to insurers providing liability cover given that companies are operating in an increasingly litigious world, as highlighted by the Lloyd’s 360 report “Directors in the dock“.

It will be fascinating to follow this debate as it progresses.

The Emerging Risks Team at Lloyd’s have recently published a report on the insurance impacts of a pandemic which explores whether or not the world is better prepared to face the next major pandemic. The report references the 1918 ‘Spanish Flu’ pandemic, which was spread by the demobilisation of troops, and some estimates believe it led to 100 million deaths, more than the First World War itself. The report considers whether this event is truly a worst case.

There are many reasons to believe the world would be better off: better drugs, better communications; models of disease spread; a healthier population and a co-ordinated response from the World Health Organisation backed up by International Health Regulations. But there are also reasons for doubt. Just-in-time supply chains used by many industries including hospitals may not be robust, particularly if they are spread across several countries; global travel far exceeds levels in 1918 and can rapidly spread disease; we have a much larger global population (nearly 3.5 times the level in 1918) and more people live in cities in which the pandemic can spread quickly.

I have a concern that most of the discussions around a pandemic relate to the flu (particularly H5N1) because, while this is the pathogen causing the most concern at present ,it is not the only possible pandemic. Others include: Hendra Virus, Cholera, Tuberculosis, Ebola, MRSA and SARS. It is important that pandemic preparedness plans do not over optimise to one scenario and are robust to many.

The report considers the scenario of a major pandemic which causes a recession (as many fear would happen) and then various experiments to consider how insurers may be affected.  

In scenario planning it is useful to consider possibilities, even if they are felt to be unlikely.  Directly affected insurance classes might include: General Liability, D&O, Employers’ Liability, Medical Malpractice, Event cancellation and Travel insurance.  However, secondary effects might also occur. For example, at the height of a pandemic the number of available tradesmen may temporarily be lower than usual (they may be sick, or just not want to go into other peoples homes). In this case, traditional claims resulting from burst water pipes, storm damage to roofs, etc, may take longer to fix; and usually claims that last longer cost more. 

While these secondary impacts are unlikely to damage the capital of insurers they will be an unwanted drain on profitability.

We hope the report is useful for professionals within insurers that are considering emerging risks.  If the impacts considered in this report were not envisaged at the time of writing a policy then contract certainty is key. Inner limits for pandemic losses may help to contain exposure.