Emerging risks: Risk perception at Swiss Re

1. Emerging risks:Risk perception at Swiss Re Sean Russell OCCA Meeting July 4, 2007

2. 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.

3. Overview • 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

4. Emerging risks - definition • “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.

5. Technological advances & scientific knowledge discovery of new threats, proof of cause-effect relations, improved methods of measuring/detectingemissions Legal standards transition of liability from ‘fault’ to ‘strict liability’ Economic circumstances higher concentration of values,stability of economics (local andglobal), intensity of insurance Social aspects enhanced awareness, deep-pocket philosophy, loyalty of the employee vs employer, public trust, collapse of social security systems Risk of change René Oefeli The Emerging Risks Landscape Finland, 9 May 2006

6. High uncertaintyLittle information availableFrequency and severity difficult to assess Difficult to quantifyRisk transfer questionable No industry positionNo one wants to make the first move Difficulties for risk communication Danger of turning into phantom risks Regulatory involvement necessary Common denominator of emerging risks

7. Group ER management frameworkRationale (Illustration100 years of asbestos premonition) 1906 French factory report of 50 deaths in female asbestos textile workers and recommendation of controls. US insurers refuse cover to asbestos workers due to assumptions about injurious conditions in the industry. 1918 Source: David Gee and Morris Greenberg, “Asbestos: from ‘Magic’ to Malevolent Mineral”. UK Merewether Report cites 66% of long-term workers in Rochdale factory with asbestosis. 1930 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 madeFirst claims paid by Swiss Re, Dec 1966 2006 US Insurance loss as of 2004: USD 55 bn *Total estimated future losses: USD 275 bn ** * according to AM Best ** according to Millimans Conclusion Asbestos exclusions were introduced in the US in 1918 – but somehow they got “lost” in the following years 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

8. Risk Management Process Risk Policy LegislationStrategy Risk Assessment PerceptionIdentificationAnalysisQuantification Risk Control EvaluationSteeringReporting Risk Management Risk informationObjectives & GoalsRisk communication Risk TreatmentAvoidancePreventionReductionFinancing/Transfer

9. P&C SONAR’s history Systematic Risk Perception started in 1995 • Risk perception network established to promptly detect faint signals • Purpose: • Identification and evaluation of emerging and future risks • Systematic screening of the risk landscape • Centralising observations associated with risk from different countries, cultures and enterprises Systematic Observations of Notions Associated with Risk SONAR Patent filed 1995 2000 2002

10. Early indicators Events Claims, losses SONAR perceives early indicators Early warning Reaction time

11. Cloning Deteriorating safety standards Ageing infrastructures Tele- medicine Endocrine disruptors Stress at work Media risks Food contaminants Contingent Business Interruption Dirty bombs Cyber risks Indoor pollution Alcohol Implants Toxic mold Spread of diseases RSI Drinking water quality Mega Tsunami Space weather Intercontinental data transmission Resistance to antibiotics Botox CO2 trading Electrosmog Business ethics Loss of reputation Invasion of privacy Off-shore & internet markets Power system break Customised drugs Organised crime Privatisation Caldera erruption Pervasive computing Nanotechnology Bogus parts Landscape of emerging risks

12. Silicosis • Silica is the second most common mineral on earth • Numerous industrial uses • Disabling, nonreversible and sometimes fatal lung disease • Disease cannot be cured but is highly preventable • Studies indicate evidence of carcinogenic properties of inhaled crystalline silica

13. Obesity • 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

14. Critical partsReuse 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.

15. 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.

16. Drugs and Cosmetics Violent reactions to antibody therapy • 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.

17. FoodPet food contamination in US • 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.

18. FoodBypass approval process for pharmaceutical • 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.

19. Complex or critical infrastructureCritical software • 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.

20. EnvironmentMysterious, 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. • 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.

21. Spreading of infectious diseasesWarning over global bird flu plan • 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.

22. Public healthBuilders sunburn • 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.

23. TerrorismBuilding weapons of mass destruction • 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.

24. Pervasive ComputingOverview • 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

25. 1000 000 nm 1000 nm 100 nm <100 nm Nanotechnology • Nanos (means ‘dwarf’ in Greek) • Technology to manipulate matter down to 1 – 100 nm • Small size • high surface to volume ratio • unique properties (material strength and weight reduction, conductivity, new optical properties) • new entry paths (high mobility in human body and environment)

26. Nanoparticles -Ubiquitous in industrial production Materials Pharmaceuticals Aerospace Electronics Chemicals Machines

27. 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 45 Source: National Science Foundation

28. How much of proof do we need to react? • 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?

29. How to set priorities? Understand: • Time to impact • Probability • Severity (accumulation, cross sector impact) • Measures / down side protection / opportunities • Premium adjustments • Capacity steering, limitations

30. Balance sheet protection:Risk mitigation levels Measures to protect balance sheet encompass:1 Risk communication to influence the business environ- ment favourably, 2 Developing (under- writing) 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 immediateactions necessary (short term); permanent observation Level 1 Raising awareness (internally & externally)to influence the business environment(e.g. Nanotechnology) Level 1 risk communication to raise internal & external awareness with risk communication to raise internal & external awareness with n n raising awareness (internally & externally) the objective to influence the business environment the objective to influence the business environment to influence the business environment (e.g. through legislative measures) (e.g. through legislative measures) individual risk individual risk assessment by Risk assessment by Risk Level 2 Application of underwriting best practice(e.g. EMF, GMO, SilicaTSE, Chemicals) n n Level 2 Engineering Services Engineering Services deviation deviation possible, possible, application of underwriting but but must be must be limitation limitation of exposure of exposure through through n n best practice documented in documented in wordings (e.g. trigger wordings (e.g. trigger definition, definition, auditable form auditable form exclusions, exclusions, product type) product type) Level 3Rules and modeladjustments (Asbestos) Level 3 exclusions exclusions n n rules & model limits limits n n adjust - - referral process referral process ments underwriting principles underwriting principles n n mandatory for mandatory for any any (e.g. market standards) (e.g. market standards) deviations deviations pricing and risk model adjustments pricing and risk model adjustments n n

31. Possible underwriting measures -‘Best practice’ in underwriting • 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).

32. Possible underwriting measures -‘Best practice’ in underwriting • 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’

33. Managing emerging risksConclusions • 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

34. Additional information Swiss Re Publications:  “www.swissre.com” Liability and liability insurance: Yesterday - today - tomorrow Emerging risks – A challenge for liability underwriters Prion infection on the rise? Hospitals in need of modern risk management Nanotechnology – Small matter, many unknowns The insurability of ecological damage