Risk is the potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). The notion implies that a choice having an influence on the outcome exists (or existed). Potential losses themselves may also be called "risks". It is the danger that injury, damage, or loss will occur. Almost any human endeavor carries some risk, but some are much more riskier than others.
New and terrifying events are happening today. The world’s population has always been faced with risks, but the difference today is that risks can now reach magnitudes of harm that hadn’t been imagined before. They have a potential of inflicting devastating damage on the vital systems and infrastructures on which our society depends. The menace to all that people value –the environment, property, and health- has never been greater.
Risks threaten our prime objective in life, which is survival and man has had to live with risks since time immemorial. He faced the risk of diseases, famine, wild animals, enemies, and even from nature itself. The risks man faced horned his survival skills and revolutionized his way of life from the simple Stone Age man to modern day technology driven man.
Risk as such has been an inherent concern for humans since the dawn of recorded history. Not only are there more risk situations today, but modern technological developments has brought a heightened awareness of risks, those that we knew of in the past, and the emerging ones associated with new developments; in addition, the mechanization of much of our daily lives has brought us into contact with new risks. At the same time, technology has provided us with the tools to measure and manage risk, altogether avoiding it at times.
Emerging risks, also called global risks are large scale events or circumstances that arise from global trends; they are beyond any particular party’s capacity to control; and may have impact not only on the organization, but also on multi parties across geographic borders, industries and/or sectors .They are those large impact, hard to predict and rare events beyond the sphere of normal expectations.
They are newly developing or changing risks which are difficult to quantify and which may have a major impact on an organization. The risks should be investigated because of the substantial potential impact on Insurers business.
There are many kinds of emerging risks. They can be caused by a number of factors ranging from new technologies to legislative changes, changes in the weather, and they may be developing or can even already exist, but not yet fully understood. However, they are likely to become significant in the near future. Other drivers of the changing risks landscape include new economic, technological, socio-political and environmental developments as well as growing interdependencies between them which can lead to an accumulation of risk. In addition, there is changing business environment to consider, liability and regulatory regimes continue to evolve, stakeholders expectations are strengthening and risks perceptions are shifting.
One characteristic of emerging risks is that they are very difficult to quantify but have a large loss potential.
Examples of emerging risks are:-
- Increasing natural resource constraints such as loss of fresh water reserves, depletion of oil reserves, which could raise the cost of raw materials, and increase food prices, human suffering, and the pressure to identify other energy sources.
- Natural or man-made disasters such as terrorism, cyber-terrorism, viruses, spyware that could cause business disruption and human catastrophes
- Increased Industrial pollution and rising global carbon emissions leading to climate change that could cause a decrease in biodiversity, a shift in locations of production and consumption and resource shortages.
- Rapidly shifting demographic patterns that could cause talent shortages in certain labor markets or within certain capabilities, lack of adequate skills or shifts in customer demands and or loyalties.
- Rising labor costs driven in part by expanding benefits and non –other salary expenses, which could result in lower profitability and loss of competitive advantage.
- Increased volatility in asset prices and commodity markets that could cause fluctuations in cost structures that cannot readily be passed on to the consumer or otherwise absorbed.
- A global liquidity crunch that could raise the cost of capital for financing transactions
- Emergence of New Technologies resulting in leapfrogging existing technologies as new applications arises.
- Technology and communications disruptions such as internet blackout or system failures which could lead to business disruptions and economic loss.
- Changes in Laws and Regulations that could cause an overhaul in the manner by which businesses are run or affect the sources of their profits.
- Decline in the economic growth which could negatively impact demand and put downward pressure on prices.
- Political crises which could result in nationalization of assets, increased regulation, protectionists tendencies, or other loss control
- Pandemics and other health crises which could jeopardize the supply chain, consumers, employees and others.
- Economic inequality which could exacerbarate poverty and suffering and increase pressure on business to engage in humanitarian efforts.
- Rise in Nuclear capability which could endanger global political stability and physical security.
- Terrorist threats which could reduce economic confidence or cause direct economic losses as well as loss of life, property, and security
- Increased completion from emerging markets and or within the home market which could cause downward pressure on prices.
- Rise in anti globalization sentiments and protectionism which could cause retrenchments from global trade and investment.
- Increase in corruption which could create anti-competitive business practice and lead to fines and sanctions and reputation damage for perpetrators.
- Decline in recognition or enforcement of intellectual property rights which could cause unlicensed commercial activity or loss of proprietary information.
Emerging risks should not be confused with special risks. Special risks have been known for a long time but still remain difficult to insure using classic forms of cover or mitigate using standard loss prevention measures. Non-physical business interruption and other forms of pure financial loss remain a great challenge but must be constantly revisited and modeled so that both the insurer and the insured are aware of their exposures to these risks when developing their risk solutions. Failure to understand and track these risks can lead to a situation of major disaster.
Emerging risks are often referred to as the “unexpected or unknown”. The speed and impact of these risks are further exacerbated by their interdependent with other risk, which requires profound understanding not only of the underlying risk factors, but also of other events that may be triggered. In a global economy, where opportunities are sought across borders and Industries, risks spread equally vastly.
It is important to recognize that emerging risks can be opportunities rather than threats if they are identified, assessed, and managed for competitive advantage.
Success and failures in responding to emerging risks are often the result of organization‘s rigor in applying risk management principles and their agility in adjusting to a changing environment and new challenges. To be able to effectively uncover such risks, resources need to be sensitized and focused on identifying the broad realm of potential risks including emerging risks.
To make risk-informed decisions, management should routinely analyze and track developments in its environment to identify potential exposure through analyzing of past events, and future trends. Such data may be structured or unstructured, quantitative or qualitative. In all cases, it should help elucidate unknowns and their potential impact on the organization. Understanding the generalities of possible emerging risks events provide a starting point to monitor the symptoms of developing issues, which should be refined as further data becomes available.
The need to share information about emerging risks is vital at both the national and international levels. In fact the pace of global socio- economic development over the past twenty years has brought about much scientific and technical progress in research and knowledge concerning risk management. The wide accessibility of the internet and other communications systems has facilitated knowledge sharing everywhere. Knowledge sharing in the development and application of new technologies, whereby the identification and assessment of associated hazards and risks need to be considered and communicated at a stage before widespread application in the industry.
Assessing and establishing preventative measures for emerging risks are expected to be part of a complex process because of many diverse factors. Traditional prevention and control tools are still effective if applied correctly to well known hazards and risks such as those arising from hazardous chemicals, machinery and tools, manual handling and biological agents. However, the tools need to be complemented by strategies and tools designed to anticipate , identify, evaluate and control emerging risks arising from changing in the world of work, as well as innovative technologies.
Insurers and Reinsurers are today operating in a risk landscape that is shifting even more rapidly. Charting emerging risks and opportunities in a pre-emptive way is an important approach to risk management.
The key is to reduce uncertainty and thus help diminish the volatility of business results. While risks today are assessed largely reactively based on loss experience, a faster pace of change requires a more anticipatory approach. To achieve this, we should strive to translate risks associated with high uncertainty into a quantifiable nature.
Emerging risks however offer the following challenges to Insurers and Reinsurers:-
- Many are perceived to be potentially significant, but they may not be fully understood.
- Their consequences cannot be clearly defined in monetary terms.
- Conventional approaches to projecting their relative frequencies, their probability distributions over time, as well as the severity of the resulting losses and other consequences may be ineffective.
- It is difficult to establish casualty between the source of the emerging risk and the consequences.
- They are typically outside of an organization’s control
- They may be systematic, as with climate change or the ageing population.
From the descriptions above emerging risks can take the form of fundamental or dynamic nature.
Fundamental risks affect large number of people in an economy. Some of the emerging risks listed above will affect large number of people in case of occurrence. If they arise from the nature of the society for example wars and unemployment; then they are not insurable. Fundamental Risks as a result of physical or natural causes are insurable.
Dynamic risks occur due to changes in the economy that causes financial loss to certain people for example rapid changes in the information technology industry.
The current conventional Insurance practice does not offer cover for such risks.
As has been mentioned elsewhere, emerging risks can be opportunities rather than threats. The Insurance Industry could therefore take the challenge and develop products that would provide solutions on occurrence of some if not all the risks.