How to define an emerging risk: Swiss Re’s Raaflaub

Swiss Re’s annual publication outlining emerging risks, based on the early signals it gathers throughout the year, is meant as a “conversation starter” for the re/insurance industry, the company’s chief risk officer, Patrick Raaflaub, says in an interview with Insurance Day.

The latest edition of Sonar, released in July, has climate and supply chains as the top emerging risks. Swiss Re defines an emerging risk as a newly developing or changing risk that is difficult to quantify and could have a major impact on society and industry.

Raaflaub says: “Sonar is a conversation starter for the re/insurance industry with the main goal of understanding and managing emerging risks. We are identifying early signals for specific emerging risks, but also for relevant trends that might lead to specific risks. And, of course, we are interested in starting to understand the potential opportunities for the insurance industry.”

Identifying emerging risks

To identify and select emerging risks for its Sonar report, Swiss Re “gathers signals and feedback”, Raaflaub says, from its employees – underwriters, client managers, risk experts and others. It also works with external specialists and research institutions.

All those signals are assessed and prioritised by the company’s “foresight function” at Swiss Re Institute, which works with topic experts from Swiss Re’s different business areas.

“We are identifying early signals for specific emerging risks, but also for relevant trends that might lead to specific risks. And, of course, we are interested in starting to understand the potential opportunities for the insurance industry”
_{Patrick Raaflaub
Swiss Re}

There are in general two approaches to underwriting emerging risks.

“One is to protect our underwriting from the downside of an emerging risk. This means avoiding, preventing and mitigating its impact. The second is to turn an emerging risk into an opportunity, such as a new product,” Raaflaub says.

“For both approaches, crucial steps are to identify an emerging risk in the first place, gain the necessary understanding and knowledge, then take the appropriate action,” he adds.

Modelling challenges

According to Swiss Re’s definition, modelling emerging risks is “almost impossible”, he continues, but that changes with a better understanding of the risk and reliable data.

“Although it is too early to fully model emerging risks, we can assess them – for example, according to their potential impact and time horizon for potential maturation,” Raaflaub says.

Risks can be both emerging and systemic, he stresses. “Clearly, there is a big difference in the potential impact of single risks – which might be more random or uncorrelated – and the types of risks that may spread and accumulate in some larger context. Often, we will need to prioritise the big systemic risks if they could affect critical infrastructure or services such as water supplies, transport and telecommunication systems,” he says.

When is a risk no longer “emerging” but established?

Raaflaub concludes: “An emerging risk becomes ‘mature’ when we know enough about it to be able to price and model it. Ideally, we can offer a risk-transfer solution for the risk.”