Risk management: a weak spot in our armour

Risk management has always been an important part of the insurance industry, but has perhaps taken a back seat in favour of other challenges such as regulatory reform as well as merger and acquisition activities.

This complacency can no longer hold sway. Speaking at the recently held Insurance Institute of South Africa’s Annual Sun City Conference, which was held at the end of July, Spiros Fatouros – CEO of Marsh South Africa – pointed to the recent World Economic Forum’s Global Risk Report as examples of the ever present nature of risk.

Technology: managing disruption
One of the major risks we face, a risk that was spoken about extensively at the conference, is technology and the fact that it is significantly disrupting our world.

The risk report points out that evidence suggests that technological change provides a better explanation than globalization for the industrial decline and deteriorating labour-market prospects that have driven anti-establishment voting in many of the world’s advanced economies.

Today’s world is one in which production, mobility, communication, energy and other systems are changing with unprecedented speed and scope, disrupting everything from employment patterns to social relationships and geopolitical stability.

Driven by the convergence between digital, biological and physical technologies, the Fourth Industrial Revolution (4IR) is creating new global risks and exacerbating existing risks.

Most assessments suggest that technology’s disruptive effect on labour markets will accelerate across non-manufacturing sectors in the years ahead, as rapid advances in robotics, sensors and machine learning enable capital to replace labour in an expanding range of service-sector job.

“A lot of conversations in the industry are about disruptive technologies. None of this happens in isolation, we need to be cognisant of change,” said Fatouros.

Environmental challenges
Environmental challenges are also becoming pertinent risks.

Environmental risks are also closely interconnected with other risk categories. Four of the top ten risk interconnections in this year’s GRPS involve environmental risks, the most frequently cited of these being the pairing of “water crises” and “failure of climate change mitigation and adaptation”.

This shows that ineffective management of the “global commons” – the oceans, atmosphere, and climate system – can have local as well as global consequences.

For example, changing weather patterns or water crises can trigger or exacerbate geopolitical and societal risks such as domestic or regional conflict and involuntary migration, particularly in geopolitically fragile areas.

“We have seen examples of the geopolitical shocks in the world over the past year. While not directly related to changing weather patterns, we personally experienced the recent drought that hit South Africa and the effects it had on the economy,” said Fatouros.

The risk report adds that further progress was made during 2016 in addressing climate and other environmental risks, reflecting firm international resolve on the transition to a low-carbon global economy and on building resilience to climate change.

Interconnected problems
Fatouros added that the risk report identified a few key interconnected problems that are driving risk in the world today.

The first problem is flawed capitalism. The bridge between the haves and the have not’s are ever widening and there is growing tension within societies who feel that equal opportunity at a better life needs to be given to all.

The second issue is stagnant economies. As we have seen in South Africa, economies are not growing fast enough to enable the growth that is needed to supply all members of society with an equal opportunity at prosperity. Unemployment is growing in many markets and job creating is slow. Because of this we are seeing increasing instances of civil disturbances, which means higher claims for the short term insurance industry.

Finally, artificial intelligence (AI) is a major problem. Fatouros pointed out that by 2050, AI will displace 70% of the world’s workforce. What effects will that have on South Africa? I suppose only time will tell.