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Horizon scanning and emerging insurance risks Issues forum – May 2010

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Horizon scanning and emerging insurance risks

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Page 1: Qbe casualty-risk-management-horizon-scanning-and-emerging-insurance-risks

Horizon scanningand emerginginsurance risksIssues forum – May 2010

Page 2: Qbe casualty-risk-management-horizon-scanning-and-emerging-insurance-risks

Identification and evaluation of risk isessential in decision-making. Some risk canbe accepted, the rest must be managed. Butrisk is not static. Horizon scanning is aboutidentifying, evaluating and managing changein risk, preferably before it manifests as a lossor becomes a threat to the business.

Every organisation will approach this ina different way, depending on resources,balance of risks, personalities and skills.

Asbestos was reported to cause healthproblems in the late 19th century butit was not until the 1930s when anyreasonable employer should have beenaware of the risk and not until the 1950swhen small exposures were consideredlethal. By then it had been used in vastquantities with hundreds of applications.

What of today’s growth areas like mobilephones, nanotechnology or the emergenceof concerns from shift working?

This “Issues Forum” discusses goodpractice in managing change in liability risks,the role insurance can play and practicaladvice on considering emerging risks.

DefinitionsEmerging risks is a term applied tochanges to current risks (and changesto the effectiveness of risk managementmeasures) and to new risks. The relativeimportance of each will depend oncircumstances but it is important thatthis term is fully understood beforedesigning a formal response to it.

Current risks are numerous e.g. yourchosen supplier may outsource to a lowerquality supplier, interest rates may vary, datamay be lost to a competitor etc. Each ofthese will already have defined tolerancesand decision responses. The task is totrigger decisions at the right time. The morecritical the decision the more effort you willput into foreseeing its arrival. The effect willbe on the bottom line, this year or next year.The emerging risk function must identifychanges in risk and changes in the efficiencyof risk management measures.

New risks are those for which noexplicit account has been made in riskmanagement and which have the potentialto stress the resources of the organisation.Prime examples of New Risks includechanges in legal regime, new technologyand new knowledge about current activities.

Date of Knowledge for the purposesof horizon scanning means industryknowledge about a given risk. In practiceit is a date set, retrospectively, by the Courtwhen an organisation ought to have knownit should have taken remedial or preventativesteps to control the risk.

Horizon scanningand emerginginsurance risks

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Horizon Scanning and Emerging Insurance Risks – May 2010

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Effective risk managementAll organisations should consider the role ofhorizon scanning and emerging risks withintheir risk management structure such thatpolicy, strategy, organisation and decisionlatitude can be defined and monitored.

The process for decision making willnormally follow the model above.

Risk transfer and insuranceHow proactive an organisation is inmanaging emerging risks will depend uponits policy. Significant investment may berequired as expertise in emerging risks isrelatively rare; it often requires knowledge ofduty, causation, latency, drivers, underlyingscience, case law, drift in case law andscaling factors.

The presence of such knowledge orexpertise within an organisation couldlead to a greater duty or an earlier dateof knowledge for a given risk that maynot apply to other organisations. Whilstthis could be viewed as burdensome, thereadiness of the organisation to react tochange will bring advantage over thoseorganisations that chose simply to transferthe risk to insurance. In other words, by thetime the organisation becomes aware of thepractice they should have adopted e.g. bycase law, it could well be too late, leavingthe organisation exposed to past liabilities.

Identify and evaluateThe organisation’s risk expert must identifyand evaluate change to known and to newrisks. The organisation will have alreadystated the degree of change which mustbe reported and the expert will alreadyknow what drivers for change there are.

For liabilities, the key drivers will be in:

• duty of care standards

• date of knowledge

• causation

• remediation

• rehabilitation

• quantum.

Identifying new liability risks requires a keeninterest in challenges to the status quo. Thisshould involve surveying the right academicjournals, official web sites, trade news andnews “infotainment” sites, looking forchanges to facts, principles, markets,opportunities, trends and concepts. Suchresearch can take considerable effort anda balance between internal resource andoutsourcing should be made. Initially, the aimis to understand the risk and how it works,occasionally a quantitative model is neededbefore advice or recommendations can beoffered upwards. Companies should addanalysis of claims data, specific regulatoryactivity and specific lobby group activity intheir sector. Those with extreme sensitivityto risk might add searches of internet trafficconcerning their products.

Alarmist reports in the media are of usein alerting the need for further thoughtand research but of little value in makingdecisions; what matters is objectiveinformation evaluated by the appropriateexpert. Unfortunately the media thrive onplausible ideas, coincidences and wordplay; much time is wasted on red herrings.Equally unfortunately some liabilityexposures such as Directors and Officerscan respond to media interest, as mayregulatory activity.

Identify Evaluate Act Monitorand Review

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Avoid Prevent ControlMitigate Transfer

Retain

Accept

Risk Change

The expert will already know there is rarelya definitive study or datum from researchsources. Every piece of information needsto be evaluated and set in the context ofother reports. The effect the datum has onexposure must be weighted by the reliabilityof that datum.

Perhaps fortunately, a “weight of evidence”is usually required before the status quo ondate of knowledge or causation is altered bythe courts. The effect is to make changes inliability exposure for new risks rather a slowprocess, giving plenty of time for response.But slow also encourages delay.

For example, the probability of causationbeing accepted (>50% probable) for VWFwas predictable 14 years before any courtso found. A lead time of 14 years couldn’thave been predicted but immediate actionto meet a reasonable standard of care couldhave eliminated 14 years’ worth of harmand unfunded claims exposure. It could alsohave proved to be a waste of money if thecourts had unexpectedly decided againstcausation when asked.

ActThe kinds of action that can be takenwhen risk changes ought to be fundamentalto the design of a horizon–scanning system.There is no point detecting change if there isno possibility of responding to it. Acceptinga risk or change of risk is a valid option iffully informed.

New information must be assessedagainst these available responses and theevaluation. Risk which cannot be managedat the business stream level can be offset ata more strategic level by diversification, saleof assets, cost cutting, investment returns,increasing low risk activity, stock marketactivity, price hikes, lobbying, increasingreserves, etc.

Monitor and reviewEach aspect of the emerging risks systemcan be monitored. Too much emphasison identifying minor change in risk leads towasted management time and responses,but missing an important change not onlyexposes the organisation to the risk but alsosuggests the system is underperforming.Recommendations from the system areeither accepted or rejected, too manyrejections suggests the need for greateralignment between evaluations andbusiness goals. Compliance with acceptedrecommendations must also be monitored.

Regular review would begin with areassessment of the vulnerability of theorganisation to risk. Areas of particularvulnerability or aggregations of risk ought tobe the main focus of the emerging risk work.Vulnerabilities and the expertise needed tocare for them vary as for example, markets,products, regulations and personnel change.

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Horizon Scanning and Emerging Insurance Risks – May 2010

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Examples of current liability issuesPleural plaques: In 1986, civil law gave credence to the concept of combined effects, i.e. biological change combined with

anxiety, being sufficient to give rise to a cause of action. The recommended date of injury-in-fact for publicliability was therefore the date the medical opinion caused the anxiety. This was unacceptable as a solution forliability insurers but it favoured the conclusion that there was in fact no injury. The recommendation was thereforeto challenge the inaccurate legal precedents. Following recent judgements pleural plaques are nowcompensable in Scotland but not within England and Wales.

Nanotechnology: Uncertainty in liability risk shows no sign of being addressed by regulators or toxicologists for at least another5 years. Toxicological approaches show no signs of being reliable for regulation either. Current recommendedaction is to develop a risk rating system which does not depend on uncertain toxicological data and favoursprimary control of exposure.

Shift work: Associations between cardiovascular disease and shift work are increasingly credible. Where these arecumulative in pathogenesis but indivisible in outcome it is likely (assuming Bailey v MOD stands) that claimswill be made and paid. There are precautionary and non-specific guidelines already in place. Insurers willconsider reserving now for incurred but not yet reported claims (IBNR), and premium change may followwith development of claims experience. The association between breast cancer and shift work remainsmore speculative but is of greater interest to regulators.

Whiplash: Current models of causation, prognosis, rehabilitation and diagnosis are not supported by coherent evidence.However, case law has not been well positioned for change in claims strategy. Current strategy is to increase theuse of objective data in diagnosis and prognosis and keep looking for objective coherent approaches to adopt.

Fructose: Knowledge of causation of two kinds of disease is developing. Regulatory standards permit exposure at levelshigher than those where risk is detectable. All stakeholders should anticipate changes in regulatory standardsand there will be date of knowledge implications.

EMFs and Exposure is everywhere but is there any harm done? Thus far all serious reviews of causation have failed tomobile phones: find sufficient evidence to cause concern except at very unlikely levels of exposure. However, reputation risk

varies quickly with media attention and mishandling concerns could be very damaging.

MSD/Manual handling: The almost complete failure of regulations to reduce the incidence of unexplained pains and disability continuesto baffle the regulators. They therefore believe there must be high levels of non-compliance or there is a needfor even more regulation or even rehabilitation. More regulation is on the way but is as lacking in supportiveevidence as was the original “six pack”. Powerful risk factors for unexplained pains and disability have beenidentified but don’t suit the model of the world that the regulator is happy with. Organisations could chooseto manage the real risks in addition to complying with ineffective regulations.

GM foods: The first GM foods have proved commercially successful, safe to eat and more or less equivalent to non-GMfoods. So far no superweeds or superpests have emerged. Uncertainties remain, particularly in relation to effectson microorganisms in the gut and what would happen if GM was universally adopted. New GM foods are beingdeveloped to deliver greater nutritional or medical effects. Volatile public opinion is the main risk at present, butthe GM organisms in development have greater potential to affect the environment.

Ageing population: There are very many risks associated with this demographic trend. Among them, the increased likelihood thatoccupational or product exposure leads to disease in old age. In addition, as retirement ages increase, thenumber of people at work with illness will increase. The new “Fit note” will potentially increase this further.

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SummaryHorizon scanning permits risk volatility tobe foreseen and planned for. Known riskswill change and risks for which no specificaction has yet been taken will emerge.Liability horizon scanning is particularlycomplex but manageable by combiningexpertise and a keen interest in challengesto the status quo.

Organisations who are proactive will bewell placed to react to change prior tothe date of knowledge being establishedin the courts, and can therefore reducetheir future liabilities.

AuthorDr Andrew Auty

Andrew has been a consultant to the liabilityrisk market for over fifteen years. He isDirector of Re: Liability (Oxford) Ltd. Asprincipal author of over 40 position papersand publications relating to liability forpersonal injury and as the editor of theRadar Journals he is widely known for hiswork on emerging risks and what to doabout them.

www.reliabilityoxford.co.uk

Visit us at www.QBEeurope.com/rm

DisclaimerThis publication has been produced byQBE Insurance (Europe) Ltd (“QIEL”).QIEL is a company member of theQBE Insurance Group.

Readership of this publication does notcreate an insurer-client, or other businessor legal relationship.

This publication provides informationabout the law to help you to understandand manage risk within your organisation.Legal information is not the same as legaladvice. This publication does not purportto provide a definitive statement of the lawand is not intended to replace, nor may itbe relied upon as a substitute for, specificlegal or other professional advice.

QIEL has acted in good faith to providean accurate publication. However, QIELand the QBE Group do not make anywarranties or representations of any kindabout the contents of this publication,the accuracy or timeliness of its contents,or the information or explanations given.

QIEL and the QBE Group do not haveany duty to you, whether in contract, tort,under statute or otherwise with respectto or in connection with this publicationor the information contained within it.

QIEL and the QBE Group have noobligation to update this report orany information contained within it.

To the fullest extent permitted by law,QIEL and the QBE Group disclaim anyresponsibility or liability for any loss ordamage suffered or cost incurred byyou or by any other person arising outof or in connection with you or any otherperson’s reliance on this publication oron the information contained within itand for any omissions or inaccuracies.

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1661/ISSUESFORUM/HORIZON SCANNING/MAY2010

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