Maximum Exposure – Talking Emerging Risks: Episode 7

Welcome to Maximum Exposure. In episode 7 Meg Catalano, global managing partner and John Bruce, senior partner at Kennedys joined Jon Guy to discuss how pressure on the global supply chain is creating new risks for businesses and with it growing liability exposures.

Thank you for listening to Maximum exposure – talking emerging risks, a new series of podcasts brought to you by emergingrisks.co.uk

We are a dedicated publication looking at the future of risk,

delivering insightful news and cogent analysis on the key emerging

topics facing the market in these turbulent times.

With over 150,000 impressions every month, Emerging Risks has

now established itself as the go-to read for all those concerned

with the latest analysis and trends in a dynamic and fast-moving risk environment.

Visit www.emergingrisks.co.uk

Transcript

SPEAKER_02 0:07

Welcome to Maximum Exposure, the Emerging Risks podcast. In episode seven, Meg Catalano, Global Managing Partner, and John Bruce, senior partner at Kennedy's, joined John Guy to discuss how pressure on the global supply chain is creating new risks for businesses and with it, growing liability exposures.

SPEAKER_01 0:28

I'm delighted today to be joined by John Bruce and Meg Catalano from Kennedy's. Welcome to you both. I suppose, in a way, one of the key interesting, one of the most interesting points in your recent Forsyth report is that you're finding that the major risks that seem to dominate risk and insurance risk managers and insurance thinking at the moment, cyber, climate, and geopolitical risk seem to be getting ever more interconnected. Are you finding that this is forcing a change or a rethinking the way those risks need to be approached?

SPEAKER_03 1:06

Um certainly, yes. That that interconnectedness of risks is absolutely something we're seeing, something we're seeing, and something that our clients are also talking about. Does it require a change in approach? Yeah, I would say so. Um one good example of this is in the natural catastrophe arena, um, where perhaps historically you would have said a hurricane hits Alabama, and you look at that as a first-party loss, you look at that through the first party framework. That's no longer the case. You now need to look at a whole host of other issues. Um, and this is coming more and more to the fore, perhaps, with climate change. And this year we're reading reports about it being a Super El Nino year. Um, and this Super El Nino in itself is a great example of where one weather system in the Pacific is spawning issues throughout the world. Um, it's gonna lead to storms, droughts, and heat extremes in in various regions. Um, so that that's gonna lead to um potentially a whole host of losses, and that in turn has a real impact on risk modeling, for example. So in the past, maybe you would have just looked at some historical data around um what is the likely outcome going to be of a particular event. That historical data these days, from what we can see, is less likely to be sufficient. You're gonna have to look at a whole host of other information. And at the same time, we're moving out from looking at things simply as a first-party type issue into also liability issues. For instance, when a hurricane hits, if damages are not as resilient as it was expected that they should be, then there could be a whole host of issues, liability issues. Were these buildings designed properly? That could lead to implications for the um architects, for the engineers and other design professionals. Should these buildings have withstood the hurricanes better than they actually did? So, yes, absolutely, interconnectedness is is definitely a theme that we're seeing all over the place at the moment.

SPEAKER_01 3:14

I suppose the problem's always been that insurance has always been seen to be quite siloed, you know, and if you look at it, the various class underwriters have their own their own sort of patch, and and rarely should the two meet. Are you seeing, obviously, from your client's point of view and the and the data and the research that you've been doing, are you seeing sort of as these as the the corporate risks change that a lot of risk managers are now talking to their insurers to say, well, look, we we we can't we need a more holistic approach to these risks, um, because what we don't want to see is um separate policies, which mean that some of these risks could fall through the cracks.

SPEAKER_00 3:56

John, yes, I think that's exactly what our clients are starting to look at. And they're they're realizing that what was a more traditional approach of one event, isolated events, one type of risk analysis just isn't going to be the thing that wins the day, so to speak, in the future. They are going to have to take a holistic approach to things, they're going to have to realize, as John just mentioned, that there's such a cascading effect of the connectedness of claims these days. So you go from a property damage claim that uh potentially has business risk implications, that has geopolitical implications, that may have cyber implications. So it's very much something that people are gonna have to look at, not just the single risk these days, but the portfolio risk. It's really so much more. And and the world is just getting very complicated. Those risks are not just across the business lines when we talk about looking at things holistically, but we're gonna have to overlay that with how does climate change impact those risks? How does an energy transition phase that the world is going through impact those risks? How do geopolitical conditions impact the risks? So, yeah, we are we are well beyond the isolated event analysis and much more into a connectedness and complex world for the insurance industry.

SPEAKER_01 5:39

I know you've you've mentioned claims, but I suppose actually from your point of view, is this is this creating sort of new um new challenges for for you around uh the interpretation of claims and maybe um the way in which um the way in which claimants are approaching um their you know their um their insurers and their claims management teams around well actually we we you know we we don't think you're performing as well as you should do.

SPEAKER_03 6:11

Um I'm not sure I've necessarily seen it as an issue of negative performance, but I I we are seeing a desire for the claims team and the underwriting teams and the actuarial teams to work more closely together and perhaps at times to get us, the lawyers, involved on an earlier stage. So um joining those people, not just at the point that the claims come in, but before the claims in the sort of loss assessment, how good is a particular insured? Um, and then looking at the new risks which are out there on the horizon and how do we how do they insurers cater for those? Is the policy drafted in the right way? What is the coverage intent? Um, aggregation of losses, um, that could be at an insurance level or indeed a reinsurance level. Um, what are the resilience requirements for a particular insured? Has an insured um demonstrated holistically that it's prepared for these big events, not just how is that building um going to perform in a particular hurricane in the example I started out with, but um is there all the other aspects of that business which may be impacted, whether it's um have they got diversified suppliers, um have they got sufficient business interruption cover? Are they properly stress testing in advance of losses, their crisis management plans and the like?

SPEAKER_00 7:33

And I would add to that, John, I think it's an exciting time for both insureds and insurers, and I think we are going to see the relationship evolve as a result. I think that the insureds are going to be looking to their insurers as business partners. They're going to be looking beyond just compensation for that individual claim because it is so much more complex, because the claims are connected, because it's going to be so much more important to really think about how do we prevent these losses, not just how we pay these losses? I think you're going to see that there's much more of a business partnership with insureds and insurers, and they're going to be looking for some guidance. They're going to be looking for the information that the insurers have on these claims. What is the data that they are amassing telling them? What lessons can be learned, so to speak? How do we jointly look at risk in a very different kind of way in the future?

SPEAKER_01 8:45

That's quite interesting. You mentioned there, uh, Meg that the whole issue about data and information, particularly information. I suppose, you know, once these risks start to unfold, how does that interconnected nature affect the way events are experienced? I mean, particularly, as we say, in a in a sort of a real-time social media-driven environment in which we now live.

SPEAKER_00 9:07

Yeah, no, I think I think it's um again very exciting, very challenging because not only, like we said, so they're connected um not just by different business lines, right? You know, we've we've talked about how that can happen. It's no longer just um one area, so it's connected from a geography perspective. John mentioned um earlier, just you know, El Nino, and that is not just in one region, one area. So geography is is connected. We're a smaller, smaller world. And social media, that that just is a whole nother dimension for sure. I think that it raises the stakes on claims. It means that the reputation of our insureds becomes a huge part of the claims analysis. And um just the fact that it becomes very public very fast is is critical. And that often is going to change how one potentially responds to these claims. There is going to be a public perception and reputation risk that both sides are going to need to consider. And how we pay and how much is at risk is very much going to be shaped by social media.

SPEAKER_01 10:39

I suppose, in a way, um this sort of comes on. I suppose one of the questions really is what should insurers be doing differently in terms of their modeling and underwriting in this new, more connected risk world?

SPEAKER_03 10:51

Obviously, those historic data trends are important, but they're going to need to get more and more information. And no doubt AI, everyone's talking about AI, AI will help them assess all the extra data that they're going to need to probably properly be able to assess the risks. Um and as we've said, given the interconnectedness, um, when you look at a property risk, you're not simply looking at the structure of the building, you're looking at all the consequences that may flow from a damage to that building, from the supply contracts that they may have in place. Um impacts as a result of um what's going to happen to their digital infrastructure, how their suppliers are going to be affected by the same sort of event. So absolutely, you just have to take a much more holistic view about any risk assessment.

SPEAKER_00 11:41

John, one of the things we've talked about here is that I think we're going to move to just a different analysis model, really. It's going to be not just what has happened, because that was really the focus in the past. What happened, what was that isolated event, and it's going to be much more what could happen. So understanding the cascade, understanding all the possibilities, that has got to be part of the underwriting process going forward that is going to be different and as I said, a challenge for everybody. I think you're going to also see some real changes potentially in pricing. Just how how do we address a cascade, the possibilities, and not just the single event? Portfolio management, as I mentioned before, is going to be critical. So we're no longer going to be looking at just single policies anymore. You're going to need to look at do you have too many flood risks in a specific geographic area? You know, things like supply chain risk. Is your portfolio concentrating in one manufacturing area versus another? Um all of that is going to be subject to change for the insurance industry going forward.

SPEAKER_01 13:02

As you say, it sounds like it's it's going to be a very um dynamic period for the insurance sector. But I mean, on the other side of this, and if we look at the insured, you know, what should businesses be doing now to try and reduce their exposures and obviously make themselves more attractive to risk carriers?

SPEAKER_03 13:21

I think a real focus on that practical resilience. Um, have they got diversified suppliers? Are they able to avoid single points of failure? Um, are they reviewing their business interruption cover? Are they really stress testing all their crisis plans? Are they investing in physical adaptation, um, improving energy resilience? Um, and are they ready to go when something hits? Are they are they checked all their crisis management plans? Do they have a crisis management plan? And if if they do, are they are they checking them? Um and ultimately this is so important because this is going to be a governance issue for insureds. This is going to be questions asked of the board, whether it's by a regulator, whether it's by their shareholders or other stakeholders. So more than ever, this is incredibly important.

SPEAKER_00 14:15

I would I would add, without trying to be too much of a doomsdayer, that I think that it's going to be critical for businesses really to be prepared for that perfect storm and really take a look at at their risks and say to themselves, you know, are they prepared for extreme weather events? Are they ready to address that disruption in energy suppliers? Have they looked at their supply chains? Are they ready for a cyber attack? Are they ready for how financial markets might react and be volatile? Are they ready for social media blitz or attention? So it's really going to be that careful planning for the perfect storm and working with the insurance industry as a business partner.

SPEAKER_01 15:10

Because I suppose one of the things that it comes back to, I think what you you know from the outset, John, you mentioned that you know we now need to take a sort of broader look at the risks we face. And I suppose for you know corporate leaders and you know the C-suite, they need to, I suppose, now start to think about the pressure they may come under from or the scrutiny they may come under from their shareholders if when you know if when the worst occurs they're found wanting when it comes to the necessary resilience and and business continuity planning.

SPEAKER_03 15:43

Yeah, absolutely. So um by trade, if you like, I'm a directors and officers claims lawyer, and there's a well-trodden path in the United States where there are claims against boards where they haven't properly prepared or where they've overstated their expected resilience. Um, traditionally in in with respect to other types of risks, but now, as ever, if there's a sort of catastrophe which hits, if there's some climate change um impacted event which hits their business, any statements that they've said in the past, they're going to be scrutinized. And if the share prices are dropping as a result, you you can be pretty sure that a claim will follow. Um, but I think it's also important to remember that it's not just uh shareholders that may have a view. Um, there's a whole host of regulatory obligations upon companies and boards. Um, so is are they all are all of those regulatory obligations being satisfied? Um whether it's with respect to um uh transparency over sourcing, production, um, and distribution, um, who are their suppliers? Um, are they satisfying the anti-slavery legislation, all those sorts of things? So a whole panoply of issues that boards are going to have to consider going forward.

SPEAKER_00 17:02

I agree, John. I mean, we haven't really spent that much time, but one of the biggest areas of uncertainty these days, and uncertainty means challenge, is the geopolitical horizon that we're all working under. The reality is we just don't know always what's coming next, and that just adds another layer of complexity, another layer of uncertainty. It's it's actually one more area that you need to do that um preparation for. It's all part of a perfect storm, whether it's you know, the situation in the Middle East or frankly, just um reactions from a sanctions perspective, it creates that instability that has a cascading effect, and that just makes the whole horizon more complicated.

SPEAKER_01 17:52

So I suppose the key issue throughout all of this is as you say, uh Meg, it's been, you know, we're going through a period of real uncertainty for businesses, and I suppose, in a way, for the insurers who are now having to um, as John said, almost like rip up their former historical data-led models to create a new breed of uh of future-looking sort of models. But I mean, from that point of view, it do you think we're now at a point where you know um the the bro, you know, the broker, the insurer, and the insured really need to get a little bit bit closer together now from the outset to have a broader discussion rather than well actually, is this you know, is this the risk you want me to assume? Rather than actually, how can we, you know, how how can we as a tripartite make your business more resilient to the benefit of all?

SPEAKER_00 18:47

I think it's a perfect way of describing it, John. Absolutely. There really needs to be a business partnership. It's what makes insurance so interesting. It actually is a societal issue. We can't have protection gaps. This is a critical part of what keeps the world going. And if they don't all work together, it's not gonna work.

SPEAKER_01 19:09

I suppose in in a way, um uh in a I suppose in a way the b the big issue, I suppose, for a lot of people now, and as you mentioned, is that it is the the swiftness of the way in which our geopolitical environment is changing. Um, and of course, I suppose in a way, the other issue is that um at the current point in time we don't really see any end to some of the major geopolitical issues. Uh I suppose in a way, um my sort of final question is are we going to see, and I I know we mentioned it, uh you mentioned a little bit earlier on the fact that it may well be that there needs to be a greater concentration on on policy wordings and how, as you say, we we look to you know we look to avoid, you know, we avoid the gaps, but I suppose drive greater insurance um penetration within the commercial market. I mean, do you think we may that may well be our next step? Is that we're gonna start to see very different wording when it comes to to to the policies that will that will be um you know sort of promoted and and marketed in the future.

SPEAKER_03 20:21

Yes, for sure. And I I think it will be also important that the buyers of insurance don't, and indeed the sellers and the brokers don't just look at each line of cover separately. So um they look at cyber alongside the property damage alongside the general liability covers, so that there is no gap in cover between all of those. So a real need more than ever before to look at insurance programs holistically so that there aren't those gaps in cover that perhaps there were in the past.

SPEAKER_01 20:53

That's brilliant. Thank you. Um our time is I our time has been run. Um I know I'm I'm honestly I could you know the three of us could talk for for far longer because as you say, it's a a huge topic. Um, but I can only thank you both for um all your you know your views, your expertise, and and and you know, the um the we the the sort of content that we're you know that our our readers and our listeners now um always want. Um hopefully we've left them asking one or two questions, maybe prompted one or two discussions in and around in around the offices, um, and and hopefully the C-suite around how they're gonna better manage their resilience in what is a very um very challenging and changeable world. And as I said, Meg, John, I really appreciate all your time and uh and thank you for joining me.

SPEAKER_00 21:43

Thank you, John. It's been a pleasure.

SPEAKER_01 21:45

Yeah, a really great discussion. Thanks, John.

SPEAKER_02 21:51

Thank you for listening to Maximum Exposure, Talking Emerging Risks, a new series of podcasts brought to you by emergingrisks.co.uk. We are a dedicated publication looking at the future of risk, delivering insightful news and cogent analysis on the key emerging topics facing the market in these turbulent times. With over 150,000 impressions every month, Emerging Risks has now established itself as the go to read for all those concerned with the latest analysis and trends in a dynamic and fast moving risk environment.