Generali’s approach to emerging risks
In Generali, the strategy to be a lifetime partner requires us to look around and focus our attention on trends related to relevant topics, such as political, economic, social and legal, as well as to disruptive scientific and technological evolutions. Through our approach we aim at identifying and properly managing the “unknowns”, both in terms of risks and of business opportunities.
We are managing our emerging risks within our broader Main Risk Self-Assessment process, coordinated by the Group Risk Management Function. The overall process involves a network of business specialists, which represents all main Group Business Functions, ranging from Underwriting, Investment and Operations, to Marketing and other expertise. Two major roles are played by Business Strategy and Group Sustainability & Social Responsibility with the purpose of granting both a strong integration with the defined business strategy and the increasing embedding of ESG factors within the risk management process.
All our Group Business Units, spread around the globe, are participating to this Group exercise. Coordinated by local Chief Risk Officers, they provide their own inputs to the risk identification process by focusing on the most relevant risks for their markets. These are assessed in terms of vulnerability, timeframe as well as risk management preparedness, ensuring coverage of all major ESG factors’ interrelations in parallel. This grants a consistent risk-based approach for the Group Materiality Matrix definition as well.
From 2018, all Generali Group employees have been provided with a Booklet accessible from Generali internal website which allows them to have an insight on specific risks. They can both learn and comment on selected topics, regardless of their geographical and organizational position.
The overall Group Emerging Risk Register is updated on yearly basis, taking into account the results of the exercise performed at both Group Head Office and Business Unit level, as well as relying on the most relevant market studies on the major trends, among which, for example, the World Economic Forum.
Generali Group participates to the European CRO Forum – Emerging Risk Initiative (ERI), dealing with the most significant trends and risks for the European insurance industry and coordinating a publication on selected emerging topics on yearly basis. In early 2019 the document ‘The Heat is On-Insurability and Resilience in a Changing Climate’ has been published.
The 2019 Generali Group Emerging Risk Register maintains a predominant focus on climate change, geopolitical instability with related financial distresses and digitalization aspects. Compared to the previous year, a major focus is given to lifestyle developments and medical trends as well as to the internet of things (IoT).
A snapshot1 of some of the main risks which are considered particularly relevant for the industry is provided below.
1 This brief summary provides some of the elements discussed within the 2019 Generali Group Emerging Risk Register and it is not to be considered exhaustive in terms of overall emerging risk assessment, nor it is intended to rank all Group risks.
Climate change is, according to some evidences, already there. The most valuable scientific outcomes, among which IPCC2, provide it will increasingly exacerbate a number of natural phenomena. Depending on the level of increase in global temperatures, these can range from increased intensity of storms, tropical cyclones with higher wind speeds and precipitations, growing risk of inland flash floods, more frequent coastal flooding and major coastal erosion from storms and sea level rise, glacial retreat in mountainous areas, permafrost thawing, extensive species losses and more frequent heat-waves. The emerging nature of this risk is related to the difficulty of predicting where, when and the intensity of the damage (uncertainty typically referred to as “global weirding”) and the complexity to forecast medium to long term developments.
Natural disasters go beyond the immediate physical risks and have a number of implications for the society and insurance industry. Financial markets are at risk of stranded assets, with an expected decrease in the value of those assets linked either to coal sector or to highly energy intensive sectors during the transition period (one of the so-called transition risks). On the other hand, green assets do represent new opportunities.
Life and health insurance products are not immune to climate and more generally pollution, heatwaves and unpleasant living conditions can also underlie what can progressively lead to a climate driven migration. Finally, insurance companies will have to increasingly monitor the liability exposures as new regulatory frameworks are being developed for, as an example, pollution liability.
Climate trends represent also a strategic driver for the whole industry, willing to continue providing the most adequate protection to the population and properly address its financial resources to foster a greener economy.
2 The Intergovernmental Panel on Climate Change (IPCC) is the United Nations body approaching climate change scenarios development.
International agreements are perceived to be less powerful, return of protectionism and regionalization, phenomena like large-scale migration, changes in global power balance, social inequality perception, increase of populism and extreme movements might lead to military conflicts, trade wars, social revolts and protests with a consequent destabilization of the world economy and of the financial markets.
Geopolitical instability could lead to tensions on food and energy prices, unemployment rates triggering social unrest as well as business interruptions. Another consequence of geopolitical instability could be the reduced trust in financial markets, with a decreasing appetite for financial products and an increasing number of lapses observed.
The increased frequency and velocity of these events, some of them disruptive like Brexit, is leading geopolitical instability to become the new reality.
Implications for financial markets and real economy might be very relevant. Geographical footprint is therefore a cornerstone of the strategic risk management process for financial institutions.
Higher volume, velocity and variety of data captured, acquired and integrated in today’s enterprises require new thinking in data governance, including data processing, storage and data consumption. In such scenario, big data represents a very broad topic and can imply exacerbating risks such as cyber security (including silent cyber from insurance perspective) as well as business implications deriving from hyper-connectivity, accessible and cheaper computational power and artificial intelligence leveraging access to big data repositories (all these having increasingly relevant regulatory and reputational impacts).
“Big Data” as an emerging risk could be associated with both higher volumes and increased speed of the data to be analyzed and used in the future, by leveraging new data sources (such as software applications on mobile devices as well as billions of interconnected devices in the Internet of Things – IoT), artificial intelligence and higher computing capacities (e.g. super cloud services provide the option of storing significant amounts of data with high level of availability, scalability and limited fault tolerance). Big data have also huge potential to increase and make use of smart city services, processing data collected through network of IoT devices so that further analyses to recognize the patterns and needs in the city can be made.
The main risk is related to not using the data, the algorithms and the source networks that are becoming available within the business processes (e.g. related to changes in consumption habits) and of not being up-to-date with coming technologies. Data adequate management and protection is on the other hand a key operational challenge, with even increased regulatory and reputational implications when it involves sensitive and private data.
Autonomous machines include driverless cars which can already be seen on some roads, driverless public transportations, robots providing advice in shops and in online experiences, machines used in medical and surgery equipment, home and care assistants, drones, as well as weapons. Their introduction is expected to affect almost all sectors of the economy and lead to important new legal, regulatory, societal and ethical considerations.
In the motor business sector, self-driving cars or semi-autonomous cars are expected to disrupt the existing insurance model, reducing the frequency of claims and increasing the severity of new risks such as cyber. With this new mobility, car insurance will be increasingly a B2B business, between insurers and producers, while the cars directly owned by individuals could rapidly decrease with the parallel spread of a sharing economy.
Besides self-driving cars, malfunctions of autonomous machines are expected to be impacting a number of insurance lines of business, particularly relevant in case of infrastructural systems or highly sensitive sectors like the medical one. A particular attention will be also addressed to software owners and programmers: the ability to evaluate the impact of error in coding as well as the related impact on liabilities will be key in the future of insurers.
Hyper-connectivity within the new communication models refer to person-to-person, person-to-machine and machine-to-machine connections. The multiplication of data sources leads to an increased cyber risk exposure such as cyber-attacks, ranging from loss of data and information to increasingly relevant business interruptions. This is even exacerbated in case of sensitive data. Reputational damage within a hyper-connected world are related, for example, to the increasing spread of fake news and deep fake.
Internet of things is also about smart factories, strongly relying to hyper-connectivity for internal processes and customers relationships, as well as domotics or so-called smart homes, providing increased assistance and support to people within their homes. On the contrary, these smart homes represent an additional IT and cyber risk exposure.
Artificial intelligence (AI) and in general cognitive computing techniques are entering into almost every facet of society. They tend to the realization of machines able to solve the problems typically solved by human intelligence and rely on cognizing software, able to learn and accumulate information. The applications in AI insurance can be various. The interaction with the IoT sensors will provide personalized data to the tariff platforms, allowing users to pay a premium that best adapts to the risks related to a personalized lifestyle, for example, to pay less for motor insurance on the basis of the driver’s risk tolerance or at the time of use of the vehicle or pay less health insurance in case of a healthier lifestyle. The complex nature and the high investment required could impact on long-term strategy in terms of companies’ capability to generate future benefits.
Automation and use of production robots lead to considerable savings related to labour and production cost with platforms that easily help companies to introduce smart robotic process automation (Smart RPA). Robots work by replicating the activities that people currently undertake, using existing core systems, legacy applications, website accesses, and manipulating spreadsheets, documents and e-mails to complete tasks. Smart Robots add Artificial Intelligence to the core replication skills mentioned above. This automatization applies also to front-end business processes, providing the client with advice and consultancy services (so called robot advice).
Labour market is not immune to social and ethical implications given the reduced workforce demand as well as the resource exhaustion, due to the need of high level digital skills.
Within finance, similar applications are known as “flash investments” phenomena, which can generally impact the short-term volatility.
Changes in people lifestyle can be found in several aspects, such as lack of sleep, smart and other drugs’ abuse, obesity, malnutrition, sedentary habits and also, on the other side, increased interest in wellbeing. This implies for insurers the need to foster promotion of wellbeing and quality of life, also with the support of digital data and, for example, partnerships with gyms, diet and fitness advisors as well as health care providers.
In this evolving context, the medical developments represent a significant trend for the society, impacting individuals, health systems and, least but not last, insurance industry given its social role. Predictive analysis, the way in which health services are provided (telemedicine, etc.) and the development of artificial intelligence in health are driven by the use of technology/automated processes in the diagnosis and treatment of patients who require care. For example, robots have been developed to perform a wide range of tasks and functions: from simple laboratory robots to highly complex surgical robots that can either aid a human surgeon or execute operations by themselves. Robots are also used in hospitals and laboratories for repetitive tasks, in rehabilitation and in physical therapy. Moreover, nanotechnology is a hot-topic in medicine, aiming to kill a broad range of harmful microbes but also producing new sensors that can detect whether a person has certain types of cancer from only a few drops of blood. Other examples of the technological developments in medicine can be CRISPR (clusters of regularly interspaced short palindromic repeats) aiming at editing genomes; CAR-T cell therapy, aiming at detecting and destroying cancer cells etc.
Changing demographics is a complex topic with implications in terms of longevity, mortality and morbidity risks with an increasing focus on healthy ageing. The reduction of birth rates and the progressively ageing population have a significant impact on the economic and financial sustainability of social protection systems and on the competitiveness of the economic-productive system, leading to an increase of defined benefit pensions and changed demand for health care. Demographic changes are intensifying pressures on health systems and are demanding for new directions in the delivery of health care (services).
Operational implications relate to the ageing workforce and the increasing competition between family care and work duties.
The development of global trade, the increasing number of large multinational companies, the growing connectivity and the population expansion have created an increasingly competitive global market.
In a global economic world in which the use of technology, the management of Big Data and Artificial Intelligence are entering into the insurance sector, big players may turn out as new market players in financial markets leveraging on capabilities and skills to manage high technology aspects, big data and artificial intelligence. Fintech (organization, usually in the start-up space, where financial services are delivered through a better experience using digital technologies), techfin (technology firm that finds a better way to deliver financial products as part of a broader offering of services), apps to manage client requirements and similar are expected to improve the efficiency of internal processes and optimize the overall data usage.
The role of companies working in platform may create new ecosystems radically impacting social and economic landscape, as well as financial institutions.
Blockchain is a technology for enabling shared, decentralized databases, which supports multiple writers in “real time”, whose entries are verified through embedded trust models, and form one unique transaction log with complete audit trail and opportune applied cryptography. Transactions are grouped into blocks and hashes link the blocks, creating a chain. The hash function creates an encrypted digital output, ensuring that the chain of blocks cannot be modified and can be accessed only by authorized readers.
The blockchain technology was developed in 2008 with Bitcoin as a use case. Since then the technology has been increasingly used in a number of processes, with the purpose to ensure trust, proof and uniqueness in digital transactions without the intermediation of a trusted third party required to manage, facilitate and store historical transactions.
Blockchain represents an important strategic challenge for the insurance industry due to its potential to revolutionize and transform core business processes as well as customer interaction, with a high degree of trust in tracking transactions.