Cyber, terrorism, compensation structures for long-term bodilyinjury, and casualty catastrophes are the most urgent risks facingthe reinsurance sector today, according to a Guy Carpenter &Co. report.

"Ahead of the Curve: Understanding EmergingRisks" identifies how to categorize these risks—as eithertechnological, crystalizing or aggravating—and analyzes theirimplications on businesses and reinsurers.

Technological risks are those that are genuinely new, such asgenetically modified organisms, nanotechnology, e-cigarettes,driverless cars and cyber attacks.

Because of increasing global interconnectedness and widespreaduse of social media and mobile devices, the risk of cyber attacksand data breaches have increased exponentially.

"Cyber attacks are now seen as one of the most serious economicand national security challenges now facing governments around theworld," the report states.

Cyber risks present a set of aggregations that spread beyond thecorporations to its affiliates and supply chains. Some of the cyberrisks that entities face include: legal liability, computersecurity breaches, privacy breaches, cyber theft, cyber espionageand cyber spying, cyber extortion, cyber terrorism, loss ofrevenue, recovery of costs, reputational damage, businesscontinuity/supply chain disruptions and cyber threat toinfrastructure.

High-profile data breaches, such the incident at Target Corp.,are growing more commonplace with increasing costs. Since the databreach, Target has incurred $88 million in cumulative expenses,with expected insurance recoveries of $52 million, according to its10-Q filing for the quarter ending May 3, 2014. The retailer saysthat it maintains $100 million of network-security insurancecoverage with a $10 million deductible.  

"Cyber" is a misleading term to describe the type of coverageoffered for this market, the report states. Comprehensive policiesinclude data privacy; regulation breaches, fines and penalties;network business interruption, first party loss: data damage andcyber extortion; and crisis management and identity theftresponse.

Companies are uncertain of how much coverage to acquire andwhether their current policies provide them with protection, thereport states. "One of the roots of the uncertainty stems from thedifficulty in quantifying potential losses because of the dearth ofhistorical data for actuaries and underwriters to modelcyber-related losses."

The reinsurer market is vast, Guy Carpenter predicts, as cybercrime costs the global economy about $445 billion every year.

Crystalizing risks

Crystalizing risks are those that are not new, but whoseimplications are emerging. This includes asbestos in the developingworld and aluminum health risks.

Long-term care for bodily injury is becoming increasinglychallenging for insurers, Guy Carpenter says. "Uncertainties thathad previously been transferred to the claimant are now retained bythe insurer in many regions."

For severe bodily injury cases in the United Kingdom, claimantsare now highly likely to opt for an annuity/periodic payment order(PPO) rather than a lump sum.

Unlike an individual claimant, the insurer needs to articulatethese risks in its capital modeling.

Aggravating risks

In the final category of emerging risks – aggravating risks –are those perils that are relatively well-known but their incidenceand impact are becoming potentially more serious. These includeclimate change, pandemics, megacities and antibioticresistance.

Given the growing population, regional conflicts, the expansivereach of social media for extremists to spread their messages andrecruit, as well as the diversity of possible attack modes to causehuman and economic loss, Guy Carpenter cites terrorism as anaggravating risk.

Congress' failure to reauthorize the Terrorism Risk InsuranceAct—schedule to expire Dec. 31—only adds to the riskuncertainty.

"Without a successful renewal, it is expected that insurancecapacity for terrorism coverage will diminish and insurers andconsumers may face substantial price increases, threatening theU.S. economy," the report states.

Casualty (liability-based) catastrophes have become increasinglyfrequent and severe over the past decade, exposing reinsurers tomore risk than they may have realized and reserved for.

"One root cause has the potential to trigger a chain reaction ofliability…that can involve multiple lines of business," the reportstates.

Casualty catastrophes do not follow patterns, unlike propertycatastrophes. A hurricane on the Florida coast is not unusual, butcasualty catastrophes rarely arise from the same conditions.

Casualty writers need to be proactive in regard to unknowns, andthe maturation of enterprise risk management practices and thedevelopment of new niche, open platform and casualty-specificcatastrophe models signal a change. It is becoming possible tomodel the accumulation of an increasing number of casualty risks,whether technological, crystalizing or aggravating, both knowableand manageable, the report states.