2016 Most Dangerous Emerging Risks

Fragmented Voice of Authority: Experts Can Speak but Who’s Listening?

Myopic decision-making based on self-selected information sources results in broad-based societal and economic harm.
By: | April 4, 2016 • 6 min read

On Jan. 11, a German-Russian girl alleged she’d been assaulted by a Muslim mob. Her allegations fed into weeks of anti-immigrant hysteria in Germany and tension between Moscow and Berlin before her statements were unveiled as a hoax.

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Fears over Syrian immigrants and Ebola light up our mobile devices as the much broader dangers of E. coli in our food supply and hospital-acquired infections get lost in the digital noise.

Misinformation on the connection between vaccination and autism spreads globally, leading parents around the world to stop inoculating their children. As a result, the measles, thought to be contained, re-emerges as a health threat in California, Germany and elsewhere.

All of these are examples of the fragmentation of the voice of informed authority.  This emerging risk stems from our tendency to self-select information sources, choosing reports that conform with our pre-established notions, rather than trust official statements.

Helen Thompson, director of commercial marketing, Esri

Helen Thompson, director of commercial marketing, Esri

In essence, there are large segments of the population giving more credence to friends’ Facebook posts than to information from the government or some other informed source.

“Because of the way that information is curated and supplied to audiences, people are increasingly curating their own sources of facts, and this changes society’s ability to understand and respond to information. Consequently authoritative information is being distorted based on our own lens,” said Helen Thompson, the director of commercial marketing for Esri.

Thompson pointed to a February extreme weather event in Virginia in which four people were killed as a risk that most people ignore, either because the death toll was “low”, or the risk wasn’t sensational enough.

“Natural disasters slip off the agenda because unless you are directly impacted something you consider equally or more important comes down your curated channel and displaces it,” she said.

“We know that when people are seeking new information, when they perceive a risk of some sort, that they hold onto the first piece of information that makes common sense to them,” said Barbara Reynolds, a senior crisis and risk communications adviser with the Centers for Disease Control and Prevention.

“Unfortunately, sometimes that piece that they are exposed to and hold onto right away could be incorrect, making it more difficult to share correct information,” she said.

The risk is that stakeholders will underestimate grave threats, magnify less substantial ones, and fail to take appropriate action. And negative information, whether by street corner gossip, or through social media, spreads much faster than accurate information which might not be as dire.

“When we see something that affects us in a negative way, we are more inclined to retweet or rebroadcast that information without trying to understand whether this is an actual fact,” said Emilio Ferrara, a researcher with the Information Sciences Institute & Department of Computer Science at the University of Southern California.

“That is one of the most dangerous consequences,” Ferrara added.

“The fact that this conversation can foster the spread of panic, or even mass hysteria, whereas there is no practical risk involved.”

International Consequences

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Perhaps the most glaring example is the current presidential election cycle in the United States.

An executive with a European reinsurer said he and his colleagues see the tone of political dialogue in the United States as a threat. That the acrimony, extremism and misinformation being expressed in some corners could lead to grave international consequences.

Among members of the Democratic and Republican parties, what’s emerged is a widespread belief that substantial disruption is needed.  That there is something very “wrong,” and that a radical overhaul is in order.

“Our willingness to accept decentralized dissemination of knowledge and reject centralization of knowledge is what’s changed.” —Helen Thompson, director of commercial marketing, Esri

That’s leading to extreme ideas like building a wall between the United States and Mexico or free college student tuition — without calculating the financial cost or the societal impact.

This when the national unemployment rate is at 5 percent, violent crime is down and we have access to better health care than previous generations, said Thompson.

“Our willingness to accept decentralized dissemination of knowledge and reject centralization of knowledge is what’s changed,” she said.

“For whatever reason, there is widespread mistrust of government and the information it shares at the federal, state and local level.”

Technology Holds the Answer

But just as technology, in the form of social media and the internet, are the vehicles for the spread of misinformation and mistrust, experts agree that technology holds the hope of mitigating, not only internet-spread rumors, but real threats such as food supply chain dangers or internet propaganda campaigns of terror organizations.

Barbara Reynolds, senior crisis and risk communications adviser, Centers for Disease Control and Prevention

Barbara Reynolds, senior crisis and risk communications adviser, Centers for Disease Control and Prevention

“Yes, we have the fragmentation that you are talking about, that is true,” said Barbara Reynolds, the CDC risk and communications adviser who spent her career at the nexus of communications and social psychology.

“But when I put those parts of my knowledge together, I find that for every negative there is a positive,” she added.

In Reynolds’ view, these online postings, Tweets and “shares” mean that government agencies become less paternalistic.

“For someone in the business of trying to help people make good health decisions, this is an invaluable feedback mechanism for me,” she said.

Whereas before it might take her days or weeks to filter through reactions to CDC statements, now she gets that feedback almost immediately.

“You can’t just put out a recommendation, you have to be able to withstand attacks,” she said. “What’s really important is to be out there first. It has to be repeated and it has to come from more than one source.”

That means dropping the notion that you are the only authority and seeking strength in numbers. Reynolds said her organization now knows to communicate in concert with other health care organizations.

“It’s important for us to work with other authorities who are trusted and bring them into the conversation,” Reynolds said.

USC’s Ferrara said he and his co-researchers are creating algorithms that are capable of learning the characteristics of misinformation campaigns.

“We are seeing promising advances into the realm of detecting — and even predicting when it’s possible — forms of artificial orchestrated campaigns.

And a campaign can be defined as sustained efforts from some party or entity or a group of people to push some information out.”

Ferrara is collaborating with a company in Washington, D.C. on a system to be used by the U.S. Department of Defense to identify and mitigate terroristic propaganda campaigns. He is also working on frameworks for the CDC and other health care authorities.

“Yes, we have the fragmentation that you are talking about, that is true. But when I put those parts of my knowledge together, I find that for every negative there is a positive.” —Barbara Reynolds, senior crisis and risk communication adviser, Centers for Disease Control and Prevention

Even though the general population might not be focused on food supply chain risks, Thompson’s Esri is working on solutions.

She said her company is working with international organizations to create a unique way to link every farm in the food supply chain to the produce they grow.

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“Now when you say, where did this apple come from and where did this prawn come from, you know its exact origin,” Thompson said.

It’s not only food supply chain risk that can be mitigated in this manner.

Labor law compliance, supply chain concerns over conflict diamonds or “gray market” gold could also be tracked through advanced technology.

“It’s going to require us to exchange information, transfer liability and quantify risk in a different way that’s happened before,” she added.

She said technology improvements and the Internet of Things will also allow for the tracking of every single unit a factory, farm or mine produces. That should provide much greater clarity for companies mitigating or facing a product recall.

“The IOT is going to fundamentally transform the way we monitor compliance and mitigate these classes of major risks,” she said. &

BlackBar

2016’s Most Dangerous Emerging Risks

brokenbridgeThe Fractured Future Infrastructure in disrepair, power grids at risk, rampant misinformation and genetic tinkering — is our world coming apart at the seams?

01b_cover_story_crackCrumbling Infrastructure: Day of Reckoning Our health and economy are increasingly exposed to a long-documented but ignored risk.

01c_cover_story_leadCyber Grid Attack: A Cascading Impact The aggregated impact of a cyber attack on the U.S. power grid causes huge economic losses and upheaval.

01e_cover_story_dnaGene Editing: The Devil’s in the DNA Biotechnology breakthroughs can provide great benefits to society, but the risks can’t be ignored.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Report: Hospitality

Bridging the Protection Gap

When travelers stay home, hospitality companies recoup lost income through customized, data-defined policies.
By: | October 12, 2017 • 9 min read

In the wake of a hurricane, earthquake, pandemic, terror attack, or any event that causes carnage on a grand scale, affected areas usually are subject to a large “protection gap” – the difference between insured loss and total economic loss. Depending on the type of damage, the gap can be enormous, leaving companies and communities scrambling to obtain the funds needed for a quick recovery.

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RMS estimates that Hurricane Harvey’s rampage through Texas could cause as much as $90 billion in total economic damage. The modeling firm also stated that “[National Flood Insurance Program] penetration rates are as low as 20 percent in the Houston area, and thus most of the losses will be uninsured.”

In addition to uninsured losses from physical damage, many businesses in unaffected surrounding areas will suffer non-physical contingent business interruption losses. The hospitality industry is particularly susceptible to this exposure, and its losses often fall into the protection gap.

Natural catastrophes and other major events that compromise travelers’ safety have prolonged impacts on tourism and hospitality. Even if they suffer no physical damage, any hotel or resort will lose business as travelers avoid the area.

“The hospitality industry is reliant on people moving freely. If people don’t feel safe, they won’t travel. And that cuts off the lifeblood of the industry,” said Christian Ryan, U.S. Hospitality and Gaming Practice Leader, Marsh.

Christian Ryan
U.S. Hospitality and Gaming Practice Leader, Marsh

“People are going away from the devastation, not toward it,” said Evan Glassman, president and CEO, New Paradigm Underwriters.

Drops in revenue resulting from decreased occupancy and average daily room rate can sometimes be difficult to trace back to a major event when a hotel suffered no physical harm. Traditional business interruption policies require physical damage as a coverage condition. Even contingent business interruption coverages might only kick in if a hotel’s direct suppliers were taken offline by physical damage.

If everyone remains untouched and intact, though, it’s near impossible to demonstrate how much of a business downturn was caused by the hurricane three states away.

“Hospitality companies are concerned that their traditional insurance policies only cover business interruption resulting from physical damage,” said Bob Nusslein, head of Innovative Risk Solutions for the Americas, Swiss Re Corporate Solutions.

“These companies have large uninsured exposure from events which do not cause physical damage to their assets, yet result in reduced income.”

Power of Parametrics

Parametric insurance is designed specifically to bridge the protection gap and address historically uninsured or underinsured risks.

Parametric coverage is defined and triggered by the characteristics of an event, rather than characteristics of the loss. Triggers are custom-built based on an insured’s unique location and exposures, as well as their budget and risk tolerance.

“Triggers typically include a combination of the occurrence of a given event and a reduction in occupancy rates or RevPar for the specific hotel assets,” Nusslein said. Though sometimes the parameters of an event — like measures of storm intensity — are enough to trigger a payout on their own.

For hurricane coverage, for example, one policy trigger might be the designation of a Category 3-5 storm within a 100-mile radius of the location. Another trigger might be a 20 percent drop in RevPAR, or revenue per available room. If both parameters are met, a pre-determined payout amount would be administered. No investigations or claims adjustment necessary.

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The same type of coverage could apply in less severe situations where traditional insurance just doesn’t respond. Event or entertainment companies, for example, often operate at the whim of Mother Nature. While they may not be forced to cancel a production due to inclement weather, they will nevertheless take a hit to the bottom line if fewer patrons show up.

Christian Phillips, focus group leader for Beazley’s Weatherguard parametric products, said that as little as a quarter- to a half-inch of rain over a four- to five-hour period is enough to prevent people from coming to an event, or to leave early.

“That’s a persistent rainfall that will wear down people’s patience,” he said.

“A rule of thumb for parametric weather coverage, if you’re looking to protect loss of revenue when your event has not actually been cancelled, you will probably lose up to 20 to 30 percent of your revenue in bad weather. That depends on the client and the type of event, but that’s the standard we’ve realized from historical claims data.”

The industry is now drawing on data to establish these rules of thumb for more serious losses sustained by hospitality companies after major events.

“Until recently the insurance industry has not created products to address these non-physical damage business interruption exposures. The industry is now collaborating with big data companies to access data, which in turn, allows us to structure new products,” Nusslein said.

Data-Driven Triggers

Insurers source data from weather organizations that track temperature, rainfall, wind speeds and snowfall, among other perils, by the hour and sometimes by the minute. Parametric triggers are determined based on historical storm data, which indicates how likely a given location is to be hit.

“We try to get a minimum of 30 years of hourly data for those perils for a given location,” Phillips said.

“Global weather is changing, though, so we focus particularly on the last five to 10 years. From that we can build a policy that fits the exposure that we see in the data, and we use the data to price it correctly.”

New Paradigm Underwriters collects their own wind speed data via a network of anemometers that stretch from Corpus Christi, Texas, all the way to Massachusetts, and works with modeling firms like RMS to gather additional underwriting information.

The hospitality industry is reliant on people moving freely. If people don’t feel safe, they won’t travel. And that cuts off the lifeblood of the industry.– Christian Ryan, U.S. Hospitality and Gaming Practice Leader, Marsh

While severe weather is the most common event of concern, parametric cover can also apply to terrorism and pandemic risks.

“We offer a terror attack quote on every one of our event policies because everyone asks for it,” said Beazley’s Phillips.

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“We didn’t do it 10 years ago, but that’s the world we live in today.”

An attack could lead to civil unrest, fire or any number of things outside an insured’s control. It would likely disrupt travel over a wide geographic region.

“A terrorist event could cause wide area devastation and loss of attraction, which results in lost income for hospitality companies,” Nusslein said.

Disease outbreaks also dampen travel and tourism. Zika, which was most common in South America and the Caribbean, still prevented people from traveling to south Florida.

“Occupancy went down significantly in that region,” Marsh’s Ryan said.

“If there is a pandemic across the U.S., a parametric coverage would make sense. All travel within and inbound to the U.S. would go down, and parametric policies could protect hotel revenues in non-impacted areas. Official statements from the CDC such as evacuation orders or warnings could qualify as a trigger.”

Less data exists around terror attacks and pandemics than for weather, though hotels are taking steps to collect information around their exposure.

“It’s hard to quantify how an infectious disease outbreak will impact business, but we and clients are using big data to track travel patterns,” Ryan said.

Hospitality Metrics

Any data collected has to be verified, or “cleaned.”

“We only deal with entities that will clean the data so we know the historical data we’re getting is accurate,” Phillips said.

“There are mountains of data out there, but it’s unusable if it’s not clean.”

Parametric underwriters also tap into the insured’s historical data around occupancy and room rates to estimate the losses it may suffer from decreased revenue.

Bob Nusslein, head of Innovative Risk Solutions for the Americas, Swiss Re Corporate Solutions.

“The hospitality industry uses two key metrics to measure loss of business income. These include occupancy rate and revenue per available room, or RevPAR. These are the traditional measurements of business health,” Swiss Re’s Nusslein said.  RevPAR is calculated by multiplying a hotel’s average daily room rate (ADR) by its occupancy rate.

“The hotel industry has been contributing its data on occupancy, RevPAR, room supply and demand, and historical data on geographical and seasonal trends to independent data aggregators for many years. It has done an exceptional job of aggregating business data to measure performance downturns from routine economic fluctuations and from major ‘Black Swan’ events, like the 9/11 terrorist attacks, the 2008 financial crisis or the 2009 SARS epidemic.”

Claims history can also provide an understanding of how much revenue a hotel or an event company has lost in the past due to any type of business interruption. Business performance metrics combined with claims data determine an appropriate payout amount.

Like coverage triggers, payouts from parametric policies are specifically defined and pre-determined based on data and statistical evidence.

This is the key benefit of parametric coverage: triggers are hit, payment is made. With minimal or no adjustment process, claims are paid quickly, enabling insureds to begin recovery immediately.

Applying Parametric Payments

For hotels with no physical damage, but significant drops in occupancy and revenue, funds from a parametric policy can help bridge the income gap until business picks up again, covering expenses related to regular maintenance, utilities and marketing.

Because payment is not tied to a specific type or level of loss, it can be applied wherever insureds need it, so long as it doesn’t advance them to a better financial position than they enjoyed prior to the loss.

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Parametric policies can be designed to fill in where an insured has not yet met their deductible on a separate traditional policy. Or it could function as excess coverage. Or it could cover exposures excluded by other policies, or for which there is no insurance option at all. Completely bespoke, parametric coverages are a function of each client’s individual exposures, risk tolerance and budget.

“Parametric insurance enables underwriting of risks that are outside tolerance levels from a traditional standpoint,” NPU’s Glassman said.

The non-physical business interruption risks faced by the hospitality industry match that description pretty closely.

“Hotels are a good fit for parametric insurance because they have a guaranteed loss from a business income standpoint when there is a major storm coming,” Glassman said.

While only a handful of carriers currently offer a form of parametric coverage, the abundance of available data and advancement in data collection and analytical tools will likely fuel its popularity.

Companies can maximize the benefits of parametric coverages by building them as supplements to traditional business interruption or event cancellation policies. Both New Paradigm Underwriters and Beazley either work with other property insurers or create hybrid products in-house to combine the best of both worlds and assemble a comprehensive risk transfer solution. &

Katie Siegel is an associate editor at Risk & Insurance®. She can be reached at [email protected]