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2017 Most Dangerous Emerging Risks

Foreign Economic Nationalism

Economic nationalism is upsetting the risk management landscape by presenting challenges in once stable environments.
By: | April 7, 2017 • 8 min read

Economic nationalism not only has an impact domestically but presents significant risks for the global economy as well.

Political risk research firm The Eurasia Group cites “independent America” as a top risk for global stability and warns that 2017 will see a “geopolitical recession” that marks “the most volatile political environment in the postwar period, at least as important to global markets as the economic recession of 2008.”

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Add to that the way other nations are turning inward and sealing their own borders in response to stalled economies, a surge in refugees or a shift in the way terror attacks are carried out by individuals, often inspired by social media.

In Europe, Britain voted to withdraw from the European Union, a.k.a. “Brexit.” In South America, Venezuela closed its borders with Brazil and Colombia.

All of this inward focus has the potential to create what the Eurasia Group calls a “G-Zero world” — a world with no global leader.

With no clear political leader, there’s also no unifying voice on security, trade or social values. There’s no coordinated response on climate change, capital flows or the internet.

With no superpower setting the agenda and global uncertainty about rising economic nationalism, the world order could fall into disarray.

“The established norms of the past 50 years quickly eroded,” said Dan Riordan, president of political risk, credit and bond insurance at XL Catlin.

“It didn’t start last week. It started over a period of time but we’re definitely reaching a different dynamic and that’s creating a lot of uncertainty,” he said.

Governments adopting nationalistic economic policies may renege on foreigners’ contracts, leaving businesses to foot the bill or renegotiate deals.

Some countries, such as Venezuela, have already seized property from foreign-owned businesses, namely natural resources such as oil, in the name of “the people.”

Global institutions may lose clout or be victimized by political retaliation.

The ripples of economic nationalism are creating worldwide uncertainty. Along with that comes emerging economic and political risks that may defy traditional forecasts and that may happen at a rapid-fire pace never before faced by risk managers.

“So many of the tools the risk manager is using today are mostly useless because of the complexity we have right now,” said Dante A. Disparte, founder and CEO of Risk Cooperative.

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Disparte attributes the global rise in economic nationalism to several factors. There’s greater global income inequality; a growing dependency on individual commodities for government revenues; too many countries hitching their economic fortunes to China; and oil-producing countries that work outside proscribed multilateral agreements, he said.

“Broadly speaking, multinational corporations find it hard to cope with this kind of rise of economic nationalism,” Disparte said.

Multinational systems, such as the World Bank and World Trade Organization, have been sources of stability in the world. If individual nations shun these global systems to work directly with some countries while leaving others out, there may be a rise of tit-for-tat reprisals, Disparte said.

It could lead to increasing political incidents and international investors being harmed as a way of sending a signal to those policymakers, he said.

Dante A. Disparte, founder and CEO, Risk Cooperative

“Don’t be surprised if the consequences become much more severe,” he said.

Trade embargoes, the expropriation of assets, freezing accounts — these tools that the U.S. and Europe keep in their arsenals when trying to send a signal to another country — can be sent back in a return volley. Companies will be the ones that will pay the most direct price, as will consumers and society, Disparte said.

Political Violence

The paradigm shift from globalization to nationalism is creating a lot of uncertainty, as well as growing concern about currency risk and political violence that can lead to targeting assets in certain countries, Riordan said.

A country looking to send a message to the U.S. might be more likely to target an Exxon oil rig than disrupt sales of Proctor & Gamble shampoo products because of the impact it can have back in the home country.

“Companies trade with each other, countries do not.” Disparte said. “It’s McDonalds, BMW, Boeing; these are the companies that are trading with the world.”

The country is merely the platform where the trade is occurring. In an era of protectionism and trade barriers, and potential risk of expropriation and nationalization of assets, businesses face significant risk, Disparte said.

Those companies with an iconic brand attached to a certain country or nationality can be targeted for political reasons, Riordan said.

“I’m a firm believer myself that trade among countries usually leads to peace,” XL Catlin’s Riordan said.

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“Risk-prone industries really need to carefully weigh their posture and the posture of their home country. They become an extension of the United States or an extension of England, which under this new political era is going to effectively anger a lot more people on the planet.

“I recommend companies start thinking about the concept of corporate activism. Not all these risks can be insured or hedged through traditional means.

“They need to prove to the market and to their customers that they can be trustworthy counterparts. The market will be more lenient to these types of firms.”

One insurer, AIG, revised one of its products to address the growing potential global threats corporations face. Late last year, AIG raised its property terrorism insurance limits globally to $1 billion from $250 million in many larger cities, typically those classified as Tier 1 terrorism risks.

The larger capacity is available to clients on a stand-alone basis or as expanded limits within AIG’s large limits property insurance offering, which provides clients with all-risk coverage limits up to $2.5 billion per occurrence.

“Risk managers need to ask the question, ‘What are we going to do if this area that we are counting on is no longer politically stable for one reason or the other?’ ” said Louis Gritzo, vice president and manager of research at FM Global.

“The big thing is just uncertainty,” Gritzo said, “The level of uncertainty is higher than it’s ever been.”

Hypothesizing about what will happen or why will never get an exact answer. But be prepared, so if you have to pull operations out of one country or find an alternative supplier, you are not starting from ground zero, Gritzo said.

Risk managers may need to ask “what if” questions that probably a few years ago they were not asking, even about some developed countries that may not have been a risk in the recent past.

To begin with, companies need to take basic assessments of their international operations and partners, and political risk insurance products.

When Steven Minsky, CEO of LogicManager, was working on a risk assessment with a client operating in 15 different countries, he noticed the company focused mainly on the countries that contributed the most revenue.

Don’t focus on the risk facing any individual country, Minsky said. Instead, look at what the likely risks are across regions and then focus on how big an impact those aggregated risks can have on your business.

“Some small-dollar countries can cause huge scandals,” Minsky said.

Dan Riordan, president of political risk, credit and bond insurance, XL Catlin

“One giant mistake is to say, ‘I’ll write this country off because they aren’t main revenue drivers.’ That is going to bite the company big time because it’s an unmanaged risk.”

XL Catlin’s Riordan recommends clients assess their local partners overseas, whether it’s a supplier, exporter, importer, investor or joint venture partner.

Business must have a good local partner that is politically and commercially adept, he said.

Assess all joint venture arrangements, whether that’s trading, investing or supplier relationships and what laws protect those agreements. Know the provisions for dispute resolutions, such as arbitration in an international setting, rather than going to a local court where you may not be treated fairly.

Stay up to date on the changing political climate. There’s a lot of information available and much of it is free, said Riordan.

For example, most U.S. embassies around the globe have a Foreign Commercial Service and those tend to be good sources of information on local partners and local business practices.

The Commercial Service mission is to promote the export of goods and services of American companies and develop and protect U.S. business interests abroad.

Also connect with international bankers, accounting firms and insurers to obtain in-depth analysis and risk assessment on each country’s political and socioeconomic risks.

Creating Opportunity

Several risk experts agree that the emerging global uncertainty can also create a lot of opportunity for international corporations with a well-prepared risk management team.

During periods of intense uncertainty, when most of the market is paralyzed, it is an enormous once-in-a-lifetime opportunity to leap ahead, Disparte of Risk Cooperative said, “as counterintuitive as it might seem.”

“There’s an opportunity in this uncertainty,” he said. “I think there’s a big chance for organizations to spring forward.”

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Minsky of LogicManager sees a general overreaction to the political climate right now, and he cautions that emotion may blindside people to the real issues.

“You can look at this as a really hot issue right now, or take a step back and say that this is part of the landscape of the international arena,” he said. Enterprise risk management helps take that subjectivity and emotion out of the risk scenario.

“You can still be personally concerned about it, there’s nothing wrong with that. But when you are thinking about it from the company standpoint, there’s still positives in this,” he said.

“Risk management enables companies to react to change and uncertainty faster than competitors, which can push a business forward.

“This is an opportunity to gain new sales and market share,” Minsky said. “That is a massive competitive advantage.”

For risk managers, weathering the changes requires “going back to basics,” Riordan said.

“There will be challenges for companies that relied on international norms of trade and investment, and organizations built to protect them like the World Trade Organization and World Bank.”

He said companies should examine the changing environment from an ERM standpoint to examine how it changes their risk appetites.

Ultimately, he said, “if they regularly are assessing their risks, they can still be successful.”

“It’s a fascinating period,” Riordan said. “It’s not Armageddon, but it is changing.” &

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2017 Most Dangerous Emerging Risks

Artificial Intelligence Ties Liability in Knots

The same technologies that drive business forward are upending the nature of loss exposures and presenting new coverage challenges.

 

 

Cyber Business Interruption

Attacks on internet infrastructure begin, leaving unknown risks for insureds and insurers alike.

 

 

U.S. Economic Nationalism

Nationalistic policies aim to boost American wealth and prosperity, but they may do long-term economic damage.

 

 

Coastal Mortgage Value Collapse

As climate change drives rising seas, so arises the risk that buyers will become leery of taking on mortgages along our coasts.  Trillions in mortgage values are at stake unless the public and the private sector move quickly.

Juliann Walsh is a staff writer at Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Insurtech

Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”

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“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.

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“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?

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“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.