Simplifying complexity
Russell Group’s Suki Basi on why the complexity of events impacting specialty classes is changing decision-making.
During a session at the International Union of Marine Insurance conference, held in Edinburgh this year, I delivered a presentation on applying the lessons learnt from other classes to marine hull.
The presentation drew on conversations I’ve had with both our (re)insurance clients and members of the Russell Working Group over various risks to their business, which range from geopolitical tensions to climate change and skill shortages.
Given the time constraints of my presentation, I wanted to delve more deeply into what I believe is the underlying issue that cuts across all specialty classes, which is the complexity of events. Also, it is my belief that to unlock the complexity of these events requires forward-looking analysis.
Over the course of this article, I will explain why the complexity of events is changing decision-making, before outlining why forward-looking analysis can support (re)insurers and corporates, before applying this to the specialty classes.
Cocktail of complexity
It is my belief that today’s events, whether they be Covid-19 or the Ukraine conflict, have become extremely complex and difficult in nature. It is because of this that many organisations have been blindsided by unforeseen outcomes arising from these events.
A clear example of this was in the car manufacturing industry during Covid-19. Many leading manufacturers, including Mercedes and BMW, cut their production due to a fall in demand.
However, when they restarted production, they had to delay the arrival of new cars as they required semiconductors. Yet the semiconductor manufacturers had prioritised the booming smartphone and electronic device industry that had taken off during the pandemic, as businesses and individuals relied on them to work and communicate during the coronavirus crisis.
The frequency and severity of events has clearly increased over the last few years, and this has been driven by connected risk. Because of this, it has become difficult for an organisation to know their actual exposure from a single event.
Defining systemic risk
These events are not just impacting organisations but also definitions, most notably systemic risk. During a panel event on connected risk that Russell hosted in the summer, one speaker said that previous definitions of systemic risk need to be recalibrated to account for today’s world.
The success of this will no doubt lie in collaboration between (re)insurers and corporates in understanding what risks can develop into new systemic ones. Therefore, the key to any organisation’s resilience and sustainability, and indeed market viability, is more proactive decision-making and risk management. Going back to the car manufacturing example I alluded to earlier, an example of proactive decision-making would be for the companies to diversify their supply of semiconductors from more than one supplier.
In other words, what corporates and their (re)insurers require is what we call forward-looking analysis.
In tomorrow’s article, I will expand on what I mean by forward-looking analysis and how this can help drive better outcome-based solutions for corporates and their (re)insurers.
Suki Basi is managing director at Russell Group