Shifting perceptions of Risk

Consider these two columns that list diverse risk items.

Sounds relevant in today`s uncertain world right? These were identified within the World Economic Forum`s Global Risk Report. The interesting thing about the columns is that column 1 referred to the calendar year 2007 and Column 2 referred to 2017. For each respective calendar year, these 5 risks were considered the Top 5 Global Risks in terms of Impact. It`s fascinating that not one risk factor survived over the 10 year period.

There may be several explanations for this shift in risk assessment:

1) We resolved all of the risks in 2007 (good job!) and hence we are now battling with new risks in 2017

2) We may be a tad bit fickle and we are likely to change our minds depending on what the 24 hour cable news headline is screaming at us

3) We really don`t appreciate the concept of Risk Management versus Risk Measurement

4) A combination of the above?

The Global Risks Report 2017 12th Edition published by the World Economic Forum

This editorial is a review some of the highlights of the World Economic Forum document. The objective of this editorial is to try to motivate as many readers to read the entire paper and perhaps to provoke the Actuarial Profession to broaden how it views risk.

World Economic Forum`s approach to Risk

This is their 12th edition. Shame on me for missing the first 11 documents especially since their tag-line is `committed to improving the state of the world`. I am setting out some of the notable highlights of their research within their 2017 report.

1) A diverse group of 745 thought leaders were surveyed regarding their opinions on the top 5 global risks

a. In terms of likelihood

b. In terms of Impact

2) 5 Risk categories were identified as being

i. Economic

ii. Environmental

iii. Geopolitical

iv. Societal

v. Technological

Referring back to Columns 1 and 2 above;

· in 2007 the top 5 risks in terms of impact were Economic (2), Geopolitical (2) and Societal (1 — Pandemics).

· Whereas in 2017 the top 5 risks were Environmental (3), Geopolitical (1) and Societal (Water — 1).

If you are indeed motivated to download the report, Figure 2 at the very start of the report shows the shift of risk perception of the top 10 risks (5 depending on likelihood and 5 on impact) from 2007 to 2017 year by year.

It took a leap year after Al Gore won the Nobel (2007) for his efforts as an activist highlighting the global risks of climate change for even one`Environmental` risk to be selected as one of top five in either the category of likelihood or impact. . In 2017 environment now has 3 risk items related to the environment and yet today we are extremely intolerant of anyone who is not sufficiently enlightened to have jumped onto the `save the planet ` bandwagon.

3) The report then provided an analysis of each risk factor, with some interesting insights: The report considers

a. the interconnectivity of the various risks, and

b. the impact and the tendency of each risk.

I have to admire the audacity of the report. It really goes out on a limb with what are basically opinions backed up with very little data and clearly states its position on the likelihood, impact, trend and the correlation of each major risk. Reminds me of this quote..

“Most decisions should probably be made with somewhere around 70% of the information you wish you had,” Amazon CEO Jeff Bezos said in his annual letter to shareholders. “If you wait for 90%, in most cases, you’re probably being slow.”

The Future of Social Protection Systems

The first three Industrial Revolutions have been dated to 1784, 1870 and 1969. The Fourth Industrial Revolution (4IR) may have the following paradigm shifts

1) For some types of work, we will be untethered from a physical location making remote connectivity easier,

2) The displacement of human labour by automation, robotics and Artificial Intelligence.

3) The changing nature of the contract between employer and employee. Workers may expect more volatility in their earnings as they engage in the`Gig Economy` or `Hollywood Hiring`; films are made by assembling a specific team for a short term contracts to deliver a one–off project as opposed to permanent jobs. Thus leaving the employee without the historical employment protection. This would increase individuals` demand for personal health, protection and saving products

These three paradigm factors will change the attractiveness of the traditional Life, Pensions, Savings and Healthcare offerings. I recently attended a presentation by a leading CEO of a global insurer. He generously shared his vision regarding accompanying his clients during various stages of the life cycles and ensuring that his company offered products and services that added value throughout the journey.

Leveraging this holistic ideal of traveling with your client, The World Economic Report suggests how a future employee`s Social Protection Needs might look like in the Fourth Industrial Revolution era. Are Insurers, Reinsurers and Distribution Channels aware that we need to transform in order to accompany the client of the future?

The rise of the machines

Advances in Artificial Intelligence have been moving ahead at breakneck speed. The World Economic Report reckons that this because of the natural order that he who is least regulated wins. It is true that the Governance of emerging technologies is patchy. Some are regulated heavily whilst others are hardly at all. And largely because some simply do not fit under the remit of an existing regulatory body.

A good example is in Brazil where Insurance services are heavily regulated, Whilst all of the global retail tech companies are present, accounted for and are booming (Facebook, Amazon, Twitter, Uber, Spotify, LinkedIn, Google, Apple, PayPal, Airbnb et al) but it would be a brave Insuretech that would open its doors today in Sao Paulo. Should the absence of leading Insuretechs in a country be a sign of over-regulation?

Conclusion: the Diversity Bonus

I recently attended presentation bu Scott Page about the `diversity bonus`. The classic example cited was Netflix. Netflix came to the conclusion that the main value of its services was recommending a new film/series to its existing client and being spot-on. Happy NetFlix clients leads to higher persistency. Netflix had an algorithm to `predict` customers tastes based on past viewings but it wanted to do better. In 2006 Netflix offered a prize of US$1 million to anyone that could improve its recommendations by more than 10% Lots of teams vied but the eventual winner was a `collection` of diverse models which attempted to improve the existing predictive model via different methodologies. Individually each model made improvements to the original model, but collectively the aggrupation of certain teams provided a diversity bonus and delivered a superior result

Might it not be that Actuaries working together with the World Economic Forum Risk experts could provide an enhanced assessment of Global Risk.

Actuaries are often challenged to accept a wider role to serve the greater society and I can think of no better initiative than saving the only planet that we`ve got.

Reference. The entire report can be downloaded here

http://www3.weforum.org/docs/GRR17_Report_web.pdf

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