MODERN RISKS

We are today living in a world of constant change. Change has been the only constant factor through history and society has adapted admirably to many of them. Those that could not change became dinosaurs. The industrial revolution moved somewhat smoothly into technological one and the world has prospered as a result. This technological changes are happening at an unprecedented speed and society’s response to this change must be rapid for it to survive. It some circles, the technological era has been described as the period of disruptive technology. 

Disruptive technological advance is an endless process and is the driving force of capitalism. The advances have brought tremendous benefits to the society, but in the process it has also created losers as well as winners. The Technological innovations are responsible for creating new markets and destroying old ones. This is clearly illustrated by the emergence of online platforms which change the way the existing services are being marketed, sold and delivered. In the long run, the process of creative destruction works towards boosting the economy and prosperity.

Risk is intrinsic to the quest for discovery, productivity, wealth creation, the improvement of the human condition and virtually all other efforts that aim to produce and add value. Our industry is a strategic partner in protecting value and encouraging opportunities for growth. The dynamic is elegant and simple. Without Insurance, there is no investment, no innovation and no growth.

In addition to our role of spurring economic growth, we also protect against the downside. Lives and livelihoods get rebuilt following a loss. Our people and our companies supply the products and services that enable businesses to function and innovate, communities to grow and individuals to thrive.

One of the key results of technological disruption is, while the benefits are often widely spread, the loses are highly concentrated. This can create pockets of human discontent.  Rapid and fundamental changes can create dislocation and conflict in a society. In the white collar job markets for example, if disruptive technological changes are to be harnessed it will mean that those who previously enjoyed stable livelihoods may find themselves jobless and without the right skills for the labour markets they may be flung into. Traditional ways of life may be undermined and the social glue that holds families and communities weakened.

Many of the technologies we use today were not available in the past.  The changes will however continue into the future, bringing into play new technological risks, which may be aligned with new opportunities. In addition to changes in the internet, we may expect to see driverless cars and artificial intelligence in the near future. The challenge would be how the Industry will respond to such changes, to ensure that we reap more benefits than negative impacts.

The insurance Industry can lead this charge by interrogating the new risks and offering solutions into the aspects of liability, scope of cover and risk mitigation. If we can do this, we will ensure prosperity in this age of volatility, uncertainty, complexity, and ambiguity, which will indeed be the defining accomplishment of our time. Our industry is central in the development of commerce and the regeneration of the world’s productive prowess. The core purpose of the Insurance Industry is to enable economic growth, taking of risks, and encouraging innovation. In addition, Insurance does not only offer freedom from the financial and emotional burden of loss, but also the freedom to the pursue innovation, investment and  creation of value.

Innovation and interconnectedness have helped accelerate human productivity. The Insurance Industry has played a significant role in all of this as most of the innovations have been made and the industry has been there to give the quintessential support.

The Insurance Industry has been very responsive to emerging risks and have come up with products to cover them. However, new risks are coming up faster than before and the Industry has a vital role to play in risk identification as well as assisting clients in determining which risks should be avoided entirely and which ones can be appropriately managed. The new risk areas include risks of employment malpractices, environmental risks, cybersecurity, terrorism, trade credit, political risks, and micro insurance. The list of emerging risks is long and is getting longer by the day. Others are climate change, water scarcity, and the sobering demographic reality of a smaller number of young people supporting a much larger number of older people. When it comes to emerging risk areas, the industry’s risk management capability and spreading of best practices to the otherwise competing market participants may be as important as the actual insurance risk transfer transactions.

An unfortunate tendency in our industry is that we build complexity and ambiguity into many products. Instead of developing customer trust and confidence, we often create a sense of apprehension around how a policy will respond in the event of a loss. Instead of differentiating by offering broad policies that engender customer loyalty, many insurers often take the easy route of limited coverage at a low price. Our focus should be on how to develop terms that offer broader coverage at a fair price, not restrictive coverage at the lowest price. Competition in the industry should be based on what is most important to the vast majority of clients; namely the breadth of coverage, claims performance, service responsiveness and price. In all this, it is important that we should keep our purpose top of our mind remembering that we exist to enable economic growth.

Strategies based on innovative products and high quality service offer yields better margin potential and longevity than lower value offerings featuring relentless price competition. The results will be broader, more strategic relationships built on a foundation of transparency, trust and certainty.

Our Industry as well as the whole of the economic environment is operating in a shifting and risk laded and chaotic, disruptive and somewhat scary, complex landscape, with both challenges and opportunities available in equal measures. For all the unprecedented challenges, dangers, and risks we face in the 21st century, there has never been a better time to be alive. More people have been lifted from poverty in the past 20 years than any time in human civilization.

Moving forward, we face an unclear terrain. There are plenty of geopolitical fault lines. this adds to financial and economic related travails we have struggled with for the past 20- years. Adding to this is the sense of unease in the rapid introduction of smart services and products that rely more on Artificial Intelligence (AI) and robots than on human skills. In the past few years, AI capabilities have been publicized in humanlike abilities such as speech, language understanding, image recognition, and sentiment analysis. Another critical area of ambiguity and uncertainty is climate change. AI could greatly improve our lives and solve many of the world problems, such as disease, hunger, and even pain. On the other hand, it could take a malevolent turn with dire consequences by creating catastrophic scenarios.

Climate change is an environmental social and economic risk, expected to have its greatest impact in the long term. Undeniably, climate change presents a series of risks with tangible effects on insurable interests- risks that must be approached strategically and creatively.

Cybercrime is another intriguing area for the Industry and the hackers are the people responsible for it.  The numerous cases of cyber-attacks bring into sharp focus the matter of cyber security. Cyber Crimes involve sensitive information and data such as dates of births, credit card, bank details being in the wrong hands. This portends huge losses to the banking and other financial sectors.  In addition to the financial losses, other costs are incurred in response to the incident such as forensic audits, IT costs, IT upgrade and loss of business. There are also legal issues to be considered and paid for.

To counter this crime, Cyber insurance has been developed and is a relatively new product. While there is an increasing body of experience being built up, there remains an enormous variety in the different wordings and coverage available.

Cyber policies are sometimes issued as bolt- ons to the Professional Indemnity Policies, or other General Liability Policies.  This option usually offers limited cover to policy holders whose business involves the storage of valuable and sensitive customer information. In particular the cyber extension in PI policies do not cover first party risks, which would generally be covered under a pure cyber policy. This may include business interruption, data recovery, and crisis management costs, including PR costs, and customer notification expenses. Some policies cover interruption, others do not. Other additional covers under this policy may include data extortion, terrorism, kidnap and ransom.

One of the conditions that must be observed by the policy holder is to install the best security systems, which are regularly updated. This is absolutely essential to underwriting of cyber risks and any underwriter would want to know what protective measures are in place, just as property underwriters would want to know about windows and door locks or burglar alarm. Cyber policy wordings currently achieve this by a variety of methods from basis of contract clauses and warranties to conditions precedents and exclusions. Whatever method is chosen, it should be implemetable, not only so that insurers can assess the risk properly before taking on, but ensure compliance by the policy holder.

 

Kenneth Obong’o Oballa

Training Manager,

Zep-Re (PTA Reinsurance Company).

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