To avoid catastrophic levels of uninsured risk in the innovation economy, the insurance industry is joining forces with technology companies and governments in a World Economic Forum-led initiative, Mitigating Risks in the Innovation Economy.
In a joint report launched yesterday, the working group lays out the risks and goals, including:
· Closing the gap in existing governance frameworks to manage risks from innovations
· Determining the liabilities, roles and responsibilities involved with these risks
· Setting up a data-sharing mechanism to manage the risks
“No one currently knows the magnitude of the risk exposure of society to new, uninsured technologies,” said Victoria Shirazi, Project Lead of the Mitigating Risks in the Innovation Economy project at the World Economic Forum. “A technology failure that was once both small and contained can cascade into potentially catastrophic losses. This initiative will help societies prevent, respond to and recover from these new risks.”
The insurers point to potential risk scenarios of emerging risks with vastly varying estimated costs:
· A cyber-attack on the US Northeast electrical grid could result in economic losses as high as $222 billion
· A disruption of the cloud could result in economic losses ranging from $15.6 billion to $121.4 billion
· A compromised software upgrade for globally interconnected systems could put between $4.5 trillion and $15 trillion of global GDP at risk over five years due to losses to global GDP output
The majority of these and other innovation-related risks are uninsured: the insurance gap is as high as 83% in a cloud service disruption scenario and 93% for a mass vulnerability setting. Other risks are yet unknown.
“As technologies emerge on their own, the risks are becoming so big and complex that businesses and governments will not be able to handle them, said Inga Beale, Chief Executive Officer of Lloyd’s, and a backer of the initiative. “With this initiative, we want to address that.”
Among the participants in the initiative are some of the world’s largest insurers and insurance brokers, including Allianz, Lloyd’s, Marsh & McLennan, Sompo Holdings, Swiss Re, Willis Towers Watson, XL Catlin and Zurich Insurance Group; technology companies such as Cisco, Hitachi, IBM and Siemens; and senior officials from the European Commission, India, Japan, Netherlands, Singapore, Switzerland, United Kingdom and the United States.
Consumers face two stark realities that the group needs to resolve, said Matthew Leonard, Partner at Oliver Wyman, and member of the initiative: “First, people do not fully understand the risks they are running; and second, those who seek to mitigate their risk with insurance are faced with a decided lack of choice and/or affordability.”
The members of this initiative have committed to further multistakeholder actions to be developed and piloted in 2018, starting at the World Economic Forum Annual Meeting in January. The report and joint initiative were prepared by the Forum in collaboration with Oliver Wyman. Throughout the process, the insurance industry will also explore how it can best fulfil its new capacities, such as risk advisory and analytics.