I don't know about you, but I'm a bit wary when I pick up my phone first thing in the morning and check on the state of the world. There's rioting where? A convective storm or wildfire destroyed what? The war in Ukraine or Iran took what turn? Inflation was how high, or job growth how low?
And the volatility is building on itself, creating what some of our authors have dubbed the "polycrisis." Economic problems lead to rioting in France, which destabilizes the Western alliance, which emboldens Putin in Ukraine, which feeds the political crisis in the U.S., which....
The insurance industry generally dislikes volatility. Insurers want a decade or two of data on a risk so they can price it properly. But how do you understand risks that appear so suddenly and can interact in such complex ways?
To get a sense, I turned to Dawn Miller, the chief commercial officer at Lloyd's and CEO of Lloyd's Americas, who explained how new data sources, better models, scenario planning and just generally processing information faster can at least help.
Let's have a look.
Here is the full interview I did with Dawn. And here is a link to this year's Global Insurance Forum, which our sister organization the International Insurance Society is holding at Lloyd's in London on Nov. 15 and 16 on the theme, "Turning Volatility Into Value." But I'll summarize:
Dawn says, "We're seeing innovations in modeling—additional data transparency being plugged into some of those core models that we've always used to look at some known perils. The perils aren't changing, but our ability to understand them is getting better, sometimes dramatically. There's also an opportunity for geopolitical assessments, economic assessments, and social demographic assessments to all play a role."
She adds that some firms like at least some volatility because it creates more potential for upside and "fits as a diversifier into their portfolios. We see others wanting the longer-tail risk. This may not be as volatile, but they want it for their own investment reasons. Our role [at Lloyd's] is to create the environment for all those different profiles to exist and to all benefit from the diversification of our marketplace. It's not an either-or—the alpha seekers or the beta seekers. It's having both in an environment where they can coexist."
Dawn cautions that today's environment is full of "new layers of complexity": "In the past, our market would focus on certain CAT risks, certain natural perils happening in one place at one time. Now we're seeing multiple risks interact at the same time, from natural catastrophes and supply-chain disruption to inflation, geopolitical uncertainty and demographic risks. And those are just to name a few.... It takes an enormous amount of creativity to predict the layers of complexity around us today."
But she's optimistic about the industry's ability to innovate, including through Lloyd's Lab and the Lloyd's Academy, to help the insurance industry react faster as perils develop and interact. She also sees the industry cooperating, including through the ecosystem that Lloyd's fosters:
"Innovation, whether it is the birth of a new product, or the birth of a new structure, or how we deal with some of the extreme large-scale infrastructure, energy, supply chain, and transportation issues that we see around the world—that is going to take more than one mind to solve."
When I wake up tomorrow morning, I'll still peek at my phone with one eye open to check on the state of the world, but all is not lost.
I hope to see you in London so we can discuss the polycrisis and its many implications in person.
Cheers,
Paul