Understanding The New Risk Ecosystem

By Michael W. Elliott

Rapid advances in technology are fueling major changes in virtually every organizational function, including risk management.

For risk professionals, the impact of the digital revolution is twofold. First, they are tasked with using new and emerging technologies to assess and mitigate their organization’s risks and identify any related opportunities. Second, they are tasked with managing and mitigating the risks arising from the technologies themselves.

To succeed in this dual offense and defense role, risk professionals require an understanding of emerging technologies and new analytical tools.  They need to know how to leverage emerging tech to both mitigate risk and determine where the threats and opportunities lie.

Understanding The Power Of A New Risk Ecosystem

The digital revolution encompasses all of the technological advances that together are creating an entirely new risk ecosystem. Prominent among them are artificial intelligence, sensors and aerial imagery, which put the smart in smart products. Drones, robots and autonomous vehicles are collecting tremendous amounts of information, which is quickly analyzed through artificial intelligence to continuously assess risk and assist risk professionals in making decisions.

The power of this new ecosystem isn’t in any single new technology (impressive as each may be), but in how that tech can be integrated into a larger risk management approach. Take autonomous vehicles, for example. Society has been talking about self-driving cars for decades, but sensors and machine learning have pushed them much closer to reality.

The digital risk ecosystem is driving a new approach based on predicting and preventing risk rather than reacting to it and indemnifying insureds. Risk professionals need an understanding of the foundational elements of this new digital ecosystem — emerging technologies, smart products and big data analytics — to develop realistic strategies to thrive in this new environment.

Emerging Technologies Present Both Risks And Opportunities

New and emerging technologies like sensors and computer vision serve as the foundation for the digital revolution. They are the eyes and ears of the smart products they enable. At the same time, as artificial intelligence and robotic process automation technologies pioneer new ways for products and systems to grow smarter and more efficient, they become the brains of this new digital ecosystem.

However, they will never replace the judgement that can be brought to assessing risk by an experienced risk professional. This is particularly true in areas that require empathy, such as determining the reasons for careless behavior by employees or supplier motivations for not identifying and treating risk.

All this intelligence presents risk professionals with an opportunity. RPA and AI will enable risk professionals to make processes more efficient and could even streamline the entire process for controlling and financing risk. AI-driven chatbots already are capable of handling internal service requests, such as those for inspections or proof of insurance.

Imaging technology and RPA could be used to assess the condition of and replacement cost of physical assets. AI tools could be used assess reputation, supply chain, climate change, and other intangible and highly complex risks that are becoming an increasing share of the risks faced by organizations.

The challenge for the risk professional is to strategically use emerging technology, data and analytics to assess and quantify the organization’s overall risk portfolio and advise the C-suite on an appropriate risk appetite for the business.

The risk professional also needs to use the knowledge gained from these activities to advise the C-suite in important areas of risk, such as those related to launching a new product or pursuing an alternate strategy. Related risk treatment recommendations should go well beyond traditional insurance, which is but one form of risk treatment.

Risk professionals must also be aware of the potential downside to automation. These technologies are raising new questions around privacy, security, transparency and ethics.

Smart Products Are Getting Smarter

These new and emerging technologies are powering an ever-growing internet of things movement, from the refrigerator that lets you know when you’re low on milk to vibration sensors that can prevent product defects arising from the manufacturing process.

These products are exciting and helpful, but risks remain. Sensor failures and software flaws create potentially catastrophic cyber and other operational risks that can affect the entire supply chain, including end customers. As businesses rely more on these sensor-driven products and robotic tech, new questions around liability emerge, and the potential for greater losses when they fail increases exponentially.

Other smart products have the potential to make risk management processes much safer and more efficient. Drones enabled with sensors and aerial image technology are having a major impact on disaster recovery. A digital twin, which is a virtual model of a physical asset such as a pipeline, provides for the capture and analysis of streaming sensor data that can be used to simulate risk scenarios leading to a redesign of processes in order to mitigate risk.

Untold Opportunities For Data Analysis

The technologies embedded in these smart products are creating unprecedented amounts of data, and it’s less expensive than ever to store and process it.

All this data is driving a rapid evolution of data analysis tools, from text mining and natural language processing to classification analysis and neural networks. These powerful tools are creating new opportunities to connect with customers and develop and deliver new products.

Parametric risk transfer, which allows payouts to be based on an event exceeding an agreed-upon level, is one powerful example. It’s not a brand-new concept, but as more sources of reliable data emerge, new parametric applications are being developed, including those for pandemics and terrorism. Text mining and other analytical tools are enabling parametric products for things like reputation risk by measuring customer sentiment via social media.

The multitude of predictive variables for risk and the analysis of their interactions made possible by machine learning are reshaping the risk transfer marketplace. Now an organization’s risk can be carved up in many ways and transferred to different risk capital providers.

For example, marine risk can be transferred to different providers depending on where and how a vessel being used — one provider might accept the risk while the ship is in the South China Sea while another accepts the risk while it is in the Northwest Passage.

Yet another might accept the risk of unusual weather events. The ability to analyze risk in new ways along with the $1 trillion of new risk capital considered to be available is providing organizations with new options for treating their risks.

There are still major unknowns around these technologies, particularly with regard to the inner workings of neural networks, and many organizations are quickly working to boost their data analytics capabilities. Risk professionals have a critical role to play in both helping ramp up data analytics efforts and in preparing for the uncertainties that come with them.

Surviving The Future Of Risk

So what do risk professionals need to do to survive this digital revolution and thrive in the future of risk? It starts with recognizing the dual role they’re expected to play in implementing these new technologies and tools to assess and mitigate risks while being realistic about the risks and uncertainties that come with them.

That requires striking the right balance between learning the specifics of the new and emerging technologies on the one hand and keeping up with the wide range of advances and innovations that are reshaping industries, companies and customer expectations on the other.

It’s critical to think beyond traditional products, services, and partnerships to embrace evolving models that serve customers and clients.

Michael W. Elliott, CPCU, ARM, AIAF, is senior director of knowledge resources, The Institutes. He may be contacted at [email protected].

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