Reassessing the risks and opportunities of a hyper-connected world

A foreword by Steve White, President and CEO at Milliman

COVID-19 has been a wake-up call on multiple fronts. One of the pandemic’s central revelations has been that event-triggered risks can unfold more rapidly and with greater severity than even the most credentialed experts—whether scientists, technologists, economists, or others—could have predicted. Moreover, the interconnectedness of today’s world, coupled with financial structures that have little margin for error, leave us increasingly vulnerable to these events.

Unfortunately, COVID-19 is not the only global risk we face and certainly not the worst. We should learn from this experience to better plan for our future. We have time and opportunity to do this. Business leaders, and the insurance industry in particular, can play a leading role, consistent with the Business Roundtable’s revised purpose of a corporation to create long-term value for all stakeholders. But to achieve that goal, companies will need to better understand the increasingly complex and interconnected long-term risks they face.

To help address that challenge, we commissioned The Oracle Partnership to closely examine today’s insurance risk landscape and project big-picture issues and trends most likely to impact our industry and the world through 2035. The result: a series of nine independent essays that the group published online between December 2019 and February 2020. This was the same period in which a novel coronavirus was first identified in China and rapidly evolved into a global pandemic. Soon thereafter, we commissioned the Partnership to develop one additional essay to examine the implications and long-term impacts of COVID-19, the toll of which will be difficult to calculate for years to come.

Given the gravity of these issues, we decided to republish the 10-essay collection in this digital format, so it can be openly and easily shared, which we encourage you to do. Our hope is that the insights contained in these essays will ignite a conversation about what the insurance industry, working in collaboration with government leaders and others, can do to help avert future crises—many of which could have larger and potentially devastating impacts.

One phrase I’ve heard repeatedly during the COVID-19 lockdown is, “the world will never be the same.” And, while I agree, I prefer to think, “you’re right; it’s up to us to make it better.” The trends reflected in the following essays are coming. We ignore them at our own peril. By working together to reinvent how companies manage strategic, long-term risk, we can build stronger businesses, create a more resilient society, and deliver greater value to all our stakeholders.

We need to step back before we can leap forward

One of the things I value most about The Oracle Partnership’s essays is their objectivity. The group has looked at the insurance industry and our connection to large societal issues from the outside, and their view is refreshingly unbiased. While the tone of the essays is urgent, they are not alarmist. In fact, as you’ll read on the following pages, many of the potential scenarios that the Partnership envisions result in highly positive outcomes—both for society and the insurance industry.

But it is highly unlikely that we’ll achieve any of those positive outcomes if we maintain a business-as-usual mindset. In order to build greater resiliency—the ability to cope with what the Partnership calls “fragile, tightly coupled systems and growing risks of extreme events”—we need to apply more foresight and imagination to our business planning processes.

We need to be especially mindful of wild-card risks like COVID-19—those that we know are coming, but we just don’t know when. It would be a mistake to simply wave off the pandemic as a so-called Black Swan, because the political, social, and economic conditions that fueled such widespread consequences still exist and, arguably, may have gotten worse. We will ultimately develop a vaccine for COVID-19. But there is no vaccine that will help us to overcome existential threats like climate change if we exceed the tipping point.

That is why it is so important for us to step back before we can leap forward. More specifically, the Partnership advises that insurers must begin “shifting from covering individuals and specific events, to insuring interlinked complex ‘systems of systems.’” You’ll see the theme of complex, multi-variable risks repeated throughout the essays, which focus on three century-shaping challenges:

• Climate change, including swiftly mounting pressure from consumers, regulators and investors, and the insurance industry’s opportunity to position itself as a key player in transitioning to a more sustainable world.
• Technology, including the issues of cybercrime, privacy and surveillance, as well as the opportunities that technology (from AI to mass automation) provide insurers to reinvent our industry, and create entirely new products and services.
• Global politics, including the rise of geopolitical competition, nationalism, populism, trade wars and growing antagonism among nations, including the United States and China.

We can’t turn our backs on these issues. We need to extinguish these potential threats now, or we will exhaust our resources fighting future wildfires—both real and figurative. While we can do many things on our own, real change will require a coordinated, global effort of governments, businesses, and individuals. The truth is, we’re at a fork in the road. Today’s decisions will help determine how positive or negative the outcomes will be.

The rise of nationalism will make this effort difficult, since strained relations between and among countries have resulted in less global cooperation at the very time we need more. Timing also poses a significant challenge, because the “wins” involved with these issues are longer-term in nature. In many cases, we may not recognize the value of the investments we make today for a decade or more. The result is limited incentive for our leaders to take the long view. Somehow, we must demand this of them.

At the same time, challenges such as climate change are time-constrained. So even though taking action today may not produce immediate results, not taking action may lead to irreversible damages. This perilous push-and-pull dynamic is likely to lead to a series of shocks and aftershocks that we may not be able to avoid, but that we can join together to overcome.

An unprecedented opportunity for insurance to lead

The first of The Oracle Partnership’s “Insurance Futures” essays includes this prescient warning: “Contrary to conventional wisdom, in chaotic economic and political conditions, culture can change abruptly. This has potentially profound implications for insurance, both because cultural attitudes to the long-term will be felt short-term and because they will impact risk appetite.”

Within a few short months, the social and economic tumult caused by the COVID-19 crisis has certainly proved that to be true. That’s why we don’t have time to wait for the next crisis to unfold—we need to act now. Regulators, particularly in the UK and other European countries, have already taken an active role in addressing some of the long-term risks discussed in this series. But those efforts alone will not be enough to solve the underlying problems.

The insurance industry has an unprecedented opportunity—and a social responsibility—to embrace a leadership role. Our work addresses critical issues facing the world, and insurance underpins the very confidence upon which our global economy is built.

Among the many tools at our disposal:

• Becoming more proactive and future-focused in pricing risks
• Being more restrictive in our underwriting
• Working with cities to build more sustainable systems
• Leading the development of tougher ESG standards
• Building more predictive models to anticipate long-term impacts
• investing in new products and services that address the complex challenges of our interconnected world

We also need to become more vocal advocates for change, helping to tear down political barriers and inspire more cooperative action.

At Milliman, we are committed to positioning the insurance industry as a key player and helping our clients lead the change to build a more sustainable world. Since the mission of our company is “to help our clients protect the health and financial well-being of people everywhere,” I can think of no cause that is more vital.