RANE Podcast: The Future of Cyber Insurance
Summary
TLDRIn this RANE Insights podcast, Rodger Baker interviews Michael Millette, founder of Hudson Structure Capital Management, about the evolving landscape of the cyber insurance world. Millette discusses the shift from physical risk coverage to addressing intangible assets and the emergence of new risks like cyber threats and AI. He emphasizes the need for companies to adapt their insurance strategies to protect against a broadening range of risks, including those posed by climate change and the potential for deep fakes and misinformation. The conversation highlights the challenges and opportunities for the insurance industry in the 21st century.
Takeaways
- 🌐 The insurance industry is evolving to address modern risks, shifting from primarily covering physical assets to focusing on business continuity and intangible assets like intellectual property and reputation.
- 🚀 The rapid growth of the cyber insurance market reflects the increasing recognition of cyber risks, with premiums projected to reach over $25 billion by 2025.
- 🌪️ The traditional commercial insurance paradigm, developed in the 20th century, is struggling to cover the extensive and diverse risks businesses face today, especially those related to non-physical threats.
- 🏢 Business interruption insurance traditionally required physical damage for coverage, which became a significant issue during the COVID-19 pandemic when many businesses suffered without physical damage.
- 🔒 Cyber insurance covers a range of issues including data theft, ransomware, and notification costs, but the constantly changing risk landscape poses challenges for insurers and businesses.
- 🌎 The impact of climate change on supply chains and business continuity is becoming more pronounced, leading to a need for new insurance products and strategies.
- 🤖 The potential for artificial intelligence to create deep fakes and disrupt traditional notions of truth presents a new frontier of risk that the insurance industry will need to address.
- 🚗 The future of auto insurance is likely to be transformed by the rise of electric, shared, and autonomous vehicles, which could significantly reduce the need for traditional car insurance while increasing the focus on cyber risks.
- 📈 The insurance industry is responding to the increasing demand for cyber coverage by investing in modeling and attracting third-party capital to manage peak risks.
- 📊 Companies and their boards should be proactive in assessing and adapting their insurance strategies to cover emerging risks, including political violence, deep fakes, and the evolving threat landscape.
- 🌟 The conversation between boards, enterprise risk managers, and the insurance industry is crucial for understanding and preparing for the future of risk and the role of insurance in mitigating it.
Q & A
What is the main focus of the Stratfor Center for Applied Geopolitics?
-The Stratfor Center for Applied Geopolitics focuses on providing geopolitical intelligence and analysis to help organizations understand and apply geopolitics to their operations.
Who is Michael Millette and what is his role in the insurance industry?
-Michael Millette is the founder and managing partner of Hudson Structure Capital Management, a firm that manages nearly $4 billion in reinsurance and transport strategies. He has also served on the boards of Cyber Cube, Vault, and Gracie Point.
What was Millette's role at Goldman Sachs?
-At Goldman Sachs, Michael Millette served as a partner, Global head of structure finance, and co-head of the Structured Finance Capital committee. He was one of the founders of Goldman's reinsurance, structured finance, and principal businesses.
How has the commercial insurance paradigm evolved over time?
-The commercial insurance paradigm grew out of the 20th century, initially focusing on insuring physical risks. It evolved from covering fires to substantial industrial risks, with the development of reinsurance in the mid-1800s. However, with the rise of intangible assets, the industry is now facing the need to adapt to cover non-physical threats and business continuity.
What challenges did the insurance industry face during the COVID-19 pandemic?
-The insurance industry faced challenges during the COVID-19 pandemic because many business interruptions did not coincide with physical damage to businesses. Policies often required proof of physical damage to collect for business interruption, which was not covered by the standard insurance forms in place.
What types of non-physical threats have emerged that the insurance industry must address?
-The insurance industry must now address non-physical threats such as cyber risks, the effects of artificial intelligence, and other emerging technologies that can lead to data theft, ransomware, and reputational damage.
How is the cyber insurance market evolving?
-The cyber insurance market is the fastest-growing market in insurance, with premiums having reached over $122 billion globally in 2022. It is expected to exceed $25 billion by 2025 and reach hundreds of billions of dollars by the late 2030s. The industry is working to grow cyber capacity to meet the increasing demand.
What are some of the risks that companies should consider when thinking about their insurance coverage?
-Companies should consider risks related to physical assets, business continuity, supply chain disruptions, cyber threats, intellectual property, brand and reputation, and political risks. They may need to seek specialized coverage for these areas, as they are not typically included in standard commercial packages.
How can companies protect themselves against the risk of deep fakes and misinformation?
-Companies can protect themselves against the risk of deep fakes and misinformation by investing in robust cybersecurity measures, fact-checking systems, and reputation management strategies. They may also need to consider specialized insurance products that cover reputational damage resulting from such incidents.
What is the impact of climate change on the insurance industry?
-Climate change has led to an increase in the frequency and severity of certain types of catastrophes, such as wildfires and floods. This has resulted in higher insurance premiums and difficulty in securing homeowners insurance in catastrophe-exposed areas. Companies operating in these areas need to manage the increased cost of doing business and may need to consider relocating to less exposed locations.
How should companies assess their risk management and insurance needs?
-Companies should work closely with their risk managers to inventory company risks and put in place an insurance and protection program. They should also engage in innovative thinking to anticipate future risks and adapt their insurance strategies accordingly, including considering the impact of emerging technologies and changing risk landscapes.
Outlines
🎙️ Introduction and Overview of Geopolitical Intelligence
The podcast begins with an introduction to Rodger Baker, the Executive Director of the Stratfor Center for Applied Geopolitics at RANE, a global center for geopolitical intelligence and analysis. The discussion revolves around the importance of understanding geopolitics for organizational strategy and touches on the evolving landscape of the Cyber Insurance World, with Michael Millette, founder and managing partner of Hudson Structure Capital Management, as a key figure. The conversation highlights Millette's extensive experience in finance, including his tenure at Goldman Sachs, and sets the stage for a deeper dive into business risk and insurance products.
🌐 Evolution of the Insurance Industry and its Modern Challenges
This segment delves into the historical development of the insurance industry, noting its origins in covering physical risks and its evolution through the 19th and 20th centuries. The discussion addresses the current challenges faced by the industry, particularly the inadequacy of 20th-century insurance models in covering the intangible assets that constitute a significant portion of the value of modern businesses. The podcast also highlights the impact of the COVID-19 pandemic on business interruption coverage and the need for the insurance industry to adapt to cover new risks such as cyber threats and AI-related vulnerabilities.
🛡️ Navigating Available Insurance Options in the Modern Era
The conversation shifts to the practicalities of securing insurance in the contemporary business environment. It emphasizes the necessity for companies to think creatively and adapt existing insurance products to cover new types of risks. The segment covers the availability of coverage for physical assets, catastrophe exposure, business interruption, cyber insurance, and intellectual property. It also touches on the growing market for political risk insurance and the challenges companies face in securing coverage for non-physical threats.
🌪️ Addressing Cyber Risks and the Impact of Climate Change
This part of the podcast focuses on the multifaceted nature of cyber risks, including data theft, ransomware, and the potential for litigation following cyber events. The discussion also explores the implications of climate change on the insurance industry, particularly the increasing difficulty and cost of securing coverage for properties in catastrophe-prone areas. The conversation underscores the need for companies to reassess their risk management strategies in light of these evolving challenges.
🤖 The Future of Risk Management and Insurance
The podcast concludes with a forward-looking perspective on the future of risk management and insurance. It discusses the potential for rapid advancements in artificial intelligence to disrupt the risk landscape and the need for the insurance industry to develop new products to address emerging threats. The segment also contemplates the transformative impact of autonomous electric vehicles on the auto insurance market and the broader implications for the industry as it adapts to a changing world.
🌐 The Challenge of Disinformation and its Insurability
The final segment addresses the growing challenge of disinformation and its potential to undermine trust and reputations. The discussion highlights the increasing difficulty in distinguishing truth from fiction in a world where deep fakes and customized information environments are prevalent. The conversation touches on the broader societal implications, including the potential erosion of legal systems and consensus reality, and ponders the insurability of reputational risks in such a complex landscape.
Mindmap
Keywords
💡Geopolitics
💡Cyber Insurance
💡Business Interruption
💡Structured Products
💡Reinsurance
💡Intellectual Property
💡Risk Management
💡Climate Change
💡Artificial Intelligence
💡Deep Fakes
Highlights
Rodger Baker, Executive Director of Stratfor Center for Applied Geopolitics, discusses the importance of geopolitical intelligence in organizations.
David Lawrence, co-founder of RANE, interviews Michael Millette, founder and managing partner of Hudson Structure Capital Management, about the Cyber Insurance World.
Hudson Structure Capital Management manages nearly $4 billion in reinsurance and transport strategies, with assets across various sectors including property catastrophe, casualty, life, health, and financial lines.
Michael Millette's extensive experience at Goldman Sachs, where he was a partner and served as the Global head of structure finance, has informed his expertise in risk management and insurance.
The insurance industry is evolving to address modern risks such as cyber threats, which have seen rapid growth in insurance premiums from $1 billion to over $122 billion globally in just 12 years.
The traditional 20th-century insurance model focused on physical assets is becoming outdated as the majority of S&P 500 companies' value now lies in intangible assets like intellectual property.
Business interruption insurance, which requires physical damage for coverage, has been highlighted as inadequate in covering losses from events like the COVID-19 pandemic.
The insurance industry must adapt to cover the new realities of business continuity, including the impact of non-physical threats like cyber attacks and geopolitical risks.
Cyber insurance covers a range of issues including data theft, ransomware, and the costs associated with notification, indemnities, and forensic activities.
The evolving risk landscape requires companies to think innovatively about their risk management strategies, including the potential impact of artificial intelligence and political risks.
Climate change is affecting the insurance market, with increased premiums and difficulty in securing coverage for properties in catastrophe-exposed areas.
The future of auto insurance is expected to change dramatically with the advent of electric, shared, and autonomous vehicles, which could significantly reduce the need for traditional auto insurance.
The spread of disinformation and deep fakes poses a significant risk to institutional trust and reputations, challenging the traditional notions of truth and evidence.
The insurance industry faces the challenge of adapting to the changing risk landscape, including the need for new products to cover emerging risks like cyber and AI-related threats.
Enterprise risk evaluation should be a forward-looking process that involves innovative thinking to anticipate and prepare for future risks.
The impact of AI and deep fakes on the ability to distinguish truth from fiction could have far-reaching consequences for legal systems, political stability, and corporate reputations.
Transcripts
I'm Rodger Baker Executive Director of the Stratfor Center for Applied Geopolitics at
RANE, a global Center of Excellence for geopolitical Intelligence and Analysis
learn how you can put geopolitics to work for your organization at ranenetwork.com
[Music] Welcome To The RANE Insights podcast from RANE Network in this episode David
Lawrence co-founder of RANE speaks with Michael Millette about the evolving outlook for the Cyber
Insurance World Michael Millette is the founder and managing partner of Hudson structure Capital
Management hscm manages nearly $4 billion in reinsurance and transport strategies in
Bermuda and Connecticut The Firm manages assets across the property catastrophe casualty Life and
Health financial lines and distribution and services Subs sectors he also serves on the
boards of cyber Cube meanwhile Vault and Gracie Point Mr Millette was at Goldman Sachs from 1994
to 2015 where he served as a partner Global head of structure finance and co-head of the
structured Finance Capital committee Mr Millette was one of the founders of Goldman's reinsurance
structured finance and principal businesses he was a team leader or key team member for over 150
transactions in the sector including the Market's first 144a catastrophe bond in 1996 he also LED
teams that developed Goldman's businesses in transport Finance intellectual property
Finance private placements and project Finance Mr Millette began his career as an analyst at City
Bank and also previously worked as a portfolio manager at John Hancock Financial he graduated
from Cornell University with a ba in history and also holds a MERS in finance from Boston College
Carol Graduate School of Management Mr Millette became a CFA in 1994 Mike it's a definite honor
and privilege to be able to speak with you and as it was an honor and privilege to work with
you at Goldman for the many years that we were together so thank you for making time thank you
David it's great to connect today to talk about the insurance Market yeah um as you know um you
are going to be participating as part of the I call thought leadership for the listed members
and their boards and sea Suites of the NASDAQ and what I have found and I I certainly learned
a great deal from you uh not just at Goldman but subsequently the issue of insurance H is
one of the most important issues in the management mitigation and quite frankly preparation uh for
risk and uh in the last couple decades company companies have had to confront an increasing
number of issues that previously they did not have to particularly think about whether it's
cyber geopolitical the business Interruption possibilities of a pandemic terrorism and uh
obviously the usual issues that deal with u what I'll refer to is Corporate fraud
government investigations Etc and I know not only um have you been one of the great innovators in
Structured Products but you've um created some of the leading riskmanagement products that are in
the market today as well as advised many many companies in their boards so uh maybe we can
begin with just an overview about how you think about business risk and think in turn about the
types of insurance products that are out there and how boards and sees should think about the
better and ways I didn't say best but the better ways that they can protect themselves and their
stakeholders you know there's a there is a substantial discussion about this in the
insurance world right now we are dealing with a commercial insurance Paradigm that grew up in
the 20th century and that insurance Paradigm was built first and foremost around insuring
physical risks that was an achievement throughout the 19th century the insurance industry evolved
from being able to cover fires and then to be able to cover substantial fires that's when
reinsurance was built in the mid 18 in the mid 1900s excuse me mid 1800s in Germany um to being
able to cover the emerging industrial world the insurance industry developed engineering
capabilities analytical capabilities Actuarial capabilities that enabled it to analyze plants to
cover steam boiler explosions to cover industrial accidents and we rolled into the 20th century with
a commercial insurance business that was based firmly on physical assets the companies would
analyze the physical assets of a firm they would assess the possibility that the use of
those physical assets would be interrupted and would pay insurance based on the damage and the
interruption um separately you know Insurance developed employee benefits features workers
compensation but this was all still based around a physical business environment and that's not
where we are today a large majority nearly 80% of the value of the S&P 500 consists of intangible
assets um especially intellectual property the needs of business still include coverage of
physical assets but most businesses um have very extensive and tangible operations that need to be
covered intellectual property reputation um work processes Brands and those aren't covered very
efficiently by the 20th Century Insurance system and we saw that starkly in Co we had a massive
shutdown of businesses Across America um that did not that did not Co Co incide with any physical
damage to those businesses and policies pretty clearly spelled out that in order to collect for
business Interruption um companies needed to be able to show physical damage and there was
and there is specific language um ruling out bacteriological and viral um causes for lack
of access to facilities as causes and so court rulings have been pretty Universal the insurance
forms in place do not cover business Interruption the industry correctly points out that it would
be hard for them to cover business Interruption on that scale but the fact stands that we had a major
loss event and insurance um didn't cover it and simply wasn't able to cover it and companies are
talking about how they need to evolve um to cover the needs of companies today Co uncovered another
feature which is let's let's leave aside the fact that it didn't cover physical assets it turned out
that many companies were able to continue to operate without physical presence because of
Zoom calls because of virtual connectivity um the large majority of companies were able to continue
to carry on their Affairs certainly companies that make things in factories needed people on
the floor um in Frontline workers were absolutely critical but many many companies in finance and
in in in law in Professional Services of All Sorts were able to carry on um without physical presence
the insurance industry is not addressing that State of Affairs in addition we've had whole new
sources of non-physical threat arise especially cber on its heels whatever the Mal effects that
will grow out of artificial offal intelligence are and the industry has had to develop a whole
new product array to address those issues so I expect that as we move through the 21st century
um we will evolve an insurance model that will have as its basis not physical assets but company
continuity with riders arising out of that but that's not where we are today so that will
represent a change in the meantime companies need to think about how to adapt an insurance system
based on physical assets to cover the other sorts of risks that they have Mike that's a um actually
fascinating overview of the evolution and you've enumerated a number of we'll call it corporate ass
assets I put that term in quote that need to be protected and um the real question here is what
should companies and boards be doing um just in terms of the availability of insurance today
and what's not available today how should they think about potentially protecting or identifying
sources that could Ure against these risks uh in the future well let me say that a good deal is
available today it's just that it flows against a business model that was more pervasive in 1950 so
to adapt what is available today to what you need you have to think a bit outside the box so what's
available today certainly coverage of physical assets you have to think hard when you get to
catastrophe exposed assets and that is becoming more of an issue than it used to be because at
least over the past 6 years we've certainly had um an upward drift in in in physical threats to
assets from from you know from wind fire water at all so physical assets can be covered catastrophe
exposed physical assets are going to take more work than they used to business Interruption is
covered to the extent that those physical assets are impaired but if companies want to think about
company continuity outside of the physical asset space they are going to have to adapt coverage
they're going to have to buy special business interruption or contingent business Interruption
which addresses situations where companies have losses but they still have use of their physical
assets or or in any case non- damage of their physical assets um that needs to be documented
and purchased separately from standard commercial multi perel or from standard commercial policies
um cyber insurance is available it's typically fairly narrowly constructed so companies have
to think carefully about whether they are getting all the protection um that they need I think we're
going through an event right now um a hack the move it hack which is causing many companies to
stand back and think about whether their cyber limits are where they should be and to seek to
increase their cyber limits um the Cyber Market is the fastest growing Market in Insurance cyber
premiums were maybe a billion dollars 12 years ago um globally they were over 122 billion in
2022 um Jeff estimates that that Quantum will be um over $25 billion by 2025 and in the hundreds
of billions of dollars by the late 2030s um the industry is working to grow cyber capacity as
fast as it can companies that want to buy cyber capacity um need to be seeking that specially
that doesn't come as part of a commercial package and increasingly cyber risks are excluded from a
commercial package um insurance for intellectual property brand and reputation are all products
that are available they are typically not included in normal commercial packages you typically need
to talk with the agent and to seek to secure those um separately and then finally um the whole realm
of political risk and this includes confiscation in difficult jurisdictions it includes political
violence strike Riot civil commotion Terror um those lines of insurance are available they don't
fall into your lab in a standard commercial package you need to think about what you need
jurisdiction by jurisdiction and the pricing in terms of those lines are tightening those lines
of business have been hit hard over the past few years from everything from you know civil unrest
in in in different countries that we've seen um to the larger war that we see now um in Eastern
Europe and so those are all areas where the insurance industry can work but it takes extra
work from the corporation and the corporate risk manager so those are some areas to think about
David and then and then you have the broader area of just of just business continuity um to think
about you know what what sort of protection do you want around things like customer lists
um that starts to get into areas where they're not conventional Insurance products available
today and Mike when you think about um broadly the active acts of terrorism or the events such
as pandemics yeah tell me how companies should be thinking about those specific
risks well companies need to think about physical assets they have that can be damaged they need to
think about the ability for them to continue their operations which may be disrupted they
need to think about Supply chains that may be disrupted the onew punch of coid and the the
Ukraine war created very very serious disruptions in Supply change chains that caused companies
not to be able to secure the goods they needed at the times they needed and that disrupted business
continuity without any physical damage at all to the companies um and that is actually some
there is a Young Insurance market around supply chain and companies can tap that but they need
to think about their exposures I I think that many companies were learning through six years
of pandemic of catastrophe and of War all of the different sensitivities they had that they may not
have been aware of um and those are all areas where they can seek insurance and Mike I know
you've been spending a lot of time around cyber um which obviously can involve theft of data denial
of service and many other forms of what I'll refer to is um Espionage and uh potential reputational
harm in the release of emails and Communications uh but it also when a cyber event occurs uh it
also attracts a fair amount of litigation civil litigation uh on behalf of customers or strategic
Partners government investigations at times fines and uh other types of punitive measures could you
unpack when we talk about cyber insurance and the Cyber risk what does that actually
mean well cyber Insurance can cover all of those things and in fact history to date a substantial
majority of all the claims payments in cyber Insurance have been to fund um notification
activities indemnities forensic activities as opposed to damage per se because most
of the damage that's been done in the cyber world history to date hasn't been physical
damage that's possible and it happens uh but the losses have been data theft ransomware
and you need to notify victims you need to pay for credit monitoring for victims in the case
of data theft in ransomware you may or may or ideally may not need to pay ransoms um you need
to pay costs to recreate um data that's become inaccessible so the losses that have been paid
in cyber are not losses you know as as we see in Hurricane risk where you know a house is knocked
down you have to pay to rebuild it it's it's losses that are paid to third-party victims
of those that are hacked to help them to recover data monitor data um and and the like so that's
cyber Insurance provided those sorts of services around that data theft those sort of services
around ransomware um which was the prevailing cause of cyber loss starting in about 20189 uh
one of the issues for cyber insurers is that the risk surface is always changing you know we Data
Theft yesterday ransomware today what exactly will it be tomorrow tomorrow will will cyber
criminals become proficient at actually tapping into disrupting and extracting value from wire
transfers that hasn't been the case that's of course a concern um we don't know exactly how
cyber risk will manifest itself in the future to what extent will cyber and artificial intelligence
start to work together so that cyber risk will shift into the realm of of deep fakes of you
know falsified kidnappings um in order to extract value um that's something that cyber insurers and
cyber and potential cyber targets are thinking about okay and of course there I just want to
go to what is often overlooked is the next order of consequence against these cyber events which
very often uh CL action litigation as well as Government investigations and is there
an insurance market for those risks well the in in cyber for example in some current hacks
what we're seeing is that the the moment a hack occurs um there is a plaintiff's lawyer attempt
to identify all of the folks whose privacy has been compromised all the folks whose data has
been sto stolen and to bring them together into a lawsuit and those lawsuits are a key
part of the claims costs in cyber um plaintiff's lawyer plaintiff lawyer activity will increase
the cost of cyber losses um although they also provide a vehicle for victims of cyber to seek
restitution Mike um a lot of focus has been on climate change and which can affect obviously um
supply chain all the things you've reference business continuity supply chain property
damage um but also you know the intangible disruption of a business can you give us a
sense of the market for how companies can begin to protect themselves um against climate change
and I look I know also we we've discussed um uh a number of markets are drawing up
companies are staying away from ensuring physical property in various areas of the country right
now we um one of the stunning features of our lifetimes is that we had a period from
about 1969 till about 1989 when we had almost no catastrophes um we had very few you none
that are all that memorable none that caused very large Insurance losses we had 20 years of
peace in our lives and because of that almost every adult over 45 in in the United States of
America thinks of the catastrophe experience of the past you know from the 1990s onward as
being extraordinary because you know in our youth there weren't many cats um that time of Peace was
a little bit odd there have always been cats um the 1920s and the 1950s were particularly
ferocious um that said we do seem to have an uplift in frequency and in certain types of
catastrophes especially wildfires and flood events All Around the World in a way that is
broadly consistent um with climate change theory so we have to assume that we are experiencing some
of the the the downside of climate change and it is getting harder to secure homeowners insurance
in some cat exposed parts of the country it's harder to get Wildfire insurance in California
harder to get homeowners insurance in Florida and certainly much more expensive um and that's
true for individuals it's it's true for companies as well uh this is very like likely to be broadly
true going forward what's been happening in the insurance Market over the past two or three years
is prices have been rising very sharply and that has been bringing additional Capital into the
market so you can secure insurance but it might be at a substantial premium to what you're used
to so I I think that what corporations need to assume is that if you are operating in
cat exposed areas the cost of doing business is higher and you're going to have to manage that
and price it in and it may be that operating you know in a wildfire or a coastal hurricane
Zone has X additional costs that makes you think about whether you want to build plant you know
in a place that isn't quite so exposed um the insurance will come but there'll be a price for
it Mike as um as a potential board member who wants to understand how a business has sort of
Taken stock of some of the most material risks and what steps have they taken to ensure against those
risks um can you maybe give us a a a primer about how a company should begin to make that
assessment so companies typically have have a risk manager which who's who has really two
jobs one is to try to inventory company risks and the other is to put into place an insurance Andor
Protection Program and you know the risk the the the risk texture of the world is evolving
we didn't think much about catastrophe risk before the 1990s we didn't think much about
Terror risk before 2001 we didn't think much about cyber risk before 2012 so I think that
actually when companies think about their risk cat Terror and cyber are probably three of the
front and center items in their mind and you know think about the fact that if you were a corporate
risk manager waking up you know one morning in 1991 you probably didn't think of any of those
things in your top three so that's a little bit of a lesson that that boards should take
Enterprise risk evaluation and the risk manager um more seriously and look not only for process
oriented feedback which will tend to always be stale and backward-looking but look for a
little bit of innovative thinking you know what is going to happen next um there are certainly
pregnant areas artificial intelligence is coming fast it is going to change the risk surface for
businesses and it doesn't seem to me that there's a lot of thoughtfulness around that um the broad
area of political risk which was more or less a bow Market from 1989 onwards you the Berlin Wall
fell we lived in a much less politically risky world for a long time 9911 not withstanding um
political risk seems to be increasing sharply there's there's more war again there's more civil
commotion and there's more political polarization that is part of the emerging risk surface um we
all think about climate change so that probably isn't new I suspect that there are risks around
around management of talent that are not front and center enough so and in addition to that
casualty risks which have been quiescent you know we had a massive explosion in in the notion of of
of liability in the 1980s people got used to it and it plateaued we had Decades of tort reform um
we we do have another broad expansion in Notions of liability um those I think that the dialogue
between boards and Enterprise Risk Managers and and and the risk manager themselves all
of which are typically part of the staff of the finance team you know it it's it's a very process
oriented dialogue it should be there should be more spitballing because the risk surface is
moving so Mike I like this notion of spitballing and and thinking around the corner um there the
uh known unknowns and the unknown unknowns and if I could ask you to maybe because you're you
are always trying to think ahead in terms of the risks and and the development of insurance
products and and Insurance Partners um what risks are you thinking about right now that you believe
the market is going the insurance Market is going to have to address you've referenced de
fakes you've referenced um you know the potential of intercepting Swift wire transactions uh the
possibility that the whole you know k&r kidnapping Ransom which has been a long established Market
that that could be uh disrupted through de fake and artificial intelligence technology
um but you know if you were going to look out I won't even say the Horizon but you know just
look out maybe you 12 12 to 18 months now what would you be thinking about in terms
of the issues that um companies not only H have to deal with but the insurance Market hopefully
will be in a position to address well let me give you two on the 12 to 18 month Horizon and
one on the 12 to 18 year Horizon on the 12 to 18 month Horizon um cyber um the insurance industry
is working hard to keep up with demand in cyber um that is is is going to require the insurance
industry to you know invest in modeling to um attract third-party Capital capacity to help
it manage keep key Peak risks excuse me um so that is one for 12 to 18 months a second is casualty or
liability risk as I said this has been a fairly settled pot within the insurance industry for a
while but we are seeing an upsurge in large litigation Awards an upsurge in Mass torts
those are undoubtedly related to the growth of alternative litigation Finance um I suspect that
the industry um is a little bit behind and will be needing to seek price increases and companies
need to think about their liability risks but let me talk about the 12 to 18year Horizon in
the largest line of business in the world and and and this is a great sort of case study in
how the risk surface is changing auto insurance auto auto insurance and in fact Autos themselves
and the way that people use them are right now not a a lot different than they were than when
my grandfather bought a car and bought auto insurance in the 1950s the vast vast majority
of cars are internal combustion engine cars that are driven by owners or lessors um and that are
not shared and that are insured with Indemnity Auto products generally purchased through an agent
some sometimes purchased directly and that was true 25 years ago and that was true 50 years ago
there's almost no chance that that will be true in 12 to 18 years so first of all let's take the cars
we are starting to see a pretty important shift from internal combustion engine to electronic cars
that is pretty consequential electronic cars have 80% fewer moving parts they have different sorts
of damage and different sorts of insurance needs furthermore um we are seeing a shift from people
driving their own cars to using shared fleets and that's likely to continue especially in densely
populated areas in addition we're seeing a shift toward autonomy um and there's a lot of there's a
lot of controversy over how fast autonomy will come on I suspect autonomy is going to come a
lot faster than people think because I do suspect that autonomy is going to interact with artificial
intelligence computers are already starting to program themselves the speed at which they will
be able to digest data and adjust digest and adjust will dwarf what we've ever seen in the
past and that should speed autonomy so right now when you look at Consultants they're they're sort
of headline point for where level four autonomy becomes pervasive as typically you know late 2030s
I would not be surprised to see very pervasive level for autonomy in you know in the very late
2020s um we just had a a large expansion of the zone in California where autonomous cars are
allowed to drive and and do passenger pickup and in fact weo just published data showing that the
accident rates and mortality rates are very very very sharply lower um for autonomous cars than
they are for driver cars and so where does this take us if we're seeing large scale autonomy in
the 2030s and we're seeing large scale autonomies with electric cars those cars can go those cars
can operate 16 hours a day those cars can go three times as long as as internal combustion
engine cars they they will know where to go to charge themselves they will be able to operate
through shared fleets at expense levels that will cause many many drivers to wonder about
the hunk of metal in their driveway and what it costs them I suspect that the personal transport
system as we move through the 2030s will have a very extensive amount of autonomous fing around
in shared vehicles and and certainly we'll see a die out of internal combustion engine cars what
does this mean for the insurance industry well 42% of all insurance premiums in North America are car
insurance premiums when you have autonomous cars that don't have accidents and electric cars with
fewer Parts um those cars are going to need much less attritional insurance although you could have
a lot of auto insurance become cyber because what you're susceptible to are hacks that are causing
the autonomous auto system to work poorly that is an interesting landscape for auto insurers um
you know as well as all sorts of companies to look down um as I said I I think that my auto
experience and auto insurance experience today has more to do with 1955 than it does with 2035
it's a great perspective Mike uh in the couple minutes we have left um I wanted to raise um
something that quite frankly has been M on my and other people's minds and it goes to the heart of
what you've already referenced uh something that doesn't necessarily hit the tangible assets of a
company or a government agency or a national government for that matter and that is the
ability to to spread disinformation and create information that looks like it is truthful and
accurate when it is not and very quickly uh damage I'll call it institutional trust and
reputations and uh as you know the whole debate I guess continues about what constitutes uh the
truth uh increasingly there are efforts to um distort facts create news that doesn't
exist and things that can be very significantly damaging to a company's brand but I'll also say
a country's brand how are you thinking about that issue and how are you thinking about the
insurability of such a uh of such an issue well I mean we're already there we're already there and
I already referenced that indirectly through the issue of political violence you know we
have increasing polarization in essentially every developed country in the world and part of it is
that the internet seems to have maybe I shouldn't just pick the internet as a cause but it seems to
be approximate cause seems to have facilitated a world world where where virtually everyone
can live in their own information environment highly customized which over time becomes a
truth environment so we are already in a place where there are different people living right
next to each other who have completely different narratives about what facts are unfolding before
them artificial intelligence is likely to make this far more grave because you know this is being
accomplished now just you know by conveying news in certain ways once once you can once you can
provide evidence in the form of deep fake voice deep fake video deep fake pictures that back all
sorts of alternative facts it's going to be very hard for people to separate truth from fiction
anybody that wants to disrupt a narrative will be able to flood his own with with a different
version of the truth they can now flood his own with you know with with different narratives
but they'll be able to flood a Zone with with completely madeup evidence and you know the
insurance system you know just to take this at a higher level David the insurance system grew
up in in in this in this sunny world world of the Enlightenment where we settled into where
we settled into an epistemological Paradigm of of fact and fiction true or false um our entire
legal system relies on Notions of evidence you know most of us grew up in a world where everyone
accepted that that there was that if you all set your compasses properly you could all find True
North in terms of what was true and what was false that is going to slip away it's going
to be harder to make cases if you have someone who has been presented with deep fake evidence
that has caused them to commit some Mal act who exactly is to blame for that and how is a jury
supposed to pick through evidence and and and and really address that we have a we've already
seen a degradation of of of consensus Notions of reality and that's likely to become quite grave
it's likely to read lead to increased political un un stress it's likely to undermine our legal
system and it's it's hard to those are those are all areas that we have to think more about how
companies operate in that world is going to be tough reputational risk how how is an insurance
company going to guarantee reputational risk against a deep fake certainly you know they
can look at a company's defect rates and and provide insurance and price it but deep Frakes
it's hard to analyze and price Mike it's been a u truly great conversation enlightening and
uh very thought-provoking and maybe I'll uh extend it with uh request to continue
the conversation uh post the conference and as we have even more feedback from the boards and
sea Su of the NASDAQ member um firms um and I look forward to continuing the conversation
and and by the way I'd be remiss if I didn't say thanks for the leadership that you show
within the um insurance industry because it's very much been um in the public service the way
you educate people and obviously educate uh insurers about the risks that are out there
and uh how to approach them so thanks again Mike thank you dve this is the RANE insights
podcast which is part of the RANE insights series comprised of both virtual and real world events
offering unique practical perspectives from RANE's leading experts in Risk Management to
learn more please visit us at ranenetwork.com that's ranenetwork.com thanks for [Music]
listening
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