RANE Podcast: The Future of Cyber Insurance

Summary

In 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

00:00

🎙️ 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.

05:01

🌐 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.

10:09

🛡️ 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.

15:12

🌪️ 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.

20:19

🤖 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.

25:23

🌐 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.

Keywords

💡Geopolitics

Geopolitics refers to the study of how geographic factors influence international politics and economic policies. In the context of the video, it is central to the mission of RANE Network, which aims to provide geopolitical intelligence and analysis to help organizations understand and navigate global political risks.

💡Cyber Insurance

Cyber Insurance is a type of insurance that covers risks related to data breaches, cyber-attacks, and other cyber-related incidents. It is crucial in today's digital age, where businesses are increasingly reliant on technology and face heightened threats of cybercrime.

💡Business Interruption

Business Interruption insurance provides coverage for lost income due to a disruption in business operations, often caused by unforeseen events like natural disasters or cyber-attacks. The coverage is typically tied to physical damage, which has been a challenge during events like the COVID-19 pandemic where physical assets were not damaged but operations were disrupted.

💡Structured Products

Structured products are financial instruments that combine various forms of securities, such as stocks, bonds, and derivatives, to create a customized investment with a specific risk-return profile. These products are often used to manage risk or to achieve specific investment objectives.

💡Reinsurance

Reinsurance is a form of insurance for insurers, where they transfer portions of their risk portfolios to other insurance companies to reduce the potential financial impact of large claims. It is a critical component of the insurance industry's risk management strategy.

💡Intellectual Property

Intellectual Property (IP) refers to creations of the mind, such as inventions, literary and artistic works, designs, and symbols used in commerce. IP is a critical asset for many businesses, especially in the knowledge-based economy, and requires protection from infringement and theft.

💡Risk Management

Risk management is the process of identifying, assessing, and prioritizing risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events. It is a crucial function in businesses to protect against potential losses and ensure continuity.

💡Climate Change

Climate change refers to significant, long-term changes in the patterns of temperature, precipitation, and other atmospheric conditions on Earth. It is largely attributed to human activities, such as the emission of greenhouse gases, and has implications for various aspects of life, including business operations and insurance needs.

💡Artificial Intelligence

Artificial Intelligence (AI) refers to the development of computer systems that can perform tasks typically requiring human intelligence, such as visual perception, speech recognition, decision-making, and language translation. AI is transforming various industries and poses both opportunities and risks.

💡Deep Fakes

Deep fakes are synthetic media in which a person's likeness—face, voice, and speech patterns—is replaced with someone else's using artificial intelligence. These manipulated videos or audio recordings can be used to spread disinformation, posing significant challenges to trust and truth in digital communications.

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]

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