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Can complex accumulation risks be controlled? Probably not completely, says Munich Re CRO Joachim Oechslin, but progress is being made
In recent years, many people have become forcibly aware of a process which, for a long time, had only attracted marginal attention: the rapidly growing interconnectedness and complexity of the economic, social and technological environment. The main drivers of this development are globalisation of production and trade, new communication technologies, and ever shorter innovation cycles. The increasing interdependencies present a range of challenges for the management of accumulation risks. It is becoming more difficult to predict the course of losses and it is often not possible to clearly identify the triggering events. Local events can lead to high losses as a result of domino effects and loss cascades. Areas that have long functioned very robustly can be badly disrupted with unexpected speed by a critical combination of factors.
Looking back, September 11 2001 was a watershed event for the re-evaluation of risks: the horrific terrorist attacks changed the world; many lost their lives. In addition, the attacks brought the new complexity home to the insurance world. Not only was the scale of loss surprising, the aftermath of the attacks also led to insured losses in almost all lines of business. And the distribution of the claims burden was also remarkable: of the approximately US$32bn in claims payments, around 33% were for business interruption losses (for example at airport duty-free shops affected by the grounding of aircraft). The attacks also caused turbulence on the stock markets, further impacting insurers' financial strength.
A second defining event for the perception of complex interdependencies was the subprime financial crisis. A combination of factors, each of which would have been critical in itself but not disastrous, interacted to result in the collapse of whole markets and a global recession. Not least the restructuring of the regulatory framework has been strongly influenced by this experience.
A current study by KPMG shows how seriously firms take the growing complexity.1 Some 94% of the senior executives involved in the survey mentioned the management of complexity as one of their company's key success factors. Compared with previous surveys, the importance assigned to this issue increased particularly in the financial sector. One of the...