Legacy tech won’t cut it, warns RMS

We’re at the beginning of the fourth Industrial Revolution and using legacy technology just won’t cut it, Victor Roldan, client director at RMS, told FIDES Today.

“We live in a different world than 15 years ago. Managing an evolving risk landscape demands innovation and future-proof tools,” he says, adding that analytics, big data, cloud storage and artificial intelligence are the agents of transformation for the insurance industry.

As the world moves towards what Roldan describes as the advent of “cyber-physical systems”, insurers need to develop understanding and align themselves on how these changes are impacting their customers, the market and their businesses.

“They have to develop their clear strategies to transform, experiment with new business models and effectively communicate value,” he adds, taking cyber risk as an example.

Roldan explains: “In the traditionally conservative, insurance company cultures of Latin America, it is easy simply to avoid any investment in this area. Leading companies are pursuing the developing of strategies in the cyber market.

“RMS’s cyber models are already helping clients launch new products, but under a risk tolerance based on expected frequency and severity of the risk, resulting on pricing cyber risk appropriately.”

A threat to humanity

The failure of climate change mitigation and adaption, extreme weather events and natural disasters are among the top five threats most likely to occur in the next 10 years, according to the World Economic Forum’s (WEF) 2019 global risk ranking.

“Our challenge is to understand the extent to which we have already deviated from the historical record and to manage and price for that appropriately,” says Roldan.

He adds that Latin America will remain highly exposed to natural catastrophe risk and that the “future of the market will benefit from continued development and understanding around country-specific risk”. This is why RMS scientists continue to work on anticipating the future through analysis and research on extreme weather and climate.

“If you include losses in Puerto Rico after Hurricane Maria, within the Latin American catastrophe losses in 2017, insured losses from disaster events were $47 billion, the second highest of all regions in the world,” says Roldan.

He adds that the disasters were a true wake-up call for the industry and that RMS learned a number of lessons, including that working with locals increases understanding of damage, that media hype can exaggerate the extent of severe damage, and that industry loss estimates must be determined very carefully, with understanding of the impact RMS’s loss estimates have on the market and its clients.

Adding to the risk equation in Latin America is the fact that it is the most urbanised region in the world. Between 1905 and 2010, the percentage of people living in cities grew from 30 percent to more than 80 percent, he says. According to Roldan, nine out of 10 Latin Americans will live in cities with populations of one million or more in the near future.

“Working from the hazard to risk equation, that means the concentrations of exposure are rapidly increasing, whether in giant industrial estates, vast ports or in proliferating cities, especially ones on the tectonic and hurricane front lines, such as Lima, Mexico City, or Acapulco.”

Armed with better technologies, the insurance industry will be able to extend insurance protection to this underserved market.

In comparison to other parts of the world, most countries in Latin America are far from reaching their potential coverage given their income levels, explains Roldan.

“The protection gap in Latin America is already large, and it continues to grow. Despite the increased demand for property cover, there isn’t enough to keep pace with the economic growth.”

This is particularly true in emerging economies in the region, with a growing middle-class population who own property but have no access to insurance.

“It is essential to close this property protection gap that leaves many household and business in Latin America vulnerable to potential losses, and at risk of stepping back into poverty,” he concludes.