Is ‘wargaming’ the answer to managing global insurance exposures more effectively?

Matt Carter, Practice Director of the Specialty Markets team at financial services software solutions company Altus explains the insurance industry could take a leaf from the military when it comes to understanding the ever more complex risk environment.

The London Market is used to handling large scale insurance events and historically has responded well to them largely, and despite many opposing views, insurers are geared up to and expect to pay claims and manage their exposures accordingly as a result.  As good business practice and regulatory requirement dictates, capital adequacy is highly controlled against this backdrop, ensuring that they are required to model potential catastrophic losses, such as two planes colliding or a hurricane hitting Florida.

However, with an ever complex world, are these generic modelled events representative of the current climate, or even simply outdated? Talk to some reinsurers and they say the “1-in-100” event now occurs broadly every 5 years, not with a single occurrence but the accumulation of many mini catastrophes. Given the recent events in Ukraine, the potential exposures to the Aviation industry and the deck of cards that appears to be the global supply chain, it is time to start wargaming more relevant worst case scenarios to better demonstrate how the industry can respond as a proactive force, as well as demonstrating that they have the capital adequacy and operational rigour to support their customers when the most significant of events occurs.

Wargaming (used originally by the army but has since slowly moved across to business) supports making better and more informed decisions in the face of real life events, role playing them in a safe environment to understand the ways to respond and react and any likely consequences as a result.  It is not that the Insurance market can’t respond to previously unexpected global events – it is just that is unlikely to have a set of operating models and resource plans to enact, should they happen.  As a result, where events happen that do not align with the models, the industry remains largely reactive – in the game of risk management, these potential exposures should not be a surprise in 2022, but one still hopes they remain rare.

Technology is often seen as the answer for many problems, but these large and complex exposures are best solved in an augmented manner where technology and human experience work together. Simulating models varying different factors provides the data, but humans with experience and an understanding of how connected parts of a chain exist (and therefore where fragility might be at its weakest) are needed to create the response plans.

Consider state-sponsored cybercrime, a war anywhere, a Suez canal blockage or a pandemic. All these events have occurred or are current, and all highlighted the fragility of parts of the global economy and how inter-connected it is, so a big pebble falling in Latin America can still have ripples felt in Europe.

Technology definitely has its place, in that some of the events more geopolitical in nature can be predicted. The escalating situation in Ukraine was openly spoken of as an invasion in waiting – AI and social media monitoring evaluating both ‘noise’ and sentiment could predict social uprising and provide the trigger for the Global insurance market to prepare to respond accordingly.

In the face of both war and war-like events, insurers should turn to wargaming to provide the much needed guiderails and capital adequacy, to ensure they respond appropriately and in a manner that supports their customers in their hours, days and weeks of need.

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