The Downside Of Enterprise Risk Management

Insurers never consider risk management unimportant, but its position on their list of critical priorities varies over time. We're now in a period where the ability to forecast, identify and manage all kinds of risks on an enterprise-wide basis is a No. 1 concern -- for insurance companies as well as for regulators, politicians and the public.

It's not only because of the high-profile devastation wrought by Superstorm Sandy, which is going to end up being one of the most expensive U.S. catastrophes on record. Sandy also provides more evidence that climate change is contributing to increasingly extreme weather worldwide. Add to that trends such as the growing potential for cyber attacks on critical infrastructure and institutions, and epidemic-level increases in chronic diseases such as diabetes, and it's no wonder that insurers in all lines of business are bringing a heightened sense of urgency to achieving true enterprise risk management, the focus of this issue of Insurance & Technology.

The ability to develop big-picture and forward-looking insights into all kinds of risk provides numerous benefits -- not only in terms of the financial advantages from being able to underwrite more accurately and minimize claims exposure, but also in terms of good things such as public safety, better building codes and national security. An array of sophisticated technology capabilities, such as analytics and modeling tools, geospatial assessment systems, cloud computing and open, modular architectures, is helping make these aspirations reality.

[10 Pillars Of An Effective Insurance ERM Framework]

But achieving true enterprise risk management with advanced predictive capabilities may create a new set of risks,I or at least unrealistic expectations. In October a court in L'Aquila, Italy, convicted six seismologists and one government official of failing to adequately warn citizens before a magnitude-6.3 earthquake struck the region in 2009, killing more than 300 people. The defendants were accused, according to the indictment, of providing "inexact, incomplete and contradictory information" about whether tremors felt in the area prior to the earthquake should have been considered grounds for an official warning of a pending earthquake.

These convictions are distressing and suggest some disturbing implications for insurance companies and other risk management professionals. As risk management-related technology becomes increasingly sophisticated, how does it change the responsibilities that insurers and governments have to educate and communicate with the public about natural and man-made threats? Does the existence of state-of-the-art forecasting tools create new levels of liability and potential culpability? Insurers are going to have to take these questions seriously, as they pertain to matters of life and death.

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio