A new model army must combat connected risk

Russell Group’s Suki Basi examines how tackling connected risks requires connected solutions.

Data science technology is shaping economic forecasting, pricing and risk scenario modelling, and is now considered to be an integral part of any (re)insurer’s or organisation’s decision-making process. However, the output generated from this technology is applied to high-level topics such as trade and investment or specific risk silos like cyber or credit. This current approach can result in a disjointed view of a portfolio or businesses, hindering rather than aiding their decision-making, as the decision-maker will not have a holistic understanding of all the potential risks to their organisation.

Scenario factory

In today’s environment, where events involve more connected risk, it is vital that an organisation can identify and mitigate any potential exposures to their business. At Russell Group, we believe that tackling connected risk requires a connected solution. The Russell Scenario Factory helps an organisation to quantify threats and scenarios from an economic loss perspective, whilst Russell ALPS quantifies the insurance and reinsurance exposure from such threats and scenarios.

A major difference between Russell’s approach and current models out there is that our solution is forward-looking. It seeks to analyse and understand an economic loss or connected loss for an insurer or reinsurer before the event, not after. The benefit of this approach will mean that an organisation can pre-empt any potential hits to their business, helping them to become resilient in the long term.

Proactive risk management

(Re)insurance clients and members of our corporate working group, which now numbers 30 risk managers, are telling us that trade disruption, geopolitical tensions, sanctions, higher commodity prices, rising costs, war, climate change and skill shortages are their main threats.

The lessons we have learnt are that the natural order of business has been disrupted and economic exposure has been driven up by higher costs, claims inflation and cost of capital. Business is now prone to more complex scenarios. The resilience and sustainability drive requires companies to adopt a more proactive risk management strategy.

Developing plausible scenarios

Contingent business interruption, cyber and geopolitical events are just a few of the threats of concern to underwriters and exposure managers. Russell has responded to this concern with a new initiative that brings together all the company’s in-work data processing and development scenarios, into what we call the Russell Scenario Factory. This now forms the basis of a new connected risk project with a Lloyd’s managing agent client to quantify intangible risks within plausible scenarios such as a China-Taiwan conflict.

Suki Basi is managing director of Russell Group