Tag Archives: Brink – The Edge of Risk

Getting Practical With Emerging Risks

Yesterday’s BRINK article on the outlook for global risks depicted a fractured and fractious world, characterized by the confluence of far-reaching technological disruptions and seismic shifts in political and geopolitical imperatives. The extraordinary velocity of change that is spurring many companies to question not just their basic resilience, but also their fitness for purpose in the new world order is also influencing expectations of risk management.

If robust finances were the major corporate concern during and after the financial crisis, the key issue these days is market positioning. If back then the risk management buzzwords were prudence and controls, now they are business case support and responsive agility. Staying out of—or exiting—certain markets for fear of an unwelcome shift in the political climate might prove expensive, not least if competitors are more bullish. Likewise, the pressure for adopting new technologies is intense, even where near-term performance benefits are uncertain and longer-term ecosystem effects unclear.

As our new report contends, risk leaders should devote more resources to grappling with emerging threats. While this doesn’t mean tasking teams with predicting the future, it does call for a stronger role in challenging prevailing assumptions and giving shape to key uncertainties in a way that illuminates the impact of plausible scenarios and informs senior management decisions. It involves recognizing not just that new risks are appearing on the horizon, but that operational risks may become strategic risks, known risks may become unknown, controllable risks may become uncontrollable, and risks assumed to be acceptable may acquire “fat tails.”

From Identification to Action

Three things are essential if work on emerging risks is to remain true to the messiness of these issues and also be truly integrated into corporate decision processes. These are: creatively exploring the sources of risk; embedding a thorough risk characterization in impact analyses; and being able to justify potential responses.

The search for emerging threats requires looking beyond the issues that can immediately and easily be anchored to business performance. Unpack hot risk topics and trends to see how different—often non-market—forces might surge or collide in problematic ways. Tease out pockets of volatility or uncertainty in the firm’s commercial ecosystem. Apply a fresh lens to the firm’s strategic and institutional vulnerabilities.

It’s often unwise to dismiss possible risk topics too early—they may combine with other ideas and be useful later. And don’t worry at the outset whether something is a risk, a driver or a consequence—that can be resolved in due course. A preparedness to challenge “house truths” is vital, as is not constraining discussions by views on probability (“the chances of that happening are tiny”).

A thorough characterization of the top emerging risks involves assessing what’s shaping each risk, their likely trajectory and its potential consequences, with a view to determining where it might touch the firm, the types of impact and the time profile of the damage. This helps clarify the materiality of each risk, and provides an initial steer for response planning.  

Quantified scenarios that give shape to plausible alternative futures are useful for exposing hidden tensions between commercial ambitions and corporate risk appetite. They can be used not just for stress-testing finances, but also for challenging strategic goals and rehearsing crisis management preparedness. Although scenario narratives and quantification exercises for emerging risks shouldn’t be constrained by historic data and risk relationships, acceptance of the results will depend on the degree to which key stakeholders have appreciated the validity of the inputs.

John Drzik on the Global Risks Report

Management levers that address a range of top-tier emerging risk concerns may present a more compelling business case than multiple action plans targeting individual issues. However, overly generic recommendations will encounter pushback from company leaders as they will be unable to articulate what they will deliver and the (opportunity) cost of doing so. The threshold for mandating action is that much higher than for familiar risks, given the high levels of uncertainty, especially with regard to preemptive responses.

Investment decisions regarding solutions for emerging risks should also take into account residual risk exposures (“are they acceptable?”), any significant knock-on consequences, the lead-in time required to implement the measures, and the speed with which precautionary measures can be unwound should they no longer be needed. Sometimes, aggressive market plays and investment in research and development are more appropriate than defensive mitigation measures. Contingency planning may strengthen resilience against fast-onset risks, where precautionary action has been deemed unviable.

The search for emerging threats requires looking beyond the issues that can immediately and easily be anchored to business performance.

A New Boldness for Risk Teams

With new risks swinging into view, senior-level demands changing, and new technological capabilities emerging, this is an exciting time for risk leaders to reframe their function for the new era.

Taking advantage of the new opportunities requires a shift of emphasis in three areas:

  1. Better alignment with business priorities: Risk teams need to demonstrate strong business or commercial acumen and engage more intensely with the company’s strategic ambitions and major investments. This will sharpen their ability to develop valuable insights into emerging concerns and help scope innovative risk mitigation solutions.
  2. More flexible deployment of resources: Revised analytical methodologies, including the introduction of new data science and automation techniques, should free up capacity in risk teams for more project-based (as opposed to routine) risk work and the provision of advice to business and functional leaders.
  3. Greater dynamism in stakeholder engagement: A more creative lens with regard to emerging risks will enable risk teams to engage with institutional and individual biases and blind spots and help build an appreciation of threats for which evidence may be limited or conflicting.

To take this forward, some risk leaders may need to expand their comfort zone. But those who can mesh strategic vision, influencing skills, and technological fluency on top of their core risk-management expertise will be best positioned to help their firms negotiate dynamic risk environments laden with potential shocks and disruption.

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Reconciling Opportunity and Resilience in Changing Times

The world’s major countries have been enjoying solid economic growth over the past few months, and this recovery clearly creates opportunity for expansion and innovation. However, the operating risk for companies in today’s global environment should not be underestimated. Building resilience against a wide and expanding array of potential shocks is required for sustainable success.

In 2017 we experienced instability stemming from a range of sources: intensifying societal polarization; assertive nationalism and a weakening commitment to multilateralism; numerous geopolitical flashpoints; and far-reaching cyberattacks, both state-sponsored and financially motivated. There are few signs that these challenges will reverse this year.

Global Risks of Highest Concern

The Global Risks Report, prepared by the World Economic Forum with the support of Marsh & McLennan Companies and other partners, evaluates the major threats facing the world over the next decade. It draws on survey data provided by nearly 1,000 members of the risk community, spanning business, government, academia and nongovernmental organizations.

The survey revealed deep pessimism about the direction of international relations. Ninety-three percent of survey respondents expect that political and economic confrontations between major powers will increase in 2018. There were high levels of concern about an increase in state-on-state conflicts that may draw in other countries. Western respondents also highlighted growing concern about economic protectionism.

Technological risks are seen as a rising global threat. Business leaders in advanced economies consider large cyberattacks to be the No. 1 risk for doing business in their respective countries, and respondents in most parts of the world anticipate these attacks will get worse in 2018. Societal risk emanating from the increase in media echo chambers and fake news is also expected to grow.

On a longer-term horizon, environmental risks ranked highest in both likelihood and impact. Extreme weather and failure to adapt to climate change showed the greatest leap in concern since last year’s report, perhaps reflecting the hurricanes, earthquakes and wildfires suffered during September when the survey was open. However, even before the devastating events of 2017, apprehension in this area was strongly reflected in this survey.

Greater Scope for Geopolitical Conflict

Recent European elections revealed continuing dissatisfaction with mainstream parties, with far-right, nationalist and populist parties gaining ground in Germany, Austria and Spain. Italy, Hungary and Sweden go to the polls next year. Moreover, disagreements between countries over Brexit, immigration and further integration issues are becoming more acute at a time when greater coordination in response to potential crises is needed.

Regional players and smaller states—especially those across Asia and the Middle East—are struggling to seize opportunities and avoid being sidelined or crushed. Among major powers, an increased preparedness for confrontation has disturbed traditional alliances, facilitated proxy conflicts and created worrisome levels of brinkmanship. Given this geopolitical climate, serious conflicts could arise from accidents or missteps.

With national sovereignty paramount, commitment to international institutions and multilateral agreements is fragile. Trade agreements are unraveling, and the functionality of the World Trade Organization has been undermined; the Paris Agreement now lacks the U.S. as a signatory; and various nuclear nonproliferation agreements, including that with Iran, are under threat. The deployment of so-called “sharp power,” focused on pressuring and manipulating opinion to gain influence, is on the rise.

Escalating Cyber Challenges

Cyber breaches recorded by businesses are escalating, having nearly doubled since 2012. Attackers have become more sophisticated and persistent, and there have been more incidents with systemic ripple effects. The takedown of a single cloud provider could cause as much economic loss as Hurricane Katrina, and the aggregated cost of cybercrime to business is projected to be $8 trillion over the next five years.

Two trends make cyber an even more challenging risk. First, cyber exposure is growing sharply as companies become more dependent on technology. For example, the explosive growth in interconnected devices, from 8.6 billion today to an estimated 20 billion by 2020, and the increasing use of artificial intelligence expand the attack surface significantly. Second, state-sponsored attacks are likely to escalate given the changes in the geopolitical climate. Cyber-risk management may be improving, but firms will have to invest significantly more to counter the growing threat of well-resourced attackers with objectives that range from simple theft and disruption to economic espionage, reputational damage and the crippling of key infrastructure and services.

Environmental Degradation

2017 included the most extreme month on record for the intensity and duration of Atlantic storms and the most expensive hurricane season ever. Economic losses from Harvey and Irma were an estimated $175 billion. The challenges posed by Hurricane Maria’s damage to Puerto Rico proved extremely demanding, with huge swaths of the island’s infrastructure out for months. Wildfires in California, Chile and Portugal also caused significant loss of life and economic damage.

Extreme weather is by no means the only environmental challenge to many centers of population and commerce. According to the World Health Organization, indoor and outdoor air pollution are together responsible for more than one tenth of all deaths globally each year. Large emerging market cities such as New Delhi endured particularly difficult spells, but pollution spikes in places such as London and Paris have also resulted in significant health impacts.

The new Global Risk Report reveals deep pessimism about the direction of international relations. Ninety-three percent of survey respondents expect confrontations to increase.

With the climate continuing to change—2017 was the hottest non-El Niño year on record—weather patterns will become ever less predictable, with impacts on biodiversity and food security. A simultaneous failure of corn (maize) production in the world’s two main growers, China and the United States, has recently been assessed as a one-in-twenty chance per decade. Progress in both regulation and disclosure requirements is needed to reduce the probability of the worst-case climate scenarios. Businesses should take proactive measures in anticipation of the structural changes in the economy that will likely come from tightening policy requirements.

No Room for Economic Complacency

Positive growth in recent months shouldn’t blind us to potential economic fragilities. The debt-to-equity ratio of the median S&P 1500 company (excluding financials) has almost doubled since 2010 and is now well above pre-financial crisis levels. Asset prices in some sectors are at historically high levels. Global debt has risen to a record $233 trillion, and at 318 percent, the global debt/GDP ratio remains near its all-time high.

Persistent low commodity prices continue to rattle exporter countries and their neighbors, with political and societal implications. Structural issues such as income inequality, rising health care costs and diminishing long-term retirement security also show little sign of being resolved.

Against this backdrop, how will investor and corporate confidence fare in the event of a major geopolitical altercation, an aggravated trade standoff or a technological catastrophe—none of which is implausible?

A Business Lens

Corporate lifespans are dramatically shortening. The average S&P 500 company had a lifespan of 61 years in 1958, versus 12 years today. Given the rapid changes in the global environment, the pressure to define a strategy with both ambition and resilience against major shocks has never been higher.

CEOs and their leadership teams need to reconcile growth and innovation opportunities with risk and security considerations and rigorously assess the value of potential initiatives in a wide range of scenarios. A dual focus on prevention and response—given the increased velocity of new and unpredictable risks—is needed.

The Global Risks 2018 report provides rich commentary on complex challenges and potential surprises, but also significant context for charting an aggressive growth strategy.

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Catastrophic Events Drive Innovation in the Reinsurance Market

Recent major weather events in Australia, Mexico, the Caribbean and the United States, including three hurricanes that were Category 4 or greater, have resulted in catastrophe losses exceeding $100 billion for the third year on record.

But the large insured loss, currently estimated at a record $111 billion before accounting for National Flood Insurance Program losses and the California wildfires, has created a perfect opportunity for the reinsurance market to showcase its ability to adapt solutions to the unique risk profiles of individual clients.

The value of reinsurance as a capital substitute was apparent during the 2008 financial crisis, when debt and equity financing was difficult to obtain. In its place, the reinsurance market demonstrated its ability to protect balance sheets, manage earnings and reduce volatility. Now, the series of catastrophic events in 2017—earthquakes in Mexico and Hurricanes Harvey, Irma and Maria—is reminding corporations, primary insurers and reinsurers that (re)insurance is one of the most effective ways to protect corporate capital bases from these events.

The third quarter of 2017 is likely to be one of the costliest in the insurance industry’s history. While it is still early and loss estimates will likely fluctuate, total catastrophe losses of just $75 billion would mean a combined ratio of 106 percent for the world’s top 20 reinsurers, according to A.M. Best. Although there appears to be little risk to solvency, earnings of individual insurers will be impacted, and in some cases, excess capital positions and catastrophe budgets may be eroded, which could result in ratings actions.

Record Capital Levels

Fortunately, the U.S. property and casualty industry is sitting on record capital levels and the global reinsurance market adds another $427 billion, so the sector is well-positioned to absorb such losses. But despite years of low reinsurance rates and low interest rates that have reduced the industry’s profitability since the last material rate increase after Hurricane Katrina, we do not expect a similar price revision this time around. Reinsurers have built up cash during the recent favorable years, while capital-market investors seeking non-correlated investments, such as hedge funds and pension funds, have put record amounts of money into catastrophe coverages.

Harvey on its own will probably not require an increase of industry capital; the addition of the cumulative effect of the earthquake in Mexico and Hurricanes Irma and Maria, however, could create a capital event. Yet with abundant capacity—and, of course, depending on the final numbers—the aggregate impact may be a one-time firming of rates within specified regions or coverages or a halting of decreases that recently began to moderate as reinsurers’ margins approached breakeven. We also expect casualty reinsurance rates to continue their recent trend of declining year-over-year rate reductions.

Rise of Insurance-Linked Securities

Insurance-linked securities (ILS), which provide approximately $82 billion of the reinsurance industry’s capital base, will likely continue to generate demand and augment traditional reinsurer capacity. Though the recent events may provide the first real test of alternative capital, investors have indicated they are prepared to recapitalize or increase their current positions, and in some cases they already have.

Earthquakes and hurricanes provide an opportunity to define the viability and effectiveness of catastrophe bonds, creating either a day of reckoning or a day of glory for the ILS market.

Thus far, we have seen these catastrophe bonds demonstrate their effectiveness and serve their intended purpose. Of course, the eagerness of investors to return to the market may be tempered by a possible capital lockup. Until all claims are settled, investors’ assets collateralizing the transaction cannot be released, which could cause them to offset any new ILS capacity offered against these withheld funds. The ability to trade certain classes of cat bonds in the secondary market enhances their liquidity if funds are withheld. Insurance company sponsors are monitoring payout patterns compared to the traditional market. Any payment disputes from ILS investors could provide reinsurers an opportunity to demonstrate their value-add to clients.

The series of catastrophic events in 2017 is reminding corporations, primary insurers and reinsurers that (re)insurance is one of the most effective ways to protect corporate capital bases from these events.

Assuming the ILS market responds to these catastrophes as defined, this capacity will likely remain an integral part of insurers’ capital structure, even when interest rates rise. Most ILS issuances define interest rates as a risk spread on top of return on U.S. Treasuries or to LIBOR, so the asset class will remain attractive as interest rates rise. ILS is now very much ingrained in the overall risk community, creating a pool of diverse capacity collectively serving and supporting the (re)insurance industry.

Technological Innovation

Overall, we expect the reinsurance marketplace to remain vibrant and continue offering a full range of products, supporting growth in reinsurance purchasing in virtually all its forms. Industry capital is at an all-time high, and clients are expanding covers, fully leveraging a broader array of solutions as the industry modernizes in the face of technological innovation. In addition to transactional products, reinsurers and ILS providers are developing more comprehensive, consultative value propositions, such as capital advisory and enterprise risk management services. These offerings withstand market cycles and macroeconomic factors and provide insurance companies with a dedicated, informed partner to support new product development and growth initiatives. This creates opportunity by leveraging advanced platforms and innovative customized solutions, such as coverage features applying to specific industries or risks unique to specific clients.

Advanced Modeling Techniques

As economic growth and demographic patterns impact risk concentrations, advanced modeling techniques will help ensure sufficient vertical and horizontal reinsurance coverage to support post-event liquidity and close the protection gap, especially around historically difficult risks such as floods. Only 27 percent of those affected by Hurricane Harvey had flood insurance, and sustained industry profitability will depend on increasing global insurance penetration. Complex emerging exposures such as cyber and terror are also increasingly finding solutions in the reinsurance market, and optimal structuring of coverage can also minimize regulatory capital. By tapping a variety of capital sources, structures and modeling capabilities, insurers are matching more efficient, customized solutions to their unique risk profiles, whether they are focused on protecting earnings against attritional losses or shielding their capital base from catastrophe losses.

As the industry enters the 2018 renewal, the market remains strong with a variety of solutions to deliver the right capital to risks. Following the recent catastrophes, reinsurers are adjusting business plans for opportunities in marine, energy, flood and specialty lines of business. In today’s world of unprecedented disruption, the (re)insurance solution for managing capital and earnings is as relevant as its solution for severity protection.

from Brink – The Edge of Risk http://ift.tt/2EKAzeI
via IFTTT

Catastrophic Events Drive Innovation in the Reinsurance Market

Recent major weather events in Australia, Mexico, the Caribbean and the United States, including three hurricanes that were Category 4 or greater, have resulted in catastrophe losses exceeding $100 billion for the third year on record.

But the large insured loss, currently estimated at a record $111 billion before accounting for National Flood Insurance Program losses and the California wildfires, has created a perfect opportunity for the reinsurance market to showcase its ability to adapt solutions to the unique risk profiles of individual clients.

The value of reinsurance as a capital substitute was apparent during the 2008 financial crisis, when debt and equity financing was difficult to obtain. In its place, the reinsurance market demonstrated its ability to protect balance sheets, manage earnings and reduce volatility. Now, the series of catastrophic events in 2017—earthquakes in Mexico and Hurricanes Harvey, Irma and Maria—is reminding corporations, primary insurers and reinsurers that (re)insurance is one of the most effective ways to protect corporate capital bases from these events.

The third quarter of 2017 is likely to be one of the costliest in the insurance industry’s history. While it is still early and loss estimates will likely fluctuate, total catastrophe losses of just $75 billion would mean a combined ratio of 106 percent for the world’s top 20 reinsurers, according to A.M. Best. Although there appears to be little risk to solvency, earnings of individual insurers will be impacted, and in some cases, excess capital positions and catastrophe budgets may be eroded, which could result in ratings actions.

Record Capital Levels

Fortunately, the U.S. property and casualty industry is sitting on record capital levels and the global reinsurance market adds another $427 billion, so the sector is well-positioned to absorb such losses. But despite years of low reinsurance rates and low interest rates that have reduced the industry’s profitability since the last material rate increase after Hurricane Katrina, we do not expect a similar price revision this time around. Reinsurers have built up cash during the recent favorable years, while capital-market investors seeking non-correlated investments, such as hedge funds and pension funds, have put record amounts of money into catastrophe coverages.

Harvey on its own will probably not require an increase of industry capital; the addition of the cumulative effect of the earthquake in Mexico and Hurricanes Irma and Maria, however, could create a capital event. Yet with abundant capacity—and, of course, depending on the final numbers—the aggregate impact may be a one-time firming of rates within specified regions or coverages or a halting of decreases that recently began to moderate as reinsurers’ margins approached breakeven. We also expect casualty reinsurance rates to continue their recent trend of declining year-over-year rate reductions.

Rise of Insurance-Linked Securities

Insurance-linked securities (ILS), which provide approximately $82 billion of the reinsurance industry’s capital base, will likely continue to generate demand and augment traditional reinsurer capacity. Though the recent events may provide the first real test of alternative capital, investors have indicated they are prepared to recapitalize or increase their current positions, and in some cases they already have.

Earthquakes and hurricanes provide an opportunity to define the viability and effectiveness of catastrophe bonds, creating either a day of reckoning or a day of glory for the ILS market.

Thus far, we have seen these catastrophe bonds demonstrate their effectiveness and serve their intended purpose. Of course, the eagerness of investors to return to the market may be tempered by a possible capital lockup. Until all claims are settled, investors’ assets collateralizing the transaction cannot be released, which could cause them to offset any new ILS capacity offered against these withheld funds. The ability to trade certain classes of cat bonds in the secondary market enhances their liquidity if funds are withheld. Insurance company sponsors are monitoring payout patterns compared to the traditional market. Any payment disputes from ILS investors could provide reinsurers an opportunity to demonstrate their value-add to clients.

The series of catastrophic events in 2017 is reminding corporations, primary insurers and reinsurers that (re)insurance is one of the most effective ways to protect corporate capital bases from these events.

Assuming the ILS market responds to these catastrophes as defined, this capacity will likely remain an integral part of insurers’ capital structure, even when interest rates rise. Most ILS issuances define interest rates as a risk spread on top of return on U.S. Treasuries or to LIBOR, so the asset class will remain attractive as interest rates rise. ILS is now very much ingrained in the overall risk community, creating a pool of diverse capacity collectively serving and supporting the (re)insurance industry.

Technological Innovation

Overall, we expect the reinsurance marketplace to remain vibrant and continue offering a full range of products, supporting growth in reinsurance purchasing in virtually all its forms. Industry capital is at an all-time high, and clients are expanding covers, fully leveraging a broader array of solutions as the industry modernizes in the face of technological innovation. In addition to transactional products, reinsurers and ILS providers are developing more comprehensive, consultative value propositions, such as capital advisory and enterprise risk management services. These offerings withstand market cycles and macroeconomic factors and provide insurance companies with a dedicated, informed partner to support new product development and growth initiatives. This creates opportunity by leveraging advanced platforms and innovative customized solutions, such as coverage features applying to specific industries or risks unique to specific clients.

Advanced Modeling Techniques

As economic growth and demographic patterns impact risk concentrations, advanced modeling techniques will help ensure sufficient vertical and horizontal reinsurance coverage to support post-event liquidity and close the protection gap, especially around historically difficult risks such as floods. Only 27 percent of those affected by Hurricane Harvey had flood insurance, and sustained industry profitability will depend on increasing global insurance penetration. Complex emerging exposures such as cyber and terror are also increasingly finding solutions in the reinsurance market, and optimal structuring of coverage can also minimize regulatory capital. By tapping a variety of capital sources, structures and modeling capabilities, insurers are matching more efficient, customized solutions to their unique risk profiles, whether they are focused on protecting earnings against attritional losses or shielding their capital base from catastrophe losses.

As the industry enters the 2018 renewal, the market remains strong with a variety of solutions to deliver the right capital to risks. Following the recent catastrophes, reinsurers are adjusting business plans for opportunities in marine, energy, flood and specialty lines of business. In today’s world of unprecedented disruption, the (re)insurance solution for managing capital and earnings is as relevant as its solution for severity protection.

from Brink – The Edge of Risk http://ift.tt/2EKAzeI
via IFTTT

Catastrophic Events Drive Innovation in the Reinsurance Market

Recent major weather events in Australia, Mexico, the Caribbean and the United States, including three hurricanes that were Category 4 or greater, have resulted in catastrophe losses exceeding $100 billion for the third year on record.

But the large insured loss, currently estimated at a record $111 billion before accounting for National Flood Insurance Program losses and the California wildfires, has created a perfect opportunity for the reinsurance market to showcase its ability to adapt solutions to the unique risk profiles of individual clients.

The value of reinsurance as a capital substitute was apparent during the 2008 financial crisis, when debt and equity financing was difficult to obtain. In its place, the reinsurance market demonstrated its ability to protect balance sheets, manage earnings and reduce volatility. Now, the series of catastrophic events in 2017—earthquakes in Mexico and Hurricanes Harvey, Irma and Maria—is reminding corporations, primary insurers and reinsurers that (re)insurance is one of the most effective ways to protect corporate capital bases from these events.

The third quarter of 2017 is likely to be one of the costliest in the insurance industry’s history. While it is still early and loss estimates will likely fluctuate, total catastrophe losses of just $75 billion would mean a combined ratio of 106 percent for the world’s top 20 reinsurers, according to A.M. Best. Although there appears to be little risk to solvency, earnings of individual insurers will be impacted, and in some cases, excess capital positions and catastrophe budgets may be eroded, which could result in ratings actions.

Record Capital Levels

Fortunately, the U.S. property and casualty industry is sitting on record capital levels and the global reinsurance market adds another $427 billion, so the sector is well-positioned to absorb such losses. But despite years of low reinsurance rates and low interest rates that have reduced the industry’s profitability since the last material rate increase after Hurricane Katrina, we do not expect a similar price revision this time around. Reinsurers have built up cash during the recent favorable years, while capital-market investors seeking non-correlated investments, such as hedge funds and pension funds, have put record amounts of money into catastrophe coverages.

Harvey on its own will probably not require an increase of industry capital; the addition of the cumulative effect of the earthquake in Mexico and Hurricanes Irma and Maria, however, could create a capital event. Yet with abundant capacity—and, of course, depending on the final numbers—the aggregate impact may be a one-time firming of rates within specified regions or coverages or a halting of decreases that recently began to moderate as reinsurers’ margins approached breakeven. We also expect casualty reinsurance rates to continue their recent trend of declining year-over-year rate reductions.

Rise of Insurance-Linked Securities

Insurance-linked securities (ILS), which provide approximately $82 billion of the reinsurance industry’s capital base, will likely continue to generate demand and augment traditional reinsurer capacity. Though the recent events may provide the first real test of alternative capital, investors have indicated they are prepared to recapitalize or increase their current positions, and in some cases they already have.

Earthquakes and hurricanes provide an opportunity to define the viability and effectiveness of catastrophe bonds, creating either a day of reckoning or a day of glory for the ILS market.

Thus far, we have seen these catastrophe bonds demonstrate their effectiveness and serve their intended purpose. Of course, the eagerness of investors to return to the market may be tempered by a possible capital lockup. Until all claims are settled, investors’ assets collateralizing the transaction cannot be released, which could cause them to offset any new ILS capacity offered against these withheld funds. The ability to trade certain classes of cat bonds in the secondary market enhances their liquidity if funds are withheld. Insurance company sponsors are monitoring payout patterns compared to the traditional market. Any payment disputes from ILS investors could provide reinsurers an opportunity to demonstrate their value-add to clients.

The series of catastrophic events in 2017 is reminding corporations, primary insurers and reinsurers that (re)insurance is one of the most effective ways to protect corporate capital bases from these events.

Assuming the ILS market responds to these catastrophes as defined, this capacity will likely remain an integral part of insurers’ capital structure, even when interest rates rise. Most ILS issuances define interest rates as a risk spread on top of return on U.S. Treasuries or to LIBOR, so the asset class will remain attractive as interest rates rise. ILS is now very much ingrained in the overall risk community, creating a pool of diverse capacity collectively serving and supporting the (re)insurance industry.

Technological Innovation

Overall, we expect the reinsurance marketplace to remain vibrant and continue offering a full range of products, supporting growth in reinsurance purchasing in virtually all its forms. Industry capital is at an all-time high, and clients are expanding covers, fully leveraging a broader array of solutions as the industry modernizes in the face of technological innovation. In addition to transactional products, reinsurers and ILS providers are developing more comprehensive, consultative value propositions, such as capital advisory and enterprise risk management services. These offerings withstand market cycles and macroeconomic factors and provide insurance companies with a dedicated, informed partner to support new product development and growth initiatives. This creates opportunity by leveraging advanced platforms and innovative customized solutions, such as coverage features applying to specific industries or risks unique to specific clients.

Advanced Modeling Techniques

As economic growth and demographic patterns impact risk concentrations, advanced modeling techniques will help ensure sufficient vertical and horizontal reinsurance coverage to support post-event liquidity and close the protection gap, especially around historically difficult risks such as floods. Only 27 percent of those affected by Hurricane Harvey had flood insurance, and sustained industry profitability will depend on increasing global insurance penetration. Complex emerging exposures such as cyber and terror are also increasingly finding solutions in the reinsurance market, and optimal structuring of coverage can also minimize regulatory capital. By tapping a variety of capital sources, structures and modeling capabilities, insurers are matching more efficient, customized solutions to their unique risk profiles, whether they are focused on protecting earnings against attritional losses or shielding their capital base from catastrophe losses.

As the industry enters the 2018 renewal, the market remains strong with a variety of solutions to deliver the right capital to risks. Following the recent catastrophes, reinsurers are adjusting business plans for opportunities in marine, energy, flood and specialty lines of business. In today’s world of unprecedented disruption, the (re)insurance solution for managing capital and earnings is as relevant as its solution for severity protection.

from Brink – The Edge of Risk http://ift.tt/2EKAzeI
via IFTTT

Catastrophic Events Drive Innovation in the Reinsurance Market

Recent major weather events in Australia, Mexico, the Caribbean and the United States, including three hurricanes that were Category 4 or greater, have resulted in catastrophe losses exceeding $100 billion for the third year on record.

But the large insured loss, currently estimated at a record $111 billion before accounting for National Flood Insurance Program losses and the California wildfires, has created a perfect opportunity for the reinsurance market to showcase its ability to adapt solutions to the unique risk profiles of individual clients.

The value of reinsurance as a capital substitute was apparent during the 2008 financial crisis, when debt and equity financing was difficult to obtain. In its place, the reinsurance market demonstrated its ability to protect balance sheets, manage earnings and reduce volatility. Now, the series of catastrophic events in 2017—earthquakes in Mexico and Hurricanes Harvey, Irma and Maria—is reminding corporations, primary insurers and reinsurers that (re)insurance is one of the most effective ways to protect corporate capital bases from these events.

The third quarter of 2017 is likely to be one of the costliest in the insurance industry’s history. While it is still early and loss estimates will likely fluctuate, total catastrophe losses of just $75 billion would mean a combined ratio of 106 percent for the world’s top 20 reinsurers, according to A.M. Best. Although there appears to be little risk to solvency, earnings of individual insurers will be impacted, and in some cases, excess capital positions and catastrophe budgets may be eroded, which could result in ratings actions.

Record Capital Levels

Fortunately, the U.S. property and casualty industry is sitting on record capital levels and the global reinsurance market adds another $427 billion, so the sector is well-positioned to absorb such losses. But despite years of low reinsurance rates and low interest rates that have reduced the industry’s profitability since the last material rate increase after Hurricane Katrina, we do not expect a similar price revision this time around. Reinsurers have built up cash during the recent favorable years, while capital-market investors seeking non-correlated investments, such as hedge funds and pension funds, have put record amounts of money into catastrophe coverages.

Harvey on its own will probably not require an increase of industry capital; the addition of the cumulative effect of the earthquake in Mexico and Hurricanes Irma and Maria, however, could create a capital event. Yet with abundant capacity—and, of course, depending on the final numbers—the aggregate impact may be a one-time firming of rates within specified regions or coverages or a halting of decreases that recently began to moderate as reinsurers’ margins approached breakeven. We also expect casualty reinsurance rates to continue their recent trend of declining year-over-year rate reductions.

Rise of Insurance-Linked Securities

Insurance-linked securities (ILS), which provide approximately $82 billion of the reinsurance industry’s capital base, will likely continue to generate demand and augment traditional reinsurer capacity. Though the recent events may provide the first real test of alternative capital, investors have indicated they are prepared to recapitalize or increase their current positions, and in some cases they already have.

Earthquakes and hurricanes provide an opportunity to define the viability and effectiveness of catastrophe bonds, creating either a day of reckoning or a day of glory for the ILS market.

Thus far, we have seen these catastrophe bonds demonstrate their effectiveness and serve their intended purpose. Of course, the eagerness of investors to return to the market may be tempered by a possible capital lockup. Until all claims are settled, investors’ assets collateralizing the transaction cannot be released, which could cause them to offset any new ILS capacity offered against these withheld funds. The ability to trade certain classes of cat bonds in the secondary market enhances their liquidity if funds are withheld. Insurance company sponsors are monitoring payout patterns compared to the traditional market. Any payment disputes from ILS investors could provide reinsurers an opportunity to demonstrate their value-add to clients.

The series of catastrophic events in 2017 is reminding corporations, primary insurers and reinsurers that (re)insurance is one of the most effective ways to protect corporate capital bases from these events.

Assuming the ILS market responds to these catastrophes as defined, this capacity will likely remain an integral part of insurers’ capital structure, even when interest rates rise. Most ILS issuances define interest rates as a risk spread on top of return on U.S. Treasuries or to LIBOR, so the asset class will remain attractive as interest rates rise. ILS is now very much ingrained in the overall risk community, creating a pool of diverse capacity collectively serving and supporting the (re)insurance industry.

Technological Innovation

Overall, we expect the reinsurance marketplace to remain vibrant and continue offering a full range of products, supporting growth in reinsurance purchasing in virtually all its forms. Industry capital is at an all-time high, and clients are expanding covers, fully leveraging a broader array of solutions as the industry modernizes in the face of technological innovation. In addition to transactional products, reinsurers and ILS providers are developing more comprehensive, consultative value propositions, such as capital advisory and enterprise risk management services. These offerings withstand market cycles and macroeconomic factors and provide insurance companies with a dedicated, informed partner to support new product development and growth initiatives. This creates opportunity by leveraging advanced platforms and innovative customized solutions, such as coverage features applying to specific industries or risks unique to specific clients.

Advanced Modeling Techniques

As economic growth and demographic patterns impact risk concentrations, advanced modeling techniques will help ensure sufficient vertical and horizontal reinsurance coverage to support post-event liquidity and close the protection gap, especially around historically difficult risks such as floods. Only 27 percent of those affected by Hurricane Harvey had flood insurance, and sustained industry profitability will depend on increasing global insurance penetration. Complex emerging exposures such as cyber and terror are also increasingly finding solutions in the reinsurance market, and optimal structuring of coverage can also minimize regulatory capital. By tapping a variety of capital sources, structures and modeling capabilities, insurers are matching more efficient, customized solutions to their unique risk profiles, whether they are focused on protecting earnings against attritional losses or shielding their capital base from catastrophe losses.

As the industry enters the 2018 renewal, the market remains strong with a variety of solutions to deliver the right capital to risks. Following the recent catastrophes, reinsurers are adjusting business plans for opportunities in marine, energy, flood and specialty lines of business. In today’s world of unprecedented disruption, the (re)insurance solution for managing capital and earnings is as relevant as its solution for severity protection.

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Catastrophic Events Drive Innovation in the Reinsurance Market

Recent major weather events in Australia, Mexico, the Caribbean and the United States, including three hurricanes that were Category 4 or greater, have resulted in catastrophe losses exceeding $100 billion for the third year on record.

But the large insured loss, currently estimated at a record $111 billion before accounting for National Flood Insurance Program losses and the California wildfires, has created a perfect opportunity for the reinsurance market to showcase its ability to adapt solutions to the unique risk profiles of individual clients.

The value of reinsurance as a capital substitute was apparent during the 2008 financial crisis, when debt and equity financing was difficult to obtain. In its place, the reinsurance market demonstrated its ability to protect balance sheets, manage earnings and reduce volatility. Now, the series of catastrophic events in 2017—earthquakes in Mexico and Hurricanes Harvey, Irma and Maria—is reminding corporations, primary insurers and reinsurers that (re)insurance is one of the most effective ways to protect corporate capital bases from these events.

The third quarter of 2017 is likely to be one of the costliest in the insurance industry’s history. While it is still early and loss estimates will likely fluctuate, total catastrophe losses of just $75 billion would mean a combined ratio of 106 percent for the world’s top 20 reinsurers, according to A.M. Best. Although there appears to be little risk to solvency, earnings of individual insurers will be impacted, and in some cases, excess capital positions and catastrophe budgets may be eroded, which could result in ratings actions.

Record Capital Levels

Fortunately, the U.S. property and casualty industry is sitting on record capital levels and the global reinsurance market adds another $427 billion, so the sector is well-positioned to absorb such losses. But despite years of low reinsurance rates and low interest rates that have reduced the industry’s profitability since the last material rate increase after Hurricane Katrina, we do not expect a similar price revision this time around. Reinsurers have built up cash during the recent favorable years, while capital-market investors seeking non-correlated investments, such as hedge funds and pension funds, have put record amounts of money into catastrophe coverages.

Harvey on its own will probably not require an increase of industry capital; the addition of the cumulative effect of the earthquake in Mexico and Hurricanes Irma and Maria, however, could create a capital event. Yet with abundant capacity—and, of course, depending on the final numbers—the aggregate impact may be a one-time firming of rates within specified regions or coverages or a halting of decreases that recently began to moderate as reinsurers’ margins approached breakeven. We also expect casualty reinsurance rates to continue their recent trend of declining year-over-year rate reductions.

Rise of Insurance-Linked Securities

Insurance-linked securities (ILS), which provide approximately $82 billion of the reinsurance industry’s capital base, will likely continue to generate demand and augment traditional reinsurer capacity. Though the recent events may provide the first real test of alternative capital, investors have indicated they are prepared to recapitalize or increase their current positions, and in some cases they already have.

Earthquakes and hurricanes provide an opportunity to define the viability and effectiveness of catastrophe bonds, creating either a day of reckoning or a day of glory for the ILS market.

Thus far, we have seen these catastrophe bonds demonstrate their effectiveness and serve their intended purpose. Of course, the eagerness of investors to return to the market may be tempered by a possible capital lockup. Until all claims are settled, investors’ assets collateralizing the transaction cannot be released, which could cause them to offset any new ILS capacity offered against these withheld funds. The ability to trade certain classes of cat bonds in the secondary market enhances their liquidity if funds are withheld. Insurance company sponsors are monitoring payout patterns compared to the traditional market. Any payment disputes from ILS investors could provide reinsurers an opportunity to demonstrate their value-add to clients.

The series of catastrophic events in 2017 is reminding corporations, primary insurers and reinsurers that (re)insurance is one of the most effective ways to protect corporate capital bases from these events.

Assuming the ILS market responds to these catastrophes as defined, this capacity will likely remain an integral part of insurers’ capital structure, even when interest rates rise. Most ILS issuances define interest rates as a risk spread on top of return on U.S. Treasuries or to LIBOR, so the asset class will remain attractive as interest rates rise. ILS is now very much ingrained in the overall risk community, creating a pool of diverse capacity collectively serving and supporting the (re)insurance industry.

Technological Innovation

Overall, we expect the reinsurance marketplace to remain vibrant and continue offering a full range of products, supporting growth in reinsurance purchasing in virtually all its forms. Industry capital is at an all-time high, and clients are expanding covers, fully leveraging a broader array of solutions as the industry modernizes in the face of technological innovation. In addition to transactional products, reinsurers and ILS providers are developing more comprehensive, consultative value propositions, such as capital advisory and enterprise risk management services. These offerings withstand market cycles and macroeconomic factors and provide insurance companies with a dedicated, informed partner to support new product development and growth initiatives. This creates opportunity by leveraging advanced platforms and innovative customized solutions, such as coverage features applying to specific industries or risks unique to specific clients.

Advanced Modeling Techniques

As economic growth and demographic patterns impact risk concentrations, advanced modeling techniques will help ensure sufficient vertical and horizontal reinsurance coverage to support post-event liquidity and close the protection gap, especially around historically difficult risks such as floods. Only 27 percent of those affected by Hurricane Harvey had flood insurance, and sustained industry profitability will depend on increasing global insurance penetration. Complex emerging exposures such as cyber and terror are also increasingly finding solutions in the reinsurance market, and optimal structuring of coverage can also minimize regulatory capital. By tapping a variety of capital sources, structures and modeling capabilities, insurers are matching more efficient, customized solutions to their unique risk profiles, whether they are focused on protecting earnings against attritional losses or shielding their capital base from catastrophe losses.

As the industry enters the 2018 renewal, the market remains strong with a variety of solutions to deliver the right capital to risks. Following the recent catastrophes, reinsurers are adjusting business plans for opportunities in marine, energy, flood and specialty lines of business. In today’s world of unprecedented disruption, the (re)insurance solution for managing capital and earnings is as relevant as its solution for severity protection.

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Risk and Opportunity in the Internet of Things

Can you envision 30 billion devices connected to the Internet of Things (IoT) by 2030? What about 100 trillion connected devices? That’s the number that Oliver Wyman predicts could be the reality by 2050. Communications, media, and technology (CMT) companies are at the nexus of the creation and use of IoT devices and offer telling insights into the opportunities and risks of IoT development.

Sixty-five percent of CMT companies said they view the Internet of Things as an opportunity over the next three to five years, according to Marsh’s global 2018 Communications, Media, and Technology Risk Survey. And nearly half said their organization already creates or provides products and services for IoT devices. Meanwhile, many CMT risk professionals may be unaware of connections to the Internet of Things.

Exhibit 1: Many CMT risk professionals may be unaware of connections to the Internet of Things

Source: Marsh 2018 Communications, Media, and Technology Risk Study

That number reinforces an awareness gap about the IoT that Marsh has found in other studies. For example, in Marsh’s 2017 Excellence in Risk Management survey, 52 percent of risk professionals said their organization does not use or plan to use the IoT, which conflicts with other data regarding IoT use.

This lack of understanding regarding the full range of risks presented by being a part of an IoT system stood out when we asked CMT organizations about related loss exposures.

Exhibit 2: System operation and security dominate IoT provider concerns; users increasingly concerned with physical risks

Source: Marsh 2018 Communications, Media, and Technology Risk Study

On the high end were system or network failure, security failure, and privacy breach. At the bottom were financial loss, property damage, and bodily injury. We also asked in which areas CMT companies’ customers/partners are seeking additional contractual protection. And here we found a disconnect, for example, in bodily injury losses. The failure of an IoT-connected device—through a production error, a cyberattack, or other cause—has the potential to cause injury. The component in a semiautonomous vehicle could fail, leading to an accident, or an IoT-connected device could be hacked, causing the system to overheat and catch fire. Fully half of respondents said their customers/partners are asking for increased protection against the risk, yet less than one-third of IoT providers are making the connection and seeing bodily injury as an IoT risk.

Partners in Innovation

A majority of our CMT survey respondents said their organizations hold risk management in high regard, with nearly 75 percent saying they’re seen as partners or providing support for innovation. But in order for these perceptions to match reality risk, professionals should challenge themselves to review their day-to-day tasks and determine if they are truly leading conversations about emerging risks and solutions, such as IoT.

Exhibit 3: CMT risk managers view themselves as innovation partners

Source: Marsh 2018 Communications, Media, and Technology Risk Study

Given the relentless pace of innovation and disruption, how can CMT risk professionals stay relevant in 2018? They must become experts in emerging risks, innovations, and trends within and outside of their industry in order to maintain a seat at the table for strategic decisions.

Companies would benefit by boosting their understanding and evaluation of IoT involvement, with specific emphasis on the new risks being created. For risk professionals, this means being a leader in discussions in all aspects of IoT and other technology risks. This includes such steps as aligning or embedding risk management team members with product development, building risk solutions into product or service offerings, and taking the lead in pushing for investment in emerging risk mitigation technologies or applications.

The IoT is just one of many technologies that will evolve and emerge in 2018, further disrupting CMT and other industries. Whether it’s IoT, artificial intelligence, blockchain, or something else, risk professionals should be prepared to lead the discussion of how these technologies will affect their companies’ risk profiles and business strategies.

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BRINK’s Top 5 Geopolitical Risk Stories of 2017

The past year saw no shortage of upheaval in the geopolitical landscape.

In Asia, China continued to expand its influence on the world stage through the high-profile Belt and Road Initiative. In Europe, nations grappled with the implications of Brexit and similar deglobalization initiatives. And new technologies and cross-border tensions forced corporations everywhere to expand their notion of risk.

Here are five stories about geopolitical risk that captured the attention of BRINK readers in the past year.

The Geopolitical Impact of China’s Economic Diplomacy

The prevailing wisdom of a singularly powerful, hegemonic China may be too simplistic. In the interconnected geoeconomics of today’s world, complex political realities surround the execution of China’s economic diplomacy.

At a public forum at the Brookings Institution titled The Geopolitical Impact of China’s Economic Diplomacy, panelists outlined a collection of competing political interests—within and outside of China—vying for a geopolitical advantage that might tip the balance of power in Asia in their favor.

Experts made the case that despite the enormous influence China exhibits across the globe today, the story of Asia’s future will be written by many Asian countries.

“[When China announced the Belt and Road Initiative] people said ‘Oh my god, China’s got this new big strategic initiative, how are we going to react to this?’ as if connectivity in Asia had been invented in China, invented in 2013, and like Athena from Zeus’s head had sprung from the head of President Xi Jinping,” said Evan Feigenbaum, vice chairman of the Paulson Institute. “It’s easy to forget that for most of its history Asia was an astonishingly interconnected place.”

Does China’s ‘One Belt, One Road’ Threaten an East-West Rift Within Europe?

China has worked hard to make its Belt and Road Initiative feel more like a charm offensive than coercion. It has tried to calm the EU’s anxieties about its motives, insisting that it would prefer Europe strong and united and that it wants to contribute to various European projects rather than compete with them. However, regardless of the economic benefits of China’s engagement, the EU still sees it as a threat. Already the signs are there that this investment comes with political strings attached, writes Małgorzata Jakimów, a lecturer in Chinese Politics at the School of East Asian Studies at the University of Sheffield, UK.

While the EU urgently needs a common policy toward China, many EU states clearly think they’ll do better if they form their own bilateral ties with Beijing—and as a result, many are now competing with each other, vying for China’s attention and cash.

As Ms. Jakimów notes, for all that the Belt and Road Initiative is presented as a purely economic project, it remains deeply political.

Examining Geopolitical Risks Under a Different Lens

2017 was fraught with tensions across the globe. The UK formally triggered its exit from the European Union, the U.S. warned North Korea about nuclear weapons and the far right made a credible bid for power in France. This level of instability and change requires businesses to develop a new lens for assessing geopolitical risk, writes Evan Freely, a global practice leader at Marsh.

“Historically, when assessing a potential foreign investment, a company might limit analysis to the economic and political risks associated with the host country and, possibly, to those that border it,” writes Mr. Freely. “Companies were generally most concerned about host government expropriation actions and international conflict. Today risks are no longer constrained by borders.”

A new lens should accommodate a broader view of the world, focusing on developments in both developed and emerging markets and analyzing a greater range of outcomes, including ways in which each could impact the full scope of business operations.

There is no consensus as to whether this challenging environment is a short-term period of instability or the edge of a longer period of change, Mr. Freely writes. But by better understanding the breadth, scope, and depth of geopolitical risks, companies can be in a better position to thrive while meeting the challenges ahead.

Sino-Indian Stand-Off Could Increase Risk and Benefit the U.S.

A tiny speck of land along the Chinese-Bhutan border roiled the leadership of both China and India last summer, causing the two countries to flex their military muscle amid hasty diplomatic communiques intent on keeping either side from firing the first shot.

Lindsay Hughes, research analyst for Future Directions International, examines how the stand-off surrounding the tri-border region between Bhutan, China and India in mid-June was emblematic of larger geopolitical themes encircling the region.

The potential for conflict in this region is causing a closer alignment between the U.S. and India, Mr. Hughes notes. This creates new geopolitical risks to China at a time when it is seeking to expand Beijing’s “soft power” in the region via the Belt and Road Initiative.

Peering Over the Precipice: Implications of a ‘Cliff Edge Brexit’

Brexit loomed large in 2017, as negotiations continued over the contours of Britain’s exit from the European Union. The slow progress made in negotiations—and the sometimes fractious relations between the two sides—appeared to portend UK’s exit from the bloc with no deal in place, a so-called “cliff edge Brexit.”

Thomas Lake, a senior analyst of political risk for BMI Research, outlines how a cliff edge Brexit would impact the British economy and the European Union at large.

The likely fallout from a cliff edge Brexit could discourage other countries with strong euroskeptic movements from seeking to leave the bloc, writes Mr. Lake. However, it would also show that the EU is more interested in preserving its key ideals than working toward a deal that would soften the blow of the UK leaving on other member states.

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BRINK’s Top 5 Geopolitical Risk Stories of 2017

The past year saw no shortage of upheaval in the geopolitical landscape.

In Asia, China continued to expand its influence on the world stage through the high-profile Belt and Road Initiative. In Europe, nations grappled with the implications of Brexit and similar deglobalization initiatives. And new technologies and cross-border tensions forced corporations everywhere to expand their notion of risk.

Here are five stories about geopolitical risk that captured the attention of BRINK readers in the past year.

The Geopolitical Impact of China’s Economic Diplomacy

The prevailing wisdom of a singularly powerful, hegemonic China may be too simplistic. In the interconnected geoeconomics of today’s world, complex political realities surround the execution of China’s economic diplomacy.

At a public forum at the Brookings Institution titled The Geopolitical Impact of China’s Economic Diplomacy, panelists outlined a collection of competing political interests—within and outside of China—vying for a geopolitical advantage that might tip the balance of power in Asia in their favor.

Experts made the case that despite the enormous influence China exhibits across the globe today, the story of Asia’s future will be written by many Asian countries.

“[When China announced the Belt and Road Initiative] people said ‘Oh my god, China’s got this new big strategic initiative, how are we going to react to this?’ as if connectivity in Asia had been invented in China, invented in 2013, and like Athena from Zeus’s head had sprung from the head of President Xi Jinping,” said Evan Feigenbaum, vice chairman of the Paulson Institute. “It’s easy to forget that for most of its history Asia was an astonishingly interconnected place.”

Does China’s ‘One Belt, One Road’ Threaten an East-West Rift Within Europe?

China has worked hard to make its Belt and Road Initiative feel more like a charm offensive than coercion. It has tried to calm the EU’s anxieties about its motives, insisting that it would prefer Europe strong and united and that it wants to contribute to various European projects rather than compete with them. However, regardless of the economic benefits of China’s engagement, the EU still sees it as a threat. Already the signs are there that this investment comes with political strings attached, writes Małgorzata Jakimów, a lecturer in Chinese Politics at the School of East Asian Studies at the University of Sheffield, UK.

While the EU urgently needs a common policy toward China, many EU states clearly think they’ll do better if they form their own bilateral ties with Beijing—and as a result, many are now competing with each other, vying for China’s attention and cash.

As Ms. Jakimów notes, for all that the Belt and Road Initiative is presented as a purely economic project, it remains deeply political.

Examining Geopolitical Risks Under a Different Lens

2017 was fraught with tensions across the globe. The UK formally triggered its exit from the European Union, the U.S. warned North Korea about nuclear weapons and the far right made a credible bid for power in France. This level of instability and change requires businesses to develop a new lens for assessing geopolitical risk, writes Evan Freely, a global practice leader at Marsh.

“Historically, when assessing a potential foreign investment, a company might limit analysis to the economic and political risks associated with the host country and, possibly, to those that border it,” writes Mr. Freely. “Companies were generally most concerned about host government expropriation actions and international conflict. Today risks are no longer constrained by borders.”

A new lens should accommodate a broader view of the world, focusing on developments in both developed and emerging markets and analyzing a greater range of outcomes, including ways in which each could impact the full scope of business operations.

There is no consensus as to whether this challenging environment is a short-term period of instability or the edge of a longer period of change, Mr. Freely writes. But by better understanding the breadth, scope, and depth of geopolitical risks, companies can be in a better position to thrive while meeting the challenges ahead.

Sino-Indian Stand-Off Could Increase Risk and Benefit the U.S.

A tiny speck of land along the Chinese-Bhutan border roiled the leadership of both China and India last summer, causing the two countries to flex their military muscle amid hasty diplomatic communiques intent on keeping either side from firing the first shot.

Lindsay Hughes, research analyst for Future Directions International, examines how the stand-off surrounding the tri-border region between Bhutan, China and India in mid-June was emblematic of larger geopolitical themes encircling the region.

The potential for conflict in this region is causing a closer alignment between the U.S. and India, Mr. Hughes notes. This creates new geopolitical risks to China at a time when it is seeking to expand Beijing’s “soft power” in the region via the Belt and Road Initiative.

Peering Over the Precipice: Implications of a ‘Cliff Edge Brexit’

Brexit loomed large in 2017, as negotiations continued over the contours of Britain’s exit from the European Union. The slow progress made in negotiations—and the sometimes fractious relations between the two sides—appeared to portend UK’s exit from the bloc with no deal in place, a so-called “cliff edge Brexit.”

Thomas Lake, a senior analyst of political risk for BMI Research, outlines how a cliff edge Brexit would impact the British economy and the European Union at large.

The likely fallout from a cliff edge Brexit could discourage other countries with strong euroskeptic movements from seeking to leave the bloc, writes Mr. Lake. However, it would also show that the EU is more interested in preserving its key ideals than working toward a deal that would soften the blow of the UK leaving on other member states.

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