How is technology changing risk management?

In the highly complex world of risk management, mistakes, shortcuts and a lack of planning or regulation can lead to grave consequences if and when disaster strikes. But the digital revolution of the past several decades has contributed a number of innovations to help risk managers craft more effective and airtight strategies for facing such situations.

At a recent conference marking the 30th anniversary of Wharton’s Risk Management and Decision Processes Center, experts in the field discussed new products and solutions for addressing challenges associated with current and emerging risks. Panelists noted that science and technology play a key role in improving the modeling of risks and developing strategies for reducing future losses and aiding recovery.

“A poor decision can turn a natural disaster into what in retrospect looks very much like a man-made catastrophe,” University of Pennsylvania Provost Vincent Price said in his introductory remarks to the conference. “Such a level of complexity demands input not only from numerous and varied academic experts, but also from experts both in the government and the private sector.”

More Predictable Weather

Perhaps no area has attracted greater concern among scientists and technologists than meteorology, where computerized modeling has “really advanced our understanding of the intensity of storms and [storm] tracks” over the past 15 years, noted Holly Bamford, former acting assistant secretary for conservation and management for the National Oceanic and Atmospheric Administration (NOAA). Bamford was recently named chief conservation officer at the National Fish and Wildlife Foundation.

A great deal has been achieved in terms of analyzing and predicting the intensity and track of storms, she noted, particularly as a result of major advances in radar. “This kind of technology is extremely significant for tornados and watching when a tornado actually hits and is causing damage,” Bamford said. “We’ve gone from just knowing that it is going to rain [today or tomorrow] to … businesses being able to plan knowing that rain is going to turn into sleet by 2 p.m. or 3 p.m.” Such advances allow schools or business to shut down early so people can arrive home before the worst weather hits, which in turn minimizes the potential human impact from severe weather.

“We’ve gone from just knowing that it is going to rain [today or tomorrow] to … businesses being able to plan knowing that rain is going to turn into sleet by 2 p.m. or 3 p.m.”–Holly Bamford

Tsunamis are another threat where technology has made it easier to manage risks. Bamford explained that in 2004, when the Indian Ocean earthquake and tsunami occurred, “we had six experimental buoys in the Indian Ocean that could detect tsunamis, and we had no global warning system.” Partially as a result, more than 200,000 people died in that event. “Today, we have over 40 tsunami detection buoys and we can not only detect a tsunami well in advance, but we can also detect storm surges from that [tsunami],” Bamford said, adding that there have also been numerous advancements in “understanding some of the supply chain risks, particularly in the climate and weather area.”

Looking to the future, Bamford said that the NOAA’s major challenge involves figuring out how to best use historic information, real time information and forecast information in the event of a disaster and getting that data to decision makers in time for them to act on it. Bamford highlighted key challenges in several different areas: First, improving NOAA’s capacity for risk communication. In 2011, “when a number of tornadoes touched down [in the U.S.], our forecast and understanding of those tornadoes was an A-plus. But in terms of the output, hundreds of people died. It wasn’t close to an A-plus.”

The agency held a public meeting to gain insights about how its response could be improved. Five hundred people came to the meeting, and the NOAA learned something unexpected: Giving people more advanced warning about the tornadoes and more lead time to take shelter didn’t save more lives. “What we saw was ‘more time, less lives saved,’” Bamford noted. “When people have a limited amount of time, they quickly and urgently [take] shelter. When they have more time [as in this case], people get into their cars. We expected people to take that information and actually take shelter. But if they have enough lead time, people don’t take the behavior you’re expecting.” Now, the agency is “incorporating social science early on into our decision making.”

A second challenge is to revamp NOAA’s pipeline for how it integrates information. Currently, NOAA’s storm forecast models and its river forecast models don’t necessarily communicate with each other smoothly. “People don’t care where the water is coming from; they just want to know when it is coming and how high it is,” Bamford pointed out. “So we are trying to integrate our science and data so we can do ‘total water analyses.’”

Public Knowledge

Although much of the discussion among experts at the conference concerned innovations undertaken by specialists trained in advanced sciences and technology, Robin Gregory, associate director of the Eco-Risk Research Unit at the University of British Columbia, noted that much of the innovation in long-term risk management is coming from the public. “Experts are surprised by that wealth of knowledge” emerging in public discussion groups and on social media, he noted.

And yet Gregory expressed concern about the unwillingness of many people to open up their thinking to viewpoints that are unfamiliar and emotionally unsatisfying, at least at first sight. A key question for him is: “How do you get people to move outside a concretized box and open themselves up to new views? Many people live in an environment where there is someone in the community — a priest, or imam or whatever — essentially telling them how they should think about issues. To get someone to open up to new points of view is something very difficult to do, but it is essential.”

“How do you get people to move outside a concretized box and open themselves up to new views?”–Robin Gregory

Another major challenge, he noted, is that “many of our early involvement techniques are focused on individuals, but the problems we’re talking about [nowadays] are collective problems. Simply aggregating the views of individuals is a misguided way to go about this…. We’re talking about important community problems; in many cases, global problems. So there are important issues of aggregation as well.”

At first, research efforts aimed at achieving collective awareness yielded very little informed participation in risk management, Gregory said, and “a lot of sham processes and cynicism on the part of the public.” The challenge for the risk management community in terms of boosting stakeholder engagement is how to develop approaches that incorporate social science concepts related to preferences, decision-making processes and other modes of thought.

“How do you do this, in the context of getting input from the public?” Gregory asked. “There is a lot of innovative work that is being done in risk management that is changing the scene — some really good work on [applying the social science concepts of] ‘mental models’ and ‘risk communication,’ and some very interesting work involving ‘deliberative polling’ with social media. Many of the methods that we grew up using – such as mail surveys, telephone surveys — are really outmoded. Social media is now changing things a great deal and is underutilized in terms of how we work with the public.”

When it comes to innovative approaches to engaging the public, Gregory added that “there is a lot of interesting work being done with climate change, where you try to develop survey mechanisms that mimic or model a good way to think about a decision. The concept is to start by outlining a sensible decision context. Talk about objectives; talk about alternatives. Address the tough trade-offs. Don’t just pose questions that people cognitively and emotionally can’t handle or answer. Build up that level of trust and think about cognitively and emotionally sensible ways of asking these tough questions.”

Another key challenge for Gregory is this: How do you get people to think about things they would prefer not to talk about? “How do you encourage dialogue about things people prefer not to discuss without being overly pushy or forceful about our views, but by encouraging a dialogue that involves sharing views? We’ve made strides, but we have a lot more to learn as a community to get people to face up to these challenges.”

Creating a Market for Risk Protection

Strides are also being made by applying digital technology to develop risk management tools that tackle the endemic poverty prevalent in the world’s lowest-income countries. Over the last 10 years, the economic losses to property due to natural disasters have amounted to $1.8 trillion, but of that, only $300 million dollars have been covered by insurance, noted Joan Lamm-Tennant, chief executive officer of Blue Marble Microinsurance, in her presentation to the panel. “The consequences for developing countries are disproportionally large,” she noted. For Haiti and Nepal, in particular, losses were larger than one year of these country’s GDPs.

“We are trying to create a market for risk-protection of the underserved.”–Joan Lamm-Tennant

This is especially challenging given the characteristics of the world’s rising population. Lamm-Tennant noted that there are seven billion people on earth today, but population experts anticipate there will be more than 9.3 billion by 2050. Currently, only about 1.8 billion people are in the middle class — only about one-fourth of the global total. But over 12% of the world’s population lives at or below $1.90 a day, according to the World Bank.

The good news, noted Lamm-Tennant: “We believe there is a chance that we can change the dynamics.” Over the next 35 years, as much as 50% of the world’s population will belong to the “emerging middle class,” she said, “but they are very vulnerable. They could easily fall to the bottom of the economic pyramid. So what do we need to enable this emergence? We need education, access to health and financial inclusion — access to credit, the ability to bank the unbanked, and the ability to finance risk — so insurance plays a role in this. How do we play a part in this eco-system? How do we enable this emerging middle class to emerge, recognizing that the answer is not all within our hands?”

To tackle the unique needs of the world’s poor and underserved, eight major insurance and reinsurance firms have established the consortium known as Blue Marble Microinsurance. As Lamm-Tennant explained, “We are trying to create a market for risk-protection of the underserved.” Unveiled at the 2015 World Economic Forum in Davos, Switzerland, the Blue Marble consortium comprises American International Group, Aspen

Insurance Holdings Limited, Catlin Group Limited, and Guy Carpenter & Company, together with Marsh & McLennan Companies, Hamilton Insurance Group, Transatlantic Reinsurance Company, X.L. Group, and Zurich Insurance Group.

Lamm-Tennant said that partnerships are vital for the success of this new business model. “Little did we know how this would involve other corporate and public partnerships. By showing good behavior to solve problems that are bigger than our own, we have invited other partnerships. It is not about capital; we represent 250,000 employees licensed in 170 countries.”