Simulation models against potential damage?

Advanced analytics and modeling solutions are designed to improve an insurer's performance and generate competitive advantage through more accurate predictive models that allow for more precise pricing and fewer reserves. Increasingly, high-performance data center services are being used to generate new data sources initiated by the Internet of Things. Some examples: The increasing importance of telematics in the automotive sector, optimized wearables in the healthcare sector or digital inventories of smart homes or business areas for property insurance.

What was treated skeptically as "oracle technology" a few years ago has now proven to be a highly useful element for insurance companies. Local companies such as Equinix (Schweiz) AG and Allianz Suisse use widely linked digital simulation models in their day-to-day risk management and for detailed company analyses.

Collaborative technology
The insurance sector is currently confronted with increased complexity, a growing number of regulations and higher consumer expectations. This also increases the demands on IT systems and insurance units that can adapt efficiently and cost-effectively.

Recently, we have been reading about more and more cooperation between technology experts and risk analysts who, with the help of redundant models (see, for example, "Satellites against extreme weather events"; MQ 12/2016), are able to carry out more and more selective damage limitation and assessments. One positive development for specific insurance stakeholders is the use of colocation sites.

By means of location-independent clouds, an optimum of efficiency, and certainly also of security and availability, is to be exploited.

Equinix's Interconnection Platform (see box) facilitates data sharing among multiple members of the international insurance market. It motivates market participants to connect directly with each other, thereby "collabo-ratively" increasing the performance of risk modeling systems and the security of cloud technologies.

Risk modelling
Insurance experts expect that the latest political decisions (Brexit, US President Trump) will give populism and protectionism a further boost and could have a negative impact on individual transactions.

According to credit insurer Euler Hermes, a subsidiary of the Allianz Group, 600 to 700 new trade barriers have been introduced globally every year since 2014. Concerns about the disintegration of the eurozone are also driving the export-oriented Swiss economy, as evidenced by the rise of this risk to 8th place in the Switzerland ranking of the

Allianz Suisse shows.

There are positive developments, but unfortunately there are always downsides. Market changes are currently considered the second most important business risk in Switzerland. In order to be able to react to such changes in market areas, companies are required to follow political projects and their implementation more closely - and to devote resources to this.

James Maudslay, Global Head of Insurance, Equinix, predicts: "We are developing an open source service that has the innovative power to change the way the entire insurance industry works. As our business ecosystems continue to expand, networks of co-active partners will inevitably form in other areas."

Sebastian Pichler, Chief Risk Offizer at Allianz Suisse, is more explicit: "Risk modeling is part of Al-lianz Suisse's core business. Technical and regulatory changes are central to this. However, modeling is primarily about an economic view, analyzing drivers for losses, their frequency and variability."

The relevance of clouds
Swiss companies fear a business interruption even more than political risks. This is the result of the current "Allianz Risk Barometer 2017", for which the industrial insurer Allianz Global Corporate & Specialty (AGCS) surveyed more than 1,200 risk managers and insurance experts from 55 countries worldwide.

For companies, an interruption in the value chain is, among other risks, an existential blow. "For companies, among other risks, an interruption in the value chain is existential because obligations continue and income is lost," says Bruno Spicher, Head of Corporate Insurance at Allianz Suisse. This makes redundant processes and technologies all the more important.

Due to the obligation to guarantee all points in terms of data protection and permanent security to the customers, compatible business solutions had to be sought. Cloud computing in particular leads to many questions about data security: "Who can ensure access to important data in case of doubt (for example, in the event of a cloud computing failure)? To what extent is data security, especially the protection of personal data, guaranteed?" Cloud computing at Allianz Suisse today works without restriction on the insurer's systems, so that the data entrusted by customers can always be localized.

Emerging risks identified
Allianz models risks per se. Natural hazards such as floods, storms, hail or earthquakes as well as non-catastrophe risks (e.g. liability issues, property damage, etc.). In the process, the findings from our own portfolios as well as new information from the insurance industry and the scientific community are continuously taken on board and the models are optimised.

The insurer conducts regular analyses of new risks, so-called "emerging risks". These include studies of pandemics as well as new types of risks that could arise from the introduction of technology, such as the controversy over "physical damage due to nanoparticles". On the customer side, risks could also arise "from new behaviours".

"For example, the use of property by other people (e.g. car sharing, renting out the apartment via Airbnb) gives rise to new liability issues without changing the classic risks," comments Sebastian Pichler, Chief Risk Officer at Allianz Suisse, on new trends in the insurance industry.

"Companies worldwide and in Switzerland are preparing for a year of uncertainty," adds Bruno Spicher, Risk Barometer expert and Head of Corporate Insurance at Allianz Suisse. "Companies are concerned about legal and political changes that are difficult to predict, as well as the current competitive environment. In addition, new threats require a rethink in the management of risks."

The company's own production can also be affected by so-called repercussions if, for example, suppliers or customers are affected.

How good are analyses?
The risk landscape for companies is changing at a rapid pace, not least due to digitalisation and new technologies. For example, companies are becoming increasingly susceptible to indirect disruptions of their operations due to tight supply chains and just-in-time production. The quintessential questions are therefore:

Can analysts now really predict a business interruption through risk modeling? Which control mechanisms are effective in the insurance context of Allianz Suisse? Bruno Spi-cher, Head of Corporate Insurance, explains in a short e-mail exchange:

"We work with the customer to analyze its entire value chain and identify potential risks. We focus on individual areas of the company to create an overall picture. For example, if a customer only purchases goods from a single supplier ('single sourcing'), this is a risk. If, for example, the delivery is not made, the production chain is disrupted. We recommend, for example, organising measures such as a second produc- tion at a different location."

"It is important to distinguish between evident, easily predictable events and uncertain risks," says the head of property and casualty insurance. The primary goal of insurers is to provide protection against uncertain events that cannot be predicted, but which will occur collectively.

Despite networked technologies such as the "Internet of Things", it is unfortunately impossible to predict a single interruption. However, insurance companies are investing in new tools that "read in" critical processes as up-to-date as possible. Similarly, event comparisons can help platform users to interpret and prevent incipient damage.

Modern technologies help to limit damage, reduce damage phases and control further consequences. A more universal understanding of risk makes it possible for market participants to succeed quickly by providing analysis, advice and loss compensation when needed.