Emerging risk and emerging risk management (i.e., the management of emerging risks) are discussed in this post.

 

In a rapidly changing business environment characterised by advancing technology, shifting geopolitical tensions and increasing regulatory scrutiny, it is more important than ever for organisations to look beyond near-term threats to prepare for the risks they could face in the future. Broadly defined, these emerging risks are new or developing threats with an unknown significance and impact and are poorly understood. Emerging risks can also be known as risks that have transformed due to changes in the business environment. The key is that even if the risk is known to some degree, the likelihood and impact of the risk are not. These “unknowns” defy traditional risk management techniques, so organisations often allocate fewer resources. But by identifying and evaluating emerging risks, organisations can be better equipped to make significant, risk-aware decisions to ensure the best long-term strategic outcomes.

 

WHAT IS AN EMERGING RISK?
Emerging risk is a new or familiar risks that become apparent in new or unfamiliar conditions. It includes new technologies – artificial intelligence (AI), nanotechnology or genetic engineering – and economic, societal, environmental, regulatory or political change. Their sources can be natural or human, and often are both. While some emerging trends are developing slowly (like demographic changes, societal preferences or cancer research), others can be fast-changing with disruptive potential (like the development of smartphones over the past decade, alternative currencies right now or AI in the future). Slow-moving emerging trends, too, may gain momentum quickly (e.g., medical breakthroughs). Hence, the need for a sound emerging risk management to enhance businesses performance.

 

Some risks are changing their character dynamically. Consequently, emerging risks, such as regulatory developments or litigation trends, are unclear or changing framework conditions. Thus, while we may think of emerging risks as being primarily entirely new risks (as is much the case with new technology, such as blockchain or the gene-editing method CRISPR3), some are known and familiar risks. Still, they become new or (re)emerging as their contextual conditions change. A field like nanotechnology qualifies as an emerging risk because some risks have been known for some time but have yet to materialise fully. We consider it a latent emerging risk.

Consequently, they continue to count as emerging risks – the ever-evolving complexity of cyber threats is a case in point. Usually, emerging risks still need to be qualified, even though they may have a high impact potential for (re)insurers and society. The need for comprehensive data is one aspect of emerging risks’ general nature. They still need to be fully understood or researched and might lead to surprises or shocks.

CHARACTERISTICS OF EMERGING RISKS

Emerging risks may have one or more of the following characteristics:

• Large-scale events,
• Often, it arises from global trends,
• Usually, beyond our capacity of control,
• Can cross geographic borders, industries, and sectors,
• Difficult to quantify the impact,
• Difficult to predict,
• Traditional risk management identification and assessment process may not work in managing emerging risks.

WHY EMERGING RISKS MAY BE UNKNOWN

Not in all cases, but emerging risks may be unknown. Why? First, the extent or nature of the potential loss has yet to be discovered. Second, there may need to be more information. Third, the organisation may have needed more time (or taken time) to analyse the risk thoroughly. Emerging risk management should be embraced by business organisations to ensure improved performance and sound enterprise risk management.

Emerging risks are unique because they are differentiated primarily by the uncertainty about their potential probability and consequences. According to the International Risk Governance Council (IRGC) there are three major types of emerging risks to look for (1) high uncertainty and lack of knowledge, (2) growing complexity, and (3) contextual changes.