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Risk takes on an existential nature.

Risk Takes on an Existential Nature

An article by the chairman of a major reinsurance company considered the risk management process in light of the "existential risks" facing society. Naturally, one is curious as to the difference between existential risks and ordinary run-of-the-mill risks. A subdivision of these existential risks as discussed by the reinsurer provides further explanation.

The reinsurer divides existential risks into "planned" and "unplanned." The planned are those risks which only have bad effects when aggregated. Although he gives no example, he evidently means such things as the use of aerosals, where no adverse effect is noticeable until their use is widespread. Unplanned existential risks on the other hand, are chance events such as auto accidents. Yet, the author points out, these unplanned existential risks become planned in the aggregate. For instance, its known that West Germany is going to have 8,500 auto accident fatalities, or thereabouts, each year.

How then have risk managers survived without knowing that the auto fleets they are responsible for made up a collection of unplanned existential risks, which in toto could not be regarded by a reasonable man as a planned existential risk? Is there any risk manager, or insurer, for that matter, who does not know that taken together the outcome of risks of a similar nature is predictable even though individually they are subject to chance?

Since the reinsurer fails to define his term, it is difficult to continue without knowing what exactly is an existential risk. In effect, he assumes that the meaning is self evident. All that is clear is that he associates existential risks with risks facing society as a whole rather than merely the factory, the company or the individual. It is also clear that existential risks have cultural and social dimensions. But what risks do not face society as a whole?

To get insight into the reinsurer's point, consider another of his subdivisions--"immanent" and "cognitive" existential risks. He presents a scale of immanent existential risks, ranked from severe to mild: destruction of biosphere, nuclear strike, war, famine, alcohol and nicotine, genetic manipulation, road traffic, unemployment, economic crises and loss of affluence.

As for the meaning of cognitive existential risks, the reinsurer states: "Cognitive existential risks are rooted in a loss of orientation resulting from the scale and complexity of the hazards of modern life, which transcend our usual orbit of experience. The term cognitive existential risk embraces the under-and over-estimation of immanent risks. This can result in either non-perception of risks which are not recognized for what they are, or the conjuring up of imaginary risks."

A Larger Argument

Why consider such philosophical arguments? Because what the writer is saying is part of a larger argument, the main point being that insurers should be "unbeatable in the use of risk management." This is increasingly being heard from insurers nowadays. They are the risk experts, so they say, and in the future, insurers will increasingly be involved in risk control services rather than pure insurance.

Thus, society's ability to cope with risk depends on the insurance industry's capacity to cope with its transfer so insurers must take the initiative. Of course, the truth, as risk managers know, is that as soon as the insurance industry is faced with major risks--latent diseases, product liability, AIDS, among others--it runs for cover and leaves industry to its own devices. If ever there were any question of relying on the insurance industry to cope with risks which might be called existential, such as the destruction of the biosphere, then the sort of global theorizing might be commendable on the grounds of good intentions.

What level of risk is deemed acceptable in society will continue to be decided by general concensus in the battle among consumers, producers and government. It is difficult to see how the insurance industry could play any other role than it does now, that is looking after its own interests as best it can.

The reinsurer's article suggests, quite rightly, that the chief power of insurers is their ability to bring things to a halt by withdrawing insurance. Unfortunately, simply cutting off the supply of insurance does not remedy risk problems in society. Some manufacturers may discontinue a product line when insurance vanishes, but there are other risk financing options. Moreover, would the supply or non-supply of insurance stop the "immanent existential risks" which the author lists?

Basically, society cannot expect much help from insurers in sorting out its risk problems because insurers are interested not in risk reduction (insurance encourages greater risk taking), but in risk predictability. The problem for insurers is finding out the cost of risk; the problem for society is justifying life and property at risk. These are very different problems.

Insurers only withdraw cover when they fear making a loss, not for reasons of social obligation or moral duty.

Chris F. Best is the editor of Foresight, a London-based risk management and insurance journal published by Risk and Insurance Group Limited.
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Title Annotation:risk management
Author:Best, Chris F.
Publication:Risk Management
Article Type:column
Date:Feb 1, 1989
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