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1 Future risk: Technology
contentsContents
2 Foreword
3 Introduction
4 Summary
7 Science, innovation and the UK insurance industry DavidWillettsMP–MinisterforUniversitiesandScience
14 Risks and opportunities:adoption and non-adoption of key technologies for the UKJamesWoudhuysen,ProfessorofForecastingandInnovation,DeMontfortUniversity,Leicester
20 Failures in Ultra Large-Scale Complex Systems ProfessorDaveCliff,UniversityofBristol,Director,UKLargeScaleComplexITSystemsResearch&TrainingInitiative
26 Fooled by lack of randomness DrPeterTaylor–ResearchFellowatOxfordUniversityandriskspecialist
30 The three scenarios
31Upside–technologicalrenaissance
33Central–statusquo
35Downside–thegreatreversal
38 Conclusion
40 Who to contact
2 Future risk: Technology
foreword
ForewordThisyeartheCharteredInsuranceInstitutecelebratesitscentenaryyearasacharteredprofessional
body.Tomarkthisachievement,wearepublishingaseriesofsevenreports,eachofwhichexplores
someoftherisksandopportunitiesthatmightfaceusinthedecadestocome,drawingonthe
assessmentofcommentatorsacrossvariousfieldsofexpertise.
Whilst‘futuregazing’doesn’talwaysleadtoaccuratepredictions,itisanimportantexerciseforthe
insuranceindustrytoundertakeasunderstandingandassessingpotentialrisksisattheheartofwhat
wedo.Indeed,centraltotheroleofinsuranceistheabilitytomakeinformed,professionaljudgments
abouttherelativerisksofvarioushazardsoccurringoveraparticularperiodoftime.Byplanningforthe
long-termandchallengingassumptionsaboutwhatthefuturemightlooklike,theprofessionwillbe
wellplacedtoprovideexpertiseandinsightontherisksthatlieahead.
Thisreportisthefourthinourcentenaryseriesandfocusesonpossibletechnologicalfutures.
Withinthereport,fourleadingexpertsprovidetheirviewsaboutfuturerisksinthisarea.Usingthe
expertanalysis,thereportseekstooutlinethreepossibletechnologicalscenariosandtheirpotential
implicationsfortheinsurancesector.
Tony Emms
Chair,CIIClaimsFaculty
3 Future risk: Technology
introductionIntroductionTherateoftechnologicalchangeoverthelasthundredyears,andthelastfiftyinparticular,hasbeen
remarkableandithasdrivensignificantimprovementsinmanyareasofourlives.Advancementsin
technologyrelatedtohealthcare,forexample,hasdramaticallyincreasedourchancesofsurviving
illnessanddisease,andenhancedourabilitytolivefollowingorganfailureorthelossofalimb.
Technologyhasalsopermeatedthroughournormaldailyroutineschangingthewaywecookandeat,
thewaywetravelfromAtoBandthewayweworkandinteractwithoneanother.What’smore,therate
ofchangeappearstobeincreasing–especiallyintheworldoftelecommunications.Neverbeforehasso
muchinformationbeenaccessibletosomanypeoplearoundtheworld.
Butwithnewtechnologicaldevelopments,comerisksaswellasopportunities;forexample,with
thewidespreaddisseminationofthemotor-carcametrafficaccidents,whilstthegrowthinownership
ofpersonalcomputersandaccesstotheinternethasledtothepossibilityofcybercrimeandinternet
fraud.Understandingtherisksattachedtonewtechnologywill,therefore,becrucialtoensuring
thatopportunitiesaremaximisedandtechnologicalchangeisembracedratherthanfearedinthe
yearsahead.
Itisalsoimportanttonotethatthebenefitsoftechnologicalchangehavebeenunequallyfeltaroundthe
world.Whilstmanyacrossthemoreadvancedeconomiestake“new”developmentslikeinternetaccess
andmobilephonetechnologyforgranted,inothercountriestheinfrastructuremaynotevenallowfor
phonelines,andpovertyissuchthatmanydonothavethecapacitytoaffordmobilephonesorpersonal
computers.Incentivisingimprovementsinaccessforthepoorestpeopleandthoselivingintheremotest
regionsis,therefore,anotherkeychallengefacinggovernmentsandindustries.
Theinsurancesectorcanhelppeoplefaceuptosomeofthesechallenges.Forexample,itplayedakey
roleinbringingforwardseatbeltsincarsandfiresafetystandardsinbuildings.Byunderstandingthe
risksattachedtotechnologyandpricinginsuranceproductsaccordingly,theindustryhasbeenable
toraiseawarenessofsomeofthedownsiderisksassociatedwithcertaintechnologiesstimulating
improvementsinsafetyforusers.Insurancecanalsoplayaroleinstimulatinginvestmentintechnology
–providingprotectionincasetechnologybackfiresprovidesanincentiveforgrowthandinnovation.And
finally,insurersarethemselvesembracingnewformsoftechnology–particularlyICTtohelpwiththeir
corebusinessfunctions.
Butwhatarelikelytobethebigtechnologicalopportunitiesandrisksoverthenextfewdecades
andwhatcantheindustrydotomitigatethem?Thislatestreportwithinthecentenaryserieswillbe
dedicatedtoansweringthisquestion.
Overall approach to the Future Risk seriesInearlyFebruarywepublishedthefirstinthecentenaryseries–Future Risk: Learning from History.It
setthescenefortheentireCIIFutureRiskseriesbyreflectingonsomeofthemostdynamictrendsofthe
pastandtheirpotentialimplicationsaswellasdiscussingsomeinitialfindingsfromaglobalsurveyinto
theriskperceptionsofmembersofthepublicfromacrosstheglobe.
Acentralpointmadebythereportwasthatinsucharapidlychanginginternationalenvironment,it
isvitallyimportanttoquestionunderlyingassumptionsabouttheworldaroundusandre-evaluate
prevailingwisdom.Wequalifiedthisstatementbynotingthatwhilstahealthylevelofscepticismabout
prevailingwisdomandfutureforecastingisagoodthing,itshouldnotpreventusfromdeveloping
somescenariosonthelong-termtohelpusprepareforsomeoftheopportunitiesandrisksthatlie
ahead.Rather,itshouldensurethatwedonotbecomeoverlyconfidentanddependentuponanysingle
narrative.Inthiscontext,thefourthinourseriesofreportslooksatsomepossibletechnologicalfutures
andtheirimplicationsfortheinsurancesectorandsocietyasawhole.Cruciallyitalsoseekstoidentify
whatroletheindustrycanplayinincentivisingasecuretechnologicalfuture.Ournextreportinthe
serieswilllookatfuturedemographicrisks.
4 Future risk: Technology
summ
arySummaryThereportbeginsbypresentinganumberofspecially commissioned essaysonfuturetechnological
risksfromleadingexpertsinthefield.Theauthorsandtheirtopicsinclude:
• David Willetts MP –TheUK’sScienceandUniversitiesMinisterdiscussestheimportanceof
investinginscienceandtechnologyandnotessomeofthekeylinksbetweennewtechnology
andtheinsuranceindustry.
• Professor James Woudhuysen–ProfessorofForecastingandInnovationatDeMontfortUniversity,
considersthetypesofinnovativeindustriesinwhichtheUKcanbuildastrongcomparativeadvantage.
• Professor Dave Cliff –DirectorofLargeScaleComplexITSystems,UniversityofBristol,reflects
ontherisksof“cascadefailure”inlargeITsystems,someoftheirimplications,andhowfailure
canbeavoided.
• Dr Peter Taylor–ResearchFellowatOxfordUniversityandriskspecialist,DrTaylorconsidersthe
waysinwhichitispossibletobedrivenbycomputationalmodelsoftheworldthatarenotalways
reliableandwhichcanleadtopoordecisionmaking.
Theseessaysrepresentcompellinglyarguedvisionsofthefuturewhichcanprovidethebasisforthe
constructionofthreeillustrativescenarios–allofwhichcouldhaveimportantimplicationsforthe
insurancesectorandbeyond.
Inourmostoptimisticscenario,thereissubstantialinvestmentinnewtechnologyunderpinning
economicgrowthbyshiftingthesupplycurve.Insurancefirmsareabletocapitaliseonnewtechnology
tobetterunderstandcustomers,marketproductsandunderwriterisks.Thelimitationsoftechnologyare
understoodandtherisksarecarefullyassessed–thoughthisdoesnotdeterprogressandinnovation.
Indeed,helpedbytheindustry’spricingofrisk,innovationstimulatesthedevelopmentofincreasingly
safeandeffectivetechnologyprovidingrealbenefitstopeople’slives.
Inourcentralscenario,whilstthereissomeinvestmentinnewtechnology,thisisnotaspronouncedasin
thefirst.Inthisenvironment,insurancefirmsdonotfullyutilisetheopportunitiesaffordedbytechnological
changeandfailtocapitaliseonpotentialbenefitstomarketing,underwritingandclaimsthattechnological
advancescanbring.Indeed,partlyasaconsequence,insurersplacetoomuchemphasisonoutdated
methodsofmodellingriskwhichleadtomispricing,ultimatelyaffectingbottomlineprofit.“Blackswan”
events(thatisbroadlyspeaking,eventsthatarerarebutcanhaveaveryhighimpact)negativelyaffectthe
industryandtherestofsociety.TheyincludetheoccasionalfailureoflargescaleITsystems,similartothe
so-called“FlashCrash”of2010,whichcausesuddenandwidespreaddisruption.
Atourmostpessimistic,overrelianceonoldtechnologycombinedwithcomplacencyintheuseof
thattechnologyhasgraveconsequences.Intheshort-term,multiplesystemsfailuresaretheresultof
‘normalisationofdeviance’–whereproblemswithtechnologyareneglectedandtakenasnormalrather
faceduptoandaddressed.Failuresoflargescalesystemsareparticularlyprevalentinthefinancialservices
sectorandenergysectorscausingwidespreadandlastingdisruptiontotheeconomyandsociety.Afear
oftechnologyresults,withdireconsequencesforinvestmentininnovation.Unfortunately,insurersare
caughtunprepared.Anoverridingobsessionwithmodellingriskusingout-of-datetechnologywhichcontain
spuriousassumptionsabouttheworld,preventstheindustryfrompreparingfor“blackswan”events.When
thetimecomes,theyareundercapitalised–technologicalfailuresputatriskthesolvencyofinstitutions.
Insummary,thereisalotatstakewithrespecttoourtechnologicalfuture.Dependingonwhichpath
wetake,technologycaneitherhelpmakeorbreakus–andkeytosuccessistoembraceinnovation
butbalancethiswithanappropriateconsiderationofsomeoftherisksnewtechnologiescanbring.In
thisregard,insurancehasakeyroletoplay–bothintermsofutilisingnewtechnologytoimproveits
ownbusinesspractices,andinhighlightingsomeofthedownsiderisksassociatedwithtechnologyto
policyholders.Insurersarealsowellplacedtoidentifypossible“blackswan”eventsrelatedtothemisuse
oftechnology.Inthisregard,collaborationwithgovernmentandotherindustrieswillbecriticaltosuccess.
5 Future risk: Technology
Past trends and possible futuresOuranalysisofpasttrendsfromthefirstreportwithinthecentenaryseriesidentifiedanumberofkeyrisks
posedbycontinuingtechnologicalchange.1Inthisopeningsection,webrieflyoutlinethekindsofinsights
thatourexpertauthorsprovideinrelationtotheserisks.Thisshortdiscussionandtheessaysthatfollow,
actasthebuildingblocksforsomesimpletechnologicalscenariossetoutlaterinthisreport.
Itshouldbenotedthattherisksoutlinedbelowareinnowayanexhaustivelist.Therearemanytechnological
risksnotdiscussedinthisreportthatmightsignificantlyaffectourfuture.Oneoftheseisrelatedtonew
developmentsinmedicaltechnology,whichhavethepotentialtodramaticallyextendlivesandthiswillbe
discussedindetail,inournextreportwithinthecentenaryserieslookingatdemographicchange.
The importance of investing in our technological futureInourfirstguestessay,Minister of State for Universities and Science, Rt. Hon. David WillettsMP,
discussesthelinksbetweeninsuranceandinvestmentintechnologyandresearchanddevelopment
intheUK.Willettsnotesmanyofthewaysinwhichscienceandtechnologyareenhancingtheability
ofinsurancetounderwritediverseriskslikeclimatechange,drugtrafficking,oilspillsandpiracyby
providingnewandmoreaccuratedatastreamsfromwhichtojudgethelikelihoodandimpactofthe
varioushazardsoccurring.Willettsalsonotesthewayinwhichadvancesincomputationalmodellingare
changingthewayinwhichinsurancebrokersoperatewiththepotentialtodelivera“modernversionof
theclassicbrokerfunction”.
InWilletts’view,theUK’scurrentandfuturecomparativeadvantageliesintheskilltoprogramme
computerstomaximisetheircapabilities,andemploythosecapabilitiestogreateffectinbusiness.For
thistohappen,thegovernment,industryandthescientificcommunitymustworktogethertoensurethat
technologicaldevelopmentsarefullyutilisedacrossindustryandforthebenefitoftherestofsociety.
Oursecondguestessayby James Woudhuysen, Professor of Forecasting and Innovation,at De
Montfort University,alsodiscussestheimportanceofinvestingintechnology.Hearguesthatthe
recentpaceoftechnologicalchangehasnotbeenasgreatasmanybelieve,andthatthereisarisk
thatagrowingdistrustoftechnologywillpreventmuchneededinvestmentintheyearsahead.Inthis
context,WoudhuysenidentifiesanumberofkeyindustriesinwhichtheUKcoulddevelopacomparative
advantageinshouldsufficientinvestmentbeforthcoming.Examplesincludenanomaterials,electronic
componentsandautomotivesystemsamongstothers.Woudhuysennotesthatwithnewtechnologies
comenewrisks,butthatfurthertechnologicaladvancesarelikelytoleadtobettermitigationofriskin
thelongrun.Heprovidestheexampleoffireengines,fireblanketsandfireextinguishers.Thebiggest
riskofallheimplies,isnottakingtherisktoinvestinnewtechnologyinthefirstplace.
Reliance on technology – avoiding some of the pitfallsProfessor Dave Cliff, Director of UK Large-Scale Complex IT Systems Research and Trainingatthe
UniversityofBristolarguesthatthedevelopmentoflargescaleITsystemsornetworked“systems-
of-systems”hasmadesomethingcalled“cascadefailure”apossibility.Thisiswhereunanticipated
interactionsbetweenthevariousmovingpartsinacomplexsystemcancausea“dominoeffect”chain
reaction.ProfessorCliffarguesthatsucheventscanbeextremelyseriousandpointstotheexampleof
the“FlashCrash”ofMay2010forevidenceofthis.Thereis,heargues,widespreadspeculationthat
theFlashCrashwascausedby“robottradersthathadbeenincorrectlyprogrammed,orunexpected
interactionsbetweenotherwisebenign”robots.AsaresulttheDowJonesposteditsbiggestintraday
loss–600basispointsbeforerecoveringthislossintwentyminutesbeforetheendoftrading.
1 Foranin-depthanalysisofpasttechnologicaltrendspleasereadourfirstcentenaryreport,Future Risk: Learning from history,Centenaryfutureriskseries:report1(Feb2012)
summ
ary
6 Future risk: Technology
Akeyriskthen,accordingtoProfessorCliff,isthatassocietiesbecomeincreasinglyreliantonlarge
scalesystems,sucheventswilloccurwithincreasingregularity.Toreducetheriskofcascadefailurehe
arguesthatwemustapplysomeoftheapproachestakenbysocalled“highreliabilityorganisations”
–organisationswheretheconsequencesoffailurearesohigh(suchastheaviationindustry)that
avoidanceandmitigationoffailureisdeeplyinterwovenintobusinesspracticesandculture.Cliffalso
callsfortighterregulationofsuchlarge-scaleITsystemsandgreaterpoliticalawarenessandoversight
oftherisksassociatedwiththem.
Dr Peter Taylor, Research Fellow at Oxford University and risk specialistalsoconsiderssomeofthe
potentialpitfallsofusingtechnologyandparticularlyrelyingoncomputermodellingtodrivedecision
making.Entitled“fooledbylackofrandomness”,DrTaylor’sessaydescribeshowpeoplecanbecome
deludedintothinkingthatcertainrelationshipsbetweenvariablesinamodelare“real”,especially
whenmodelledbycomputerswhichcan“lendanapparentobjectivitytotheresults”.Taylorprovides
theexampleofLloyd’sofLondonwhichwasnearly“broughttoitsknees”inthe1980s.Hearguesthat
thiswastheresultoftheLloyd’smarketbeingfooledintothinkingtherewaslittleornodangertoa
highexcessoflosslayerasaresultofanoverrelianceonrecenthistoricaldata.Taylorarguesthat“the
variabilitywasthere,itjusthadn’toccurredinrecenttimes”.
Thiskindofproblemisalsorelevanttogovernmentpolicyandregulatoryrules,andinparticularthe
implementationofSolvencyII.ThecoreprincipleofSolvencyIIisthatinsurershavesufficientcapitalto
remainsolventfor199yearsoutof200.Indeterminingwhetherinsurersmeetthisrequirement,firms
mustchooseaparticularlossmodelwhichprovidesestimatesoftheamountofcapitalneededtooffset
assumedlosses.
Taylorarguesthatifinsurersgetthiswrong,asbanksdidunderBaselII,theninsurersmaybe
undercapitalised.Alternatively,ifthemodelchosenoverestimatestheamountofcapitalneeded,
insurersmaybecomeovercapitalisedandtherebytooexpensive.Taylorarguesthatinorderto
striketherightbalance,firmsmustunderstandthewaysinwhichpeoplecanbefooledintounder-or
overestimatingriskandtocalibratemodelsaccordinglywhilstnottobeingoverreliantuponthem.
Indeed,sometypesofevents,suchasthosetermed“blackswans”arebydefinitionbeyondthe
realmsofmostmodellingcapabilities,despitethedramaticeffectsthattheycanhaveonindustry
andthewidereconomy.
Building scenarios on the futureOurexpertauthorsidentifyanumberofsignificantandinterrelatedtechnologicalopportunitiesaswell
asrisks,whichcanbeexpectedtohavesubstantialimplicationsforourfuturewellbeingandprosperity.
Crucially,anumberoftheexpertauthorsarguethateffectiveactionmustnotbedeferred–what
policymakersandbusinessleadersdonowwillhaveimportantimplicationsforourlong-termfuture.In
laterchapterswewillusethisexpertanalysistoformthebasisforsometechnologicalscenarioslaterin
thisreport.
summ
ary
7 Future risk: Technology
science and the insurance industryScience, innovation and the UK insurance industry2
David Willetts MP – Minister for Universities and Science
TheUKhasaworld-leadinginsurancesectorandLondonistheonlymarketinwhichalloftheworld’s
20largestreinsurancegroupsarerepresented.ToooftentheCityisregardedasshorthandfor
investmentbankingbutlet’sbeclear:theCitycoversfarmorethanthatandweshouldbeproudof
competitivesectorslikeinsurancewhichmatteragreatdealfortheeconomy.
“ For the Government ’s part, we remain committed to securing the best possible outcome for the UK insurance industry under Solvency II – on the timing of implementation and on the critical detail concerning equivalence and the matching premium.
”TheUKinsurancesectoristhethirdlargestintheworld–andthebiggestinEurope,accountingforseven
percentofglobalpremiums.Employingaround300,000peopleintheUK–morethanaquarterofall
financialservices’jobs–itcontributessome£10billionintaxes.It’salsoamajorexporter,withabout30
percentofitsnetpremiumincomecomingfromoverseasbusiness.FortheGovernment’spart,weremain
committedtosecuringthebestpossibleoutcomefortheUKinsuranceindustryunderSolvencyII–onthe
timingofimplementationandonthecriticaldetailconcerningequivalenceandthematchingpremium.
Thereisawiderlessonhereforfinancialservices.Insurancehasfaceditsowntravails,butithassorted
itselfout,reformeditspracticesandemergedstronger.ThecontroversysurroundingsomeLloyd’s
ofLondonunderwritingsyndicateswaspainfulandIhaveconstituentswhoarestilllivingwiththe
consequencesofEquitableLife.ButtheCitycanlearnfromunhappyepisodeslikethese,embrace
reformanditcanbounceback.
NowtheUKcancelebrateastrong,vigorousinsuranceindustry.Thereisalso,andIamtheMinister
responsible,astronguniversityandresearchsectorintheUK–andthereareconnectionsbetweenthe
two.Fortherestofthisessay,Iwanttoinvestigatetheseconnections–toshedlightontherealnature
andsignificanceofhigh-techgrowth,andhowbesttosupportit.
Thefirstandmostobviousfunctionforhigherandfurthereducationistoproducegraduatesthat
businesscanrecruit–and,intheinsuranceindustry,ofcourse,thereisaclearneedforgraduateswith
mathsskills.Thegoodnewsisatschoollevel,uptakeofSTEMsubjects–that’sscience,technology,
engineeringandmaths–atGCSEandAlevelhasbeenrisingsteadilyoverthepastfewyears.We’ve
seena42percentincreaseamongUK-basedstudentstakingafirstdegreeinmathsoverthepast
10years–andan18percentincreaseamongmathsPhDentrants.IntheAutumnStatement2011,
weannouncedthatwewouldsupportaschemetoenablethekite-markingofSTEM-relatedcourses
whicharevaluedbyemployers.Buttheeducationalroleisonlyoneaspectoftherelationship.The
associationsarebothbroaderanddeeper.
2 ThisisanabridgedversionofaspeechgivenbytheMinistertoWillisinMarch2012
8 Future risk: Technology
Windows upon the worldThelinksbetweentheUK’soutstandingscienceandresearchbaseandwhattheinsuranceindustry
goesevenfurtherthaneducation.Theygorightbacktotheopencharacterofoursociety.Brokerslike
Willis,forexample,connecttheworld’srisksandtheworld’sinsurancecapacity.Insurancehasalways
beenaglobalbusiness,asshownbyourmerchantswhosoughttoinsuretheircargoesmovingacross
theoceans–originallyinthecoffeehousesoftheSquareMile.Nodoubttheydosoagaintoday,thanks
toStarbucksandwifi.It’saclearcaseofhistoryrepeatingitself,butalsoaclassicexampleofBritain’s
reach–andnotjustinapurelyinternationalsense.Nowadays,UKinsurersunderwritecommercial
activitiesrangingfromthedeepseatoearthorbit.
UKscienceandresearchisanotherinternationalwindowontheworld.Likeinsurance,itisboundup
withBritain’shistoryofexplorationanddiscoveryandit’swhatliesbehindourunderstandingofthe
culturesandlanguagesofothercountries.Foranywhereintheworld,we’relikelytohavelinguists,
anthropologists,historians,sociologistsstudyingittoday.Therearenotmanynationswhocanclaim
thatbreadthofexpertise.Thisbreadthresidesnotjustinthehumanitiesandsocialsciences.According
tolastyear’sreportwrittenbyElsevier,theUKcanboastinternationally-recognisedresearchstrength
inmorethan400fields.Thatincludesstrengthsinstudyingthephysicalandthenaturalworld–
biology,geology,geography,hydrographyandallthosedisciplineswhichjoinedtheRoyalNavyand
merchantfleetontheircircumnavigations.Britishscientistsstillfanoutacrosstheworldandstudy
datacollectedfromaboveandbelowit,tounderstandhowourplanetworks.InFebruary2012,Ivisited
BritishAntarcticSurveyresearchersonthewestoftheAntarcticPeninsula.Thepeoplestationedthere
areconductingarangeofexperimentsincludingexaminingmolluscscollectedduringCaptainScott’s
expeditionwiththesamespeciescollectedbycurrentresearchersfromtheverysamelocationto
understandtheeffectsofclimatechangeovertime.Veryfewcountriesareinapositiontocarryoutthis
kindofcomparativeworkbecausetheydon’thaveourhistoryofexplorationandscientificinvestigation.
“ ...scientists and insurers must gaze through the same pane of glass. Scientists’ raison d’être is understanding nature and insurers also need to understand nature as the prerequisite to judging risk. Insurers and scientists, therefore, share the same need to understand our world.
”Sotheinsuranceindustryhasawindowontheworld.Scientistsdotoo–andtheiractivitiesareintrinsic
towhatinsurersdo.Infact,scientistsandinsurersmustgazethroughthesamepaneofglass.Scientists’
raisond’êtreisunderstandingnatureandinsurersalsoneedtounderstandnatureastheprerequisiteto
judgingrisk.Insurersandscientists,therefore,sharethesameneedtounderstandourworld.
Earthobservationexemplifiesthatsharedmission–andforme,itstrueimportancehithomewhenI
visitedtheNASAJetPropulsionLaboratoryinPasadena,wherealargescreensimultaneouslyshows
missionsmonitoringtheoceans,polarice,atmosphericpollutionandforestfires.Ittreatstheworldlike
ahumanpatient.Noonecountrycantakeresponsibilityforallthiswork,buttheUKplaysaleadingrole.
In2012wechairedtheinternationalcommitteethatcoversspaceandmajordisasters;UKsatellites
providevitaldatainthewakeofmajornaturaldisasters.In2012wecelebratedthetenthanniversaryof
theEnvisatsatellite–10yearsofUK-builttechnologyprovidingscientistsandresearcherswithquality
datatoanalyseglobalwarmingandclimatechange.
science and the insurance industry
9 Future risk: Technology
OnereasonIamsokeentosupporttheUKspacesectoristhatIseeourroleasaspacefaringnation
asanaturalfollow-onfromourroleasaseafaringnation.Again,itgivesBritainglobalreachand
understanding.Inmarsat,theworld’sleadingmaritimecommunicationsbusinessisbasedinLondon,
andwe’redoingourbesttomakesurethatthebusinessinfrastructureisinplacetogrowtheFTSE100
spacecompaniesoftomorrow.ThatincludeschangingtheOuterSpaceActbyintroducinganupper
limitonliabilityforUKoperators,developingtherightinsuranceinfrastructureforspaceactivitiesand
investingtoopenupnewmarkets.
There’sanotheraspectofGovernmentinvestmentinspacelikelytobeofparticularinteresttothe
insuranceindustry.InNovember2011,wecommitted£21milliontoassistinthedevelopmentand
launchoftheUK’sfirstSyntheticApertureRadarsatellite–betterknownasNovaSAR.OnceNovaSARis
upandrunning,businesseswillbeabletousethedatainvariousways,includingmaritimesurveillance
ofdrug-trafficking,oilspillsandpiracy.Withpiracy,themajoradvantageofNovaSARisthatithasthe
abilitytoimageatdayornightandeffectivelyseethroughclouds.NovaSARcanalsocovervastareas,
liketheIndianOcean,inrelativelyshortperiodsoftime–withsufficientresolutiontodetectsmall
individualships,theirspeedanddirection.Bymarryingthisinformationwithautomaticbroadcast
messageswhichidentifyindividualships,NovaSARwillenablelawenforcementagenciestoidentifyand
targetuncooperativeorsuspectvessels.
TheGovernmentisalsoinvestinginotherbranchesofsciencetohelpallofusunderstandtheworld–
andhelpinsurerstounderwriteit.TheMetOfficeHadleyCentreisprobablytheworld’sleadingplacefor
combiningweatherandclimateforecasting.Inthepast,theMetOfficehassatwiththeBoardofTrade
andtheMinistryofDefence,givenitsimportanceinprotectingcommercialshippingandtheUK’sarmed
forces.In2011,itmovedovertoBISandispartofthesciencefamilyforwhichwehaveresponsibility.
WehaveexcellentcentresofmeteorologysuchastheUniversityofReading.Meanwhile,theNatural
EnvironmentResearchCouncil(NERC)isleadingthe£2.8millionPUREprogrammeonprobability,
uncertaintyandriskintheEnvironment–improvingassessmentandquantificationinnaturalhazardsby
developingnewmethodsanddemonstratingtheirapplicability.
TheMetOfficeiscontinuingtocombineitsexpertiseinweatherandclimatewiththeUK’sresearchers
inenvironmentalscience.Ithasalreadybroughttogetherseveralinstitutionsandagenciestoform
theNaturalHazardsPartnership,whichprovidesround-the-clocksupporttotheemergencyresponse
services.NowitisextendingthisconceptthroughtheEnvironmentalSciencetoServicePartnership,
whichaimstoharnessthenation’sinvestmentinenvironmentalscienceforthebenefitofsociety,
businessandgovernment.Atthesametime,theUKSpaceAgencyisopeningupdataforresearchers
andcompaniesatthecentreforClimateandEnvironmentMonitoringfromSpace(CEMS).WewantCEMS
tobecometheleaderinsatellitedataintegrationandinformationdelivery.
A world in fluxUnderstandingthephysicalworldisallthemorenecessarybecauseofthespeedatwhichthenatural
environmentisaltering.Naturaldisasterscaused£100billionofdamagein2011anditwasthecostliest
yearintheinsurancemarket’s323-yearhistory.Scientistsandinsurersarebothurgentlyscrutinisinga
worldinflux.
TheIcelandvolcano,flashfloodsinPakistan,theearthquakeinHaiti,wildfiresinRussia,scientists
recorded960loss-relevanteventsin2010,aworldrecord.Morethanever,insurersarerelianton
Earthobservationdataforexposurecontrol,damageassessmentandthenlossquantification.Whena
catastrophehappens,theinsuranceindustryisonlyafewstepsbehindtheemergencyresponders.
science and the insurance industry
10 Future risk: Technology
Therewerefewerthan400naturalcatastrophesin1980,comparedtoalmost1,000in2010–witha
significantriseinmeteorologicalandhydrologicalevents,andameasurableincreaseinclimatologicalones.
Astheclimatechanges,soweexpectmoreenergyintheclimatesystemtoleadtomoreextreme
weatherevents.But,ofcourse,whilewecanmakethisgeneralpointonaprobabilisticbasis,individual
eventscannotnecessarilybeattributedtoclimatechange.Thepastmaybenoguidetothefuture–
hencetheenormousvalueofscientificmodellingtoaworldwherethereismoreofvaluetodestroy–
morebuildings,shipsandwealththaneverbefore.
“ There have been quite a few stories about financial services in recent years, some of them pretty dreadful, but they haven’t focused on the London insurance market. One reason for that is its continuous engagement with the scientific community to make sure it has the best possible understanding of the world around us.
”MoreofthesenaturaleventsareinsuredintheLondonmarketthananywhereelse–meaningrecord
pay-outs.ButtherehasnotbeenacrisisintheLondonmarket.Therehavebeenquiteafewstories
aboutfinancialservicesinrecentyears,someofthemprettydreadful,buttheyhaven’tfocusedon
theLondoninsurancemarket.Onereasonforthatisitscontinuousengagementwiththescientific
communitytomakesureithasthebestpossibleunderstandingoftheworldaroundus.
The Government’s position on climate changeAsacoalitiongovernment,weareinformedbytheavailablescientificevidence:evidencefromtemperature
recordsinEnglanddatingbackto1659andproxymeasurementsfromicecoresgoingbackthousandsof
years;evidencefromthesophisticatedmodelsdesignedbyNASAandtheMetOffice,projectingfuture
climateunderarangeofemissionsscenarios.Theevidenceisoverwhelming,validatedbythevastmajority
ofscientists,andpointsinonedirection.Theearth’ssurfacehaswarmedbymorethan0.75degrees
centigradesincearound1900,withmuchofthiswarmingoccurringinthepast50years.
TheFourthAssessmentReportoftheIntergovernmentalPanelonClimateChangein2007concluded
that–withaprobabilityofmorethan90percent–mostoftheobservedglobalwarmingsincethe
mid-20thcenturyisattributabletotheobservedincreaseinhuman-causedgreenhousegas
concentrations.Wearecurrentlyannuallyemittingmorethan30billiontonnesofCO2globallyby
burningfossilfuels.Puttingallthistogether,averageglobaltemperaturesmayrisebetween1.1°C
and6.4°Cabove1990levelsbytheendofthiscentury.
Ofcoursetherearemanyuncertaintiesinvolvedhere–discontinuitiesortippingpoints,forexample,and
thescientificcommunityisfocusinghugeeffortsonexaminingthese.Butasscienceminister,Ioperate
purelyfromtheavailableevidence.
Onereasonwhyclimatechangeissoimportantisthepotentialburdenourgenerationmaybequeath.
WhenMargaretThatcheropenedtheHadleyCentreinMay1990,sheobservedthat“Man’sactivitiesare
alreadyaddinggreenhousegasestotheEarthatanunprecedentedrate,withinevitableconsequences
forourfutureclimate”–andthat“Theproblemsdonotlieinthefuture—theyarehereandnow—andit
isourchildrenandgrandchildren,whoarealreadygrowingup,whowillbeaffected.”Thisrelatestothe
centralthemeofmybook,ThePinch–fairnessbetweengenerations.
science and the insurance industry
11 Future risk: Technology
AccordingtoaDEFRAclimatechangeriskassessmentpublishedinJanuary2012,forexample,annual
damagetopropertiesinEnglandandWalesfromriverandseafloodingisprojectedtorisetobetween
£2billionand£12billionannuallybythe2080s–againstacurrentcostofaround£1.3billion.While
prematuredeathsduetocoldwintersareprojectedtodecreasesignificantly,prematuredeaths
duetohottersummersarelikelytoincrease–byuptoaround4,000bythe2050s.Fromascientific
perspective,uncertaintiesaroundtippingpoints,andthepotentiallyincalculablecoststhatthesecould
imposeonourdescendants,areratherbigbetstoplaceonthefuturewhentherearesoundarguments–
andgoodbusinessopportunities–formovingtowardsalowcarboneconomynow.
The modelled worldThusfar,thisessayhasillustratedthesignificanceofthelinksbetweentheworkofscientistsstudying
climatechangeandthenaturalworld,andtheworkoftheinsuranceindustry.Butthatisnottheendofthe
story,forthereisanotherconnectionbesides.It’snotonlywhatweresearchthatmatters,buthowwedoit.
Thesheervolumeofdataiscurrentlyoneofthebiggestchallengesfacingscience.Analysingallthatdata
forscientificdiscoveryisoneofourgreatchallenges.
Oneoftheclassicwaysinwhichwehandletheselargevolumesofdataisthroughalgorithms.Andthis
year,inJune,wemarkedthecentenaryofthebirthofthegreatBritishscientistwho,morethananyoneelse,
linkedthemathsofalgorithmstomoderncomputing:AlanTuring.Handlinglargedatasetsisakeyskillin
financialservices,inadvancedmanufacturing,andinscientificresearchtoo.ThatiswhytheGovernmentis
investing£165millionine-infrastructure.AndinMarch2012Ico-chaired,withProfessorDominicTildesley,
thefirstmeetingofthee-infrastructureleadershipcouncilthatisgoingtoensuretheUKmaintainsits
globalleadinthisdiscipline.
Computationalmodelling,asI’vealreadysuggested,iswelldevelopedforpredictingthenaturalworld,
butthereishugepotentialincombininghighperformancecomputingandanalyticstoimproveexisting
models:thebetterthemodel,thebetterthebusinessdecision.TheUKhasgreatstrengthsinmodellingand
simulationsoftware,butwealsoneedthemathematicsknowhowtoexploitfuturearchitectures,combine
methodologiesinsolvingcomplexproblemsandhandletheassociatedstorageanddataanalysisissues.
ArecentinternationalreviewratedtheUKasexcellentinthemathematicalsciences,withworld-leading
researchersineverysubfield.Iknowthatsomeofourmathematiciansareworriedthattheimportanceof
mathsresearchisbeingoverlooked.Itaketheirconcernveryseriously–andsodoestheEngineeringand
PhysicalSciencesResearchCouncil.Inresponsetothereview’srecommendations,theEPSRCpublished
anactionplaninNovember2011.Infact,theEPSRCtellmethattheywillbeincreasingthetotalamountof
resourcesgoingintomathsthroughtheirwiderworkonsocietalchallengesovertheperiodcoveredbythe
spendingreview.
SofarastheCityisconcerned,theGovernmenthavepledgedsupportforadoctoraltrainingcentrein
financialcomputingatUniversityCollege,London.The£20millioncentre–for£7.5millionfromtheResearch
Councilsleveragedtheremaininginvestment–hasaparticularinterestinalgorithmicrisksimulation.
“ ...through a market match algorithm, insurance brokers can harness new technology to deliver a modern version of the classic broker function. The customer wins thanks to better information about the market, which drives competition. Business wins thanks to better access to more customers. The UK wins by insurers being at the forefront of innovation and also based in the UK.
”
science and the insurance industry
12 Future risk: Technology
Thisiswhereinsurancefitsin–presumablyhopingclientswillplacetheirbusinesswiththem.For
example,throughamarketmatchalgorithm,insurancebrokerscanharnessnewtechnologytodeliver
amodernversionoftheclassicbrokerfunction.Thecustomerwinsthankstobetterinformationabout
themarket,whichdrivescompetition.Businesswinsthankstobetteraccesstomorecustomers.TheUK
winsbyinsurersbeingattheforefrontofinnovationandalsobasedintheUK.
Infact,arangeofmajorUKfirmsandsectorsareessentiallyinthealgorithmbusiness.Autonomyis
one,ofcourse,buttheyarenotalone.WPPmaybethoughtofasaservicescompany,anditsR&D
budgetisofficiallysmall,butsophisticatedsentimentanalysisiscrucialtoitsbusiness.Andwhatabout
Tesco,whorelyonclubcardsandalgorithmstoachievesmartcustomersegmentationandtargeting?
Algorithmsseekoutanddiscovernewrelationshipsandbusinessopportunitiesthatwouldotherwisebe
invisibleandunexploited.
“ Our comparative advantage is different. It is the skill to programme those computers to maximise their capabilities, and employ those capabilities to great effect in business. It is also to develop new market opportunities in, for example, low energy use computing.
”IamnotsayingthattheUKwillhavetheworld’sbiggestorfastestcomputers,thoughwedoneedto
bethereorthereabouts.Ourcomparativeadvantageisdifferent.Itistheskilltoprogrammethose
computerstomaximisetheircapabilities,andemploythosecapabilitiestogreateffectinbusiness.Itis
alsotodevelopnewmarketopportunitiesin,forexample,lowenergyusecomputing.In2012Iopened
theworld’smostenergyefficienthighperformancecomputerinEdinburgh.BlueGene/Qcancarry
somethinglike800millionmillioncalculationsasecond,yetrequiresonlytheelectricityneededtoruna
lightbulb.
SowehaveseenseveralconnectionsbetweenwhatinsurersdoandtheUK’sscientificactivities.UK
insuranceandUKscienceshareaneedtounderstandtheworldaroundusandtounderstandhowitis
changing.We’veseenhowbothrelyonsophisticatedmaths-basedmodels.Letmefinallytakeastep
backandconnectallthistothewiderargumentabouttheGovernment’sgrowthstrategy.
Defining and supporting high-tech industryEarlierin2012IsetouttheCoalition’scommitmenttohigh-techgrowth–notjustasaniceideabutas
somethingweshouldactivelypursuethroughtherightmixofpoliciesbackingscience,researchand
innovation.Onechallengetomyspeechwasthathightechmaysoundsexybutitjustisn’tbigenoughto
mattertoday;inthefuture,perhaps,butnotnow.
Itistruethatofficialstatisticsrecordhigh-techbusinessesasasmallpartofourGDP.TheOECD
definitionofahigh-techindustryisonewithaR&D-to-outputratioofmorethan4percent.Bythis
measure,hightechdoesindeedlooksmallintheUK.Indeed,measuredinthisway,hightechinvariably
comprisesasmallpartofanyadvancedeconomy.Butweneedtolookbehindthatdefinition,because
it’sabadguidetopolicy.Itcompletelyfailstoaccountforthewayinwhichscientificknowledgeflows
intoindustries.Manylow-techactivities,suchastimberproductsorwarehousing,haveimportant
scientificinputs.Therefore,generalpurposetechnologiespermeatetheeconomy–withanimpact
extendingwaybeyondso-calledhigh-techsectors.
science and the insurance industry
13 Future risk: Technology
BytheOECDdefinition,insuranceisnotofficiallyahigh-techindustry.Eventhoughit’sclassedas
“knowledgeintensive”–withmorethanonethirdofitsworkforcequalifiedtodegreelevel–insurance
isconsideredtodolittlebywayofR&D.Iverymuchdoubtthatanyinsurancecompanyspendsanything
likefourpercentofitsturnoveronR&D.
But,asIhavearguedinthisessay,insurersactuallydependtoaconsiderabledegreeonhigh-tech
scienceandresearch.Insurers’excellentglobalperformancedependsinpartonaccesstoworld-class
sciencewhichdoesnotshowupinfiguresmeasuringinsuranceactivity.
Sohightechmattersfarmorethanofficialfiguressuggest,andthatchallengetomyJanuaryspeech
–thathightechremainsrelativelyunimportant–ismisguided.Evenapparentlylow-techindustries
maydependonhigh-techinvestmentandresearch.Currently,theUKhashigh-techindustriesflying
undertheradarand–oncewerecognisethem–itbecomesclearhowcruciallyimportanthigh-tech
capabilityreallyis.That’swhytheUK’shigh-techstrategyissocentral–whyinvestmentingeneral
purposetechnologieslikehigh-performancecomputingandourcommitmenttoscientificresearchareso
necessarytorebalancingtheUKeconomy.
science and the insurance industry
14 Future risk: Technology
Risks and opportunities: adoption and non-adoption of key technologies for the UK James Woudhuysen, Professor of Forecasting and Innovation, De Montfort University, Leicester
IntroductionWillratesofdevelopmentintechnologyincreaseatthesamepaceoverthenextdecadesastheyhave
overpastones?Howcanweeffectivelymanageevolutionsintechnologytoensurethesafetyand
securityofusers?Theseareinterestingquestions,buteachcontainsitsownunstatedpremises.
Inhistoricalterms,therecentpaceofdevelopmentofnewtechnologies,acrossabroadfront,maynot
havebeenespeciallyrapid.3Whilenewapplicationsonhand-helddevicesreceivealotofattention,
theyarefarfromthewholestory.Onthewhole,technologicaldevelopmentmayactuallybeslowing
down,notspeedingup.BigAmericanITcompaniesprefertohoardhundredsofbillionsofdollarsrather
thaninvestthatmoneyininnovation.4InAmericaandEurope,businessandgovernmentresearchand
development(R&D)asproportionsofGDPhavelongbeenstagnating.5
Theideathattheimpetuousevolutionof(information)technologythreatenseveryone’ssafetyand
securityisalsoratherbanal.Asearlyas1964,the‘muckraking’USjournalistVancePackardwrote,inhis
bookTheNakedSociety,abouttheincreaseinsurveillance(‘sincethebeginningofWorldWarII’),and
‘thetremendousamountofelectroniceavesdroppingthatnowoccurs’.6Theunprecedentedsensationof
amasslossofprivacytodayisonething.Butjusthowmuchshouldwereallyfearthatloss,orblameit
onomnipotentITsystems?
“ What’s new, rather, is that technology is regarded as fundamentally problematic, if not a little dangerous. Being complex and in some sense counter-posed to the workings of nature, technology today is perceived to be more a risk to be insured against than a down-payment on a better future.
”Indiscussionsofgrowth,technologytakesabackseattoendlessdebatesontaxationandstate
expenditure.Indeed,technologyhascaughtsomeoftoday’sbroaderdistrustofgrowth.7
InBritain,asinotherpartsoftheWest,therisksoffailingtoinvestintechnologicalinnovationare
rarelytalkedabout.Yetweknowfromhistorythatnewtechnologiescanlaythebasisforwholenew
industries,andsocreatemillionsofjobs.EvenintheDepressionofthe1930s,Britainsawinnovation
andemploymentgrowinfieldssuchasradio,appliancesandvehicles.
Whatfollowsisanoverviewoffivetechnologicaldomainsthathavegreatpotential,butwhichenjoy
less-than-greateconomicandpoliticalsupport.Thesedomainsarenottheonlyonesofmerit,norare
eachofthemguaranteedagreatfuture.Buttheyalreadyformtheobjectofinternationalinterest.
3 TylerCowen,TheGreatStagnation:How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better;Dutton,2011;JamesWoudhuysen,ed,BigPotatoes:theLondonManifestoforInnovation,ThinkingApart,2010
4 JimPyke,‘LargeTechGiantsHoardingCash?WhyAppleIsUnique’,SeekingAlpha,22August2011,onhttp://seekingalpha.com/article/288780-large-tech-giants-hoarding-cash-why-apple-is-unique
5 SeeOrganisationforEconomicCo-operationandDevelopment(OECD),Main Science and Technology Indicators (MSTI): 2011/1 edition,KeyFigures,chartsforbusinessandgovernmentexpenditureaspercentagesofGDP,p21,onhttp://www.oecd.org/dataoecd/27/52/47406944.pdf
6 VancePackard,TheNakedSociety[1964],PenguinBooks,1966,p20
7 Seethediscussionofthecategories‘addiction’toenergyand‘technologicalfix’inJamesWoudhuysenandJoeKaplinsky,Energise! A future for energy innovation,BeautifulBooks,2009,pp84–85,88–89.Forabroadercritiqueofwhathecalls‘growthscepticism’,seeDanielBen-Ami,FerrarisforAll:InDefenceofEconomicProgress,PolicyPress,2010
adoption and non-adoption of key technologies for the U
K
15 Future risk: Technology
1. Nanomaterials: the example of food packagingInOctober2011theEuropeanCommissiondefinedananomaterialasanatural,incidentalormanufactured
materialcontainingparticles,ofwhich50percentormoreareinthesizerange1nm–100nm[between
oneand100billionthsofametre].8‘Nanotechnologies’thereforerefertoawidevarietyoftechniques,
coveringawidevarietyofindustries.
Nano-scaleworkhasimprovedthesurfacesofcars,thedressingsappliedtowounds,andtheflame
retardancyofplastics.InGermany,theInno-CNTscientificalliancegroups90partnerstogethertowork
withcarbonnanotubesinthefieldsofenergyandtheenvironment,mobility,lightweightconstruction,
electronics,andhealthandsafety.9InBritain,theGovernment’sTechnologyStrategyBoardlistsmore
than20microtechnologyandnanotechnologycentres.Therearespecialistsinfabrication(10),medicine
(4),metrology(2),healthandsafety(1),andinmaterials(6).10
“ Typically enough, fears about the risks posed by nanomaterials have preceded real breakthroughs in the genre.
”Typicallyenough,fearsabouttherisksposedbynanomaterialshaveprecededrealbreakthroughsinthe
genre.In1986theAmericantechnologistKEricDrexlersaidthat‘greygoo’,ormassesofuncontrolled,
nanotechnology-scale,replicatingmolecularmachines,posed‘anobviousthreattootters,people,
cactiandferns–totherichfabricofthebiosphereandallthatweprize’.11In1992thewriterMichael
Crichtonpursuedasimilarthemeinhisthriller,Prey.In2004,PrinceCharleswarnedthatregulation
onnanotechnologyhad‘todevelopatthesamerateasthetechnologyitself’,andthataprecautionary
approachshouldbeapplied.12
Infactthenext100yearswillshowthatnanomaterialshavesofardevelopedtooslowly,nottoofast.
Theyshowparticularpromiseinthepackagingoffood,avitalpartoftheBritisheconomy.13InAmerica,
potentialapplicationshavebeenfoundinpaperthatdemonstratesantibacterialactivityagainstE.coli,
andintransparentcoatingstomakeplasticbottlesbothstronger,andmorecapableofkeepingtheir
contentsfizzy.14
“ The decision facing manufacturers and retailers serving food to UK markets will be whether to capitalise on public acquiescence to nanopackaging, or rather to allow scaremongers and regulators to keep the initiative.
”Rightnow,qualitativeresearchbyBritain’sFoodStandardsAgencysuggeststhatconsumerstakea
relativelycharitableviewoffoodpackagingapplicationsusingnanomaterialstoextendshelf-lifeor
todetectwhenfoodbeginstospoil.15Thedecisionfacingmanufacturersandretailersservingfoodto
UKmarketswillbewhethertocapitaliseonpublicacquiescencetonanopackaging,orrathertoallow
scaremongersandregulatorstokeeptheinitiative.
8 ‘CommissionRecommendation’of18October2011onthedefinitionofnanomaterial,OfficialJournaloftheEuropeanUnion,20October2011,p40,onhttp://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:275:0038:0040:EN:PDFNote:microtechnologyrelatestodistancesofaroundamillionthofametre
9 ‘Inno.CNT:Nanomaterialsofthenextgeneration’,onhttp://www.inno-cnt.de/en/uebercnt.php
10 ‘MicroandNanoTechnologyCentres’,onhttp://www.innovateuk.org/deliveringinnovation/micronanotechnologycentres.ashx
11 EricDrexler,Engines of Creation: the Coming Era of Nanotechnology (1986),Anchor,1987,p172
12 ArticleforThe Independent on Sunday,10July2004,onhttp://www.princeofwales.gov.uk/speechesandarticles/an_article_by_hrh_the_prince_of_wales_on_nanotechnology_the__59.html
13 ManyofthoseworkinginBritain’senormousfoodindustryworkwithdifferentformsoffoodpackagingintheirjobs.InQ1of2011,thefoodchaininGreatBritain,excludingagriculture,employed3.05millionpeople.DepartmentforEnvironment,FoodandRuralAffairs/OfficeforNationalStatistics,FoodStatisticsPocketbook2011,2011,p17,onhttp://www.defra.gov.uk/statistics/files/defra-stats-foodfarm-food-pocketbook-2011.pdf
14 SeeRonenGottesmanandothers,‘SonochemicalCoatingofPaperbyMicrobiocidalSilverNanoparticles’,Langmuir,2011,Vol27No2,pp720–6,and“Nano-bricks”mayhelpbuildbetterpackagingtokeepfoodsfresherlonger’,ScienceDaily,27March2011,onhttp://www.sciencedaily.com/releases/2011/03/110327191031.htm
15 FoodStandardsAgency,FSA Citizens Forums: Nanotechnology and Food,April2011,pp15–17,onhttp://www.food.gov.uk/multimedia/pdfs/publication/fsacfnanotechnologyfood.pdf
adoption and non-adoption of key technologies for the U
K
16 Future risk: Technology
2. Electronic componentsIn2002andagainin2006,yearsbeforeJapan’srecentordealbyearthquake,tsunamiandnuclear
blast,responsibleauthoritiesonbothsidesoftheAtlanticgavesomementiontotheuseofITaround
disastersandhealthcare.Announcingaconvergencebetweennanotechnologies,biotechnologies,ITand
cognitivescience,AmericanexpertsaskedaboutthefielduseofmobileITinrespondingtodisasters,
andeulogised‘comfortable,wearable’sensorsthatwould‘enhanceeveryperson’sawarenessofhis
orherhealthcondition,environment,chemicalpollutants,potentialhazards…’.16InParis,economists
wroteabouttheremotesensingofdisasters,andconsideredhowbesttotransmitanddisplaywarnings
aboutthem.17
“ The potential prize is a big one: over the next decades, the use of sensors and displays in disasters and health could dramatically lower the world ’s risks.
”However,inbothdisastersandpersonalhealth,the21stcentury’sevidencesofarsuggeststhat
progressintheuseofITneedstospeedup.Thepotentialprizeisabigone:overthenextdecades,the
useofsensorsanddisplaysindisastersandhealthcoulddramaticallylowertheworld’srisks.
Sensorsanddisplayswillbecomemorecapable.Printinglayersofelectronicinkontolongrollsof
flexiblematerialheldatambienttemperatures,firmsspecialisinginsemiconductorssuchasIntel(US)
andARMHoldings(UK)willcontinuetobringdownthescaleandcostsofelectroniccomponents.18The
resultwillbechips,sensors,displaysandotherelectronicsystemsthat,comparedwithtoday’sversions,
arelight,uselittleenergyandprocessdetailedimagesquickly.
Britainhasstrengthsinsensors,displaysandthebroaderdomainofprintinginelectronicinks,whether
plasticorotherwiseorganicincomposition.AtImperialCollege,London,thePlasticElectronicsDoctoral
TrainingCentrehasateamlookingatnon-invasivesensorsthatcandetectdiabetesfrompeople’sbreath.19
PlasticLogic,co-foundedbyCambridgeUniversityProfessorSirRichardFriendandbackedbyHerman
Hauser,atoptechnologyfinancier,offersRussianstudentsa475g,27.2cme-bookreaderthat,at$400,
boastsashatterproof,glare-freedisplayand,nearly,aonce-a-weekchargingregime.20AtSedgefield,
CountyDurham,thePrintableElectronicsTechnologyCentreusesorganicinkstodesign,developand
prototypenotjustthinfilmtransistorsfordisplays,butalsosolid-statelightingandphotovoltaics.21
Theseeffortsarecommendable,butaretheyenough?IntheUS,theDefenseAdvancedResearch
ProjectsAgencyusesthenew,moreminiaturisedchipsandsensorstobuildUnmannedAerialVehicles
(UAVs)thesizeofbirdsorinsects(‘microdrones’),22aswellassense-and-communicateelectronic
systemsmountedonandpoweredbyinsects.23
Economically, militarily and in many other ways, there is a lot riding on the new generation of
electronic components.
16 MihailCRocoandWilliamSimsBainbridge,eds,Converging Technologies for Improving Human Performance: Nanotechnology, Biotechnology, Information Technology and Cognitive Science(2002),sponsoredbytheUSNationalScienceFoundationandDepartmentofCommerce,KluwerAcademicPublishers(currentlySpringer),2003,pp5,127,onhttp://www.wtec.org/ConvergingTechnologies/Report/NBIC_report.pdf
17 OECD,Information Technology Outlook,2006.pp259–262,272,onhttp://www.keepeek.com/Digital-Asset-Management/oecd/science-and-technology/oecd-information-technology-outlook-2006_it_outlook-2006-enTheOECD’sideasonconvergenceandwearablesensorsderiveinnosmallmeasurefromMihailCRocoandWilliamSimsBainbridge,eds,Converging Technologies,opcit
18 Todaythehalf-pitchinanelectronicarray,definedashalfthedistancebetweenidenticalfeaturesinit,is22nanometres,orbillionthsofametre
19 ‘Non-InvasiveSensorsfortheDetectionofDiabetesviaBreathSamples’,onhttp://www3.imperial.ac.uk/plasticelectronicsdtc/research/cwmbproj
20 ‘PlasticLogicIntroducesthePlasticLogic100,BringsInnovationtotheFutureofEducationinRussia’,12September2011,onhttp://www.plasticlogic.com/news/pr_education_announce_sep122011.php
21 ‘AboutPETEC’,onhttp://www.uk-cpi.com/3_pages/focus/petec/about/index.html
22 SeeforexampleElisabethBumillerandThomShanker,‘WarEvolvesWithDrones,SomeTinyasBugs’,NewYorkTimes,19June2011,onhttp://www.nytimes.com/2011/06/20/world/20drones.html?pagewanted=all
23 ‘Tinycyborgbeetlescouldrechargejustbyflying’,InnovationNewsDaily,29November2011,onhttp://www.msnbc.msn.com/id/45483410/ns/technology_and_science-innovation/#.TvjLVJibB9kAttheUniversityofMichigan,KhalilNajafiandErkanAktakkahaveusedthemovementofaninsect’swingstopoweratinypiezoelectricgenerator.Foranoverviewofpowersupplysystemsforelectronics,withafavourableappraisalofpiezoelectricdevices,seeKACook-Chennault,NThambiandAMSastry,‘PoweringMEMSportabledevices–areviewofnon-regenerativeandregenerativepowersupplysystemswithspecialemphasisonpiezoelectricenergyharvestingsystems’,Smart Materials and Structures,Volume17Number4,August2008,onhttp://deepblue.lib.umich.edu/bitstream/2027.42/64168/1/sms8_4_043001.pdf
adoption and non-adoption of key technologies for the U
K
17 Future risk: Technology
3. Automotive systemsForthenextdecadeorso,themostsignificantchangesinautomotivecomponentswillbeinbasic
assembliesandinIT.
InDurham,Comesys(ControlandMeasurementSystems)Europehasshownhowassemblieswill
change.Onitsacceleratorpedals,Comesysdoesn’tfitcomplicatedslidingsensors,butnon-contact
rotaryonesthatgreatlysimplifythemechanics.Result:amoreaccuratepedal,fewercarbonemissions
andlowwear–alifespanclaimedtobemorethan10millioncycles.24
WithComesyspedals,DigitalSignalProcessingisalsoimportant,underliningthemoderncar’sgrowing
dependenceonelectronics.AlreadyJapanandGermanyhavebeguntobuildradar-basedcollision
avoidancesystemsintocars–towarnthedrivertouseevasivetacticsandtopreparethevehiclewhena
collisionisinevitable.Therewillalsobemoreincidentavoidancesystems,inwhichtelemetrymonitors
keycomponentsinlorriestoensurethattheybreakdownlessfrequently.
“ Even before mass automotive IT has matured, however, we can be certain there will be concerns about which kind of insurer to call if systems bring about a motorway pile-up.
”Thefuturewillseecollisionavoidanceusedtoallowvehiclestomovetogetherinclose-upconvoys–
especiallyifBritaincontinuestobuildnonewmainroads.Even before mass automotive IT has matured,
however, we can be certain there will be concerns about which kind of insurer to call if systems bring
about a motorway pile-up.
Whataboutreplacementsfor,oratleastadditionsto,theinternalcombustionengine?Well:anall-
electriccarisawonderfulthing,butitwon’tbearoundasaseriousproportionoftheworld’sfleet
fordecades.Still,Britaincanalreadyclaimadvanceinelectricmotors.Torque-to-massratiosontwo
YokelessAndSegmentedArmature(YASA)motorsmadebyOxfordYASAMotorsarehighenoughtobe
abletoaccelerateavehicleto60mphinlessthanfiveseconds.25
Beyondelectricpower-trains,fuelcellspoweredbyhydrogenareanoption.FromitsglobalHQin
Loughborough,IntelligentEnergyalreadyusesahydrogenfuelcellwithaprotonexchangemembrane
tobuild,withPSAPeugeotCitroën,amedium-range,lighturbandeliveryvehicle–and,withTheSuzuki
MotorCorporation,amotorbike.26
Perhapsthemostencouragingdevelopmentinhydrogencarsisonethatalmostturnsthefuelitselfinto
acomponent.AttheRutherfordAppletonLaboratory,Harwell,Oxfordshire,CellaEnergystoreshydrogen
ashydridesencapsulatedinpolyimide-basedmicrofibres.27Cella’shopeistomakethemicrofibresinto
pelletsthatcanbebroughtbytankerfromoilrefineries(whichiswheremostoftheworld’shydrogen
istobefound),andthenpumped,asafluid,tocarsatpetrolstationsequippedsimplywithmodified
pumps.Noneedtoinsureagainstmishapswiththe700atmospheresofpressureusuallyneeded
tostorehydrogen.Noneedtopersuadepetrolstationfranchiseesoftheneedtobuildawholenew
hydrogeninfrastructure.
That’sthethingwithinnovation.Although no unconventional technology is likely to overtake
conventional automotive engines and fossil fuels for decades, a really ingenious innovation just might
make significant inroads at an unexpected rate. The risk here lies not with the innovation, but rather
with Britain’s vehicle manufacturing sector. A major employer and a surprisingly resilient feature of
UK plc, it must be ready for the major changes in mass transportation that the 21st century may bring.
24 ‘Technology’,onhttp://comesys.co.kr/europe/technology.htm
25 ‘TheYASA™Motor’,onhttp://yasamotors.com/technology
26 ‘IntelligentEnergyatUnprecedentedShowcaseofFuelCellElectricMobilityTechnologyinFrance’11October2011,onhttp://www.intelligent-energy.com/news_events_and_press/news/94/
27 Thefibresaregivenanano-scaleporositythroughtheuseofatechniqueCellacallscoaxialelectrospinningorelectrospraying.CellaEnergy,‘Ourtechnology’,onhttp://www.cellaenergy.com/index.php?page=technology
adoption and non-adoption of key technologies for the U
K
18 Future risk: Technology
4. Airport passenger flow and security Fortheperiod2010–2030,Boeingforecastsanannualriseof4.2percentinthenumberofpassengers
usingaeroplanes.InBritain,theDepartmentforTransportprojectsthatthenumberofpassengersusing
Britain’sairportswillgrowfrom372millionin2008to540millionin2050.28
Withthiskindofexpansion,machinesthatautomatesecuritychecksonairportpassengerswillbemuch
indemand.YetBritain’srecordwithirisrecognitionatairportshasnotbeenanentirelyhappyone–and
internationalbusinesstravellersmaymarkthecountrydownasaconsequence.29
PerhapsthebiometrictechnologiespioneeredbyHumanRecognitionSystems,Liverpool,andAOptix
Technologies,California,pointawayforward.InstalledatGatwickAirport,HRS’sMFlowTracksystem
quickly,andwithoutmuchintrusion,capturesirisesandfacesatadistanceofaboutametre,goingon
tomatchthemtootherformsofidentification–typically,boardingpasses.Itspeedspassagethrough
airportsecuritycheckpoints,evenifitdoesn’tclaimtobeasubstituteforpassportcontrol.Another
systematGatwick,MFlowJourney,employspassivefacerecognitiontotrackpeopleflowatidentified
areas,anddisplaysqueuetimessothatpassengerscanchoosethefastest-movinglane.30
Systems for allowing secure movement through buildings could well find outlets beyond airports. But
if they were to grow too ubiquitous, the risk is that they become something of a signal of society’s
fears. Security is good; but an atmosphere permeated by security systems won’t necessarily make
people feel safer.31
5. Machines that work under the seaAfterthe2010Deepwater HorizondisasterintheGulfofMexico,theworldwokeuptotheuseof
undersearobotstotrackandstaunchtheescapeofoil.Infact,submarineroboticshasafuturemore
noblestill.
TheEarth’ssurfaceismostlycoveredbywater,buttheplanet’sseabedshaveyetfullytobeexploited.
In110kmoffRiodeJaneiro,Brazil,FMCTechnologies,Houston,willprovidetheoilcompanyPetrobras
witha‘subseaseparationmodule’thatwillsegregateheavyoil,gas,sandandwater…atadepthofup
to900m.Petrobrassaysthatithopestohavemarineoilextractiondonewithoutoilplatformsby2020,
usingunderseamachinesandrobots,someautomatic,somecontrolledfromthesurface.32
Britain’sexperienceinpumpingCO2inNorthSeaoilandgasoperationsmaycomeinhandyifkeeping
thegasunderseabecomesafruitfulpartofcarboncaptureandstorage(CCS)aroundcoal-firedpower
stations.Butoil,gasandCO2storagebynomeansexhaustthepotentialoftheseabed.There,metal
sulphides–copper,zinc,silver,gold–havealreadyattractedtheinterestofChina,Russia,Indiaand
SouthKorea.Andontopofthat,therangeofspeciesnowbeingfoundontheseabedisenormous.
Already,pharmaceuticalcompanieshavebegunexperimentingwithseacucumbers,inpursuitofdrugs
fortreatingcancer.33
Britainhascapabilitiesaroundtheseabedmining.HeadquarterednearNewcastle,SMDbegandesign
andmanufactureofseabedploughsinthe1970s.SMD’sQuantumisthecompany’slatestremote
operatedvehicleforconstructionandsurveywork.Withatotalhydraulicpowerofmorethan170kW,it
candigtrenchesinstrongcurrents,toadepthof3000metresofseawater.34
28 Boeing,‘CurrentMarketOutlook2011-2030’,onhttp://www.boeing.com/commercial/cmo/;DavidMillward,‘Localairports“todoubletheircapacityinnext40years”’,The Daily Telegraph,26November2011,p14
29 HelenWarrellandRoseJacobs,‘Airportiris-scanningsystemisscaledback’,Financial Times,15November2011
30 HRS,‘WorldfirstasGatwickinvestsinpioneeringbiometrictechnology’,19October2011,onhttp://www.hrsid.com/press-releases/mflow/70-World-first-as-Gatwick-invests-in-pioneering-biometric-technology
31 Onthegeneralphenomenonofgivingintotheterroristagenda,seeFrankFuredi,Invitation to Terror: the Expanding Empire of the Unknown,ContinuumInternationalPublishingGroup,2007
32 ‘MarlimOilField,Brazil’,offshore-technology.com,onhttp://www.offshore-technology.com/projects/marlimpetro/;RobinYapp,‘Braziltoreplaceoilrigswith“underwatercities”’,Daily Telegraph,29December2010,onhttp://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/8228548/Brazil-to-replace-oil-rigs-with-underwater-cities.html
33 ‘Suddenly,awiderworldbelowthewaterline’,The Economist,14May2009,onhttp://www.economist.com/node/13649265
34 Quantumspecification,onhttp://www.smd.co.uk/download.php?file=/page/123_119_10.pdf
adoption and non-adoption of key technologies for the U
K
19 Future risk: Technology
Environmentalorganisations,however,willnodoubtprotestman’sfurtherexploitationoftheseabed,
becauseofthedangerofpollution,andalsobecauseofperceivedorrealthreatstobiodiversity.Onthe
otherhand,claimsontheseabedbycompetingcountriesaremultiplying.Thereisnoneedtotalkup
theprospectof‘resourcewars’.But the chances are that, as undersea technologies for exploration,
mining and harvesting grow more sophisticated, so too will the controversy, diplomacy, litigation and
insurance that surround them.
6. ConclusionAswehavesaid,thefivetechnologicaldomainsconsideredabovedonotexhaustallthosethat
willproveimportantinyearstocome.Onecouldtake,forexample,3Dprinting,evenifsomeofthe
claimsmadeforitsfuturemayturnoutalittleextravagant.35Nevertheless,nanomaterialsforfood
packaging,miniaturisedelectronicsandcleverautomotivesystemseachhaveavibrantfuture.So,too,
dothesmoothingandsecuringoflarge-scaleflowsofpeoplearoundairportsandelsewhere,andthe
excavationoftheseabed.
Onthewhole,Britain’scommercialandstateinterestinthetechnologiesofthefutureisnotallthatit
couldbe.TheGovernment’scommitmenttoput£50mbehindresearchintoindustrialapplicationsof
graphene–two-dimensionallatticesofcarbon–iscreditableenough;yetifwecomparethissum,or
thosefieldedbyprivateinvestorsinR&D,withthoseroutinelyspentinbankingorinsurance,thesense
ofarealcommitmenttotechnologyismissing.
“ ...as we suggested in our discussion of sensors and displays in relation to disasters and to personal health, technology itself can often be developed to mitigate risk.
”Witheverynewtechnology,beginningwithfire,therearerisksattached.However,aswesuggestedin
ourdiscussionofsensorsanddisplaysinrelationtodisastersandtopersonalhealth,technologyitself
canoftenbedevelopedtomitigaterisk.Theuseoffire,afterall,alsolettothefireextinguisher,thefire
engine,thefireblanketandthefireescape.
WereBritainnottogetmoreseriousaboutthedomainswehavedescribed,ahugeriskmightwellbe
encountered.Food,electronicsandtravelarealreadyvitaltotheeconomy,andtheseasaroundthis
islandformakeyasset.NottofundtechnologicaladvanceinthesedomainscouldreducetheUKto
competitiveinsignificance.
35 Foranenthusiasticappraisalof3Dprinting,seePeterMarsh,‘Productionprocesses:Alightbulbmoment’,Financial Times,28December2011,onhttp://www.ft.com/cms/s/0/b59678b4-313b-11e1-a62a-00144feabdc0.html#axzz1i1IqRUYA
adoption and non-adoption of key technologies for the U
K
20 Future risk: Technology
failures in ultra large-scale complex S
ystems
Failures in Ultra Large Scale Complex Systems
Professor Dave Cliff, University of Bristol, Director, UK Large-Scale Complex IT Systems Research & Training Initiative
SummaryAdvancesininformationandcommunicationstechnology(ITC)inthepasttwodecadeshaveradically
alteredthenatureandscaleofrisksassociatedwithfailuresintechnologicalsystems.Previously
independentengineeredsystemsareincreasinglybeingconnectedtogethertoformsuper-systems
knownassystems-of-systems.Unanticipatedinteractionsbetweencomponentsincomplexnetworked
systemscancausedomino-effectchainreactionstorippleoutcausing“cascadefailure”or“contagious
collapse”.Sucheventsaretypicallyveryrare,butveryseriouswhentheydooccur.Incurrentandfuture
networkedsystems-of-systems,thescaleofthenetworkscanbetrulyvast,thefailurescanpropagate
fasterthanhumansarecomfortablyabletodealwith,andthemagnitudeoftherisks(thepotentialscale
oflossesthatsuchcascadefailurescancause)canbehuge.Therealityofthissituationisillustrated
herewithaspecificexample:theunprecedentedgyrationsintheUSfinancialmarketsontheafternoon
ofMay6th,2010,aseriesofeventsthatcamedangerouslyclosetocausingaglobalmeltdownofthe
world’sfinancialmarkets.Ifappropriateactionisnottakenbygovernments,societies,andindustry
practitioners,national-scaleandinternational-scalecontagiouscollapsesofkeylarge-scalecomplex
technologicalsystemscouldinfutureposeasignificantrisk.Systems-of-systemsareincreasinglycritical
tomaintainingthesocioeconomicwellbeingofextremelylargenumbersofpeople.Theimplicationsof
cascadefailureinsocioeconomicallycriticalsystemsarebleak.
IntroductionAstheCIIcelebratesitscentenary,lookingbackoverthepast100yearsitisclearthatamajorchange
hasoccurredinthepastdecadeorsoinalmostallfunctionsofadvancedeconomies:information
management,transaction-processing,accounting,andrecord-keepingsystemsthatwerepreviously
paper-basedarenowincreasinglymigratingtowhollyelectronicsystemswheredataisdigitisedat
thepointofgeneration,andthereafterallinformationisstoredandtransmittedinelectronicform.The
explosivegrowthoftheinternetandtheworld-widewebaroundtheturnofthemillennium,andthe
currentshifttowardremotely-accessed“cloudcomputing”systems,meansthatanycomputercantalk
toanyother,andthephysicalpositionofadatastoreisnowoftenoflittleornorelevance:thedatais
“inthecloud”,accessiblefromanywherewithadecentinternetconnection.
“ Increasingly, automated processing of data, and automatic selection and execution of appropriate actions, is being trusted to computers; and the human workers who previously performed those roles are expected to find work elsewhere.
”
21 Future risk: Technology
Furthermore,theongoingexponentialfallsintherealcostsofcomputingandcommunicationshardware
meanthatthecomputersthatstoreandmovedataaroundcanincreasinglybecalledupontoanalyse
thedataandactupontheresultsoftheanalysis.Computersystemsarecapableofanalysingvastlymore
datathanahumanheadcanhold,andcandosoonsplit-secondtimescales.Increasingly,automated
processingofdata,andautomaticselectionandexecutionofappropriateactions,isbeingtrustedto
computers;andthehumanworkerswhopreviouslyperformedthoserolesareexpectedtofindwork
elsewhere.Moreover,justasahumanworkercouldimproveovertimeasherexperiencegrew,so
currentcomputersystemsareincreasinglyabletoadaptandlearnfromtheirexperience.
“ Ultra large scale systems represent major challenges to the engineers responsible for the construction and ongoing maintenance of the constituent systems, and they also present major challenges to anyone concerned with the measurement and control of risk.
”Thesetechnologydevelopmentsmeanthatnetworksconnectingadaptivecomputersystems,each
performingjobsthatwerepreviouslydonebyskilledhumans,willbecomeevermoreprominentin
21stCenturylife.Increasingly,systemswillbecomposedofnetworkswherethenodes,thecomponents
inthenetwork,arethemselveseachstand-alonesystemsthatweredesignedandconstructedwith
littleornoforeknowledgeoftheothersystemsthattheywouldsubsequentlybeconnectedto.
Networkedsystemscomposedofinteractingbutotherwiseindependentsystemsareknowntechnically
assystems-of-systems(SoS).Typically,eachoftheconstituentsystemsinaSoSconsistsnotonlyof
technologycomponentsbutalsoofthepeople,andgroupsorteamsorfirmscomposedofpeople,that
interactwiththetechnology–forthisreason,thesystemsthatarelinkedinaSoSarereferredtoas
socio-technicalsystems,asthenistheSoSitself.Geographicallydistributedsocio-technicalsystems-
of-systemswherethenodesinthenetworkofsystemsarethemselvesheavilydependentoncomputer
technologyareknownaslarge-scalesoftware-intensivesocio-technicalsystems-of-systems.Because
thisisquitealongphrase,anditsacronymLSSISTSoSisn’tparticularlyeleganteither,asanalternative
manypractitionersnowrefertosuchsystemssimplyasultralargescaleorULSsystems.ULSsystems
representmajorchallengestotheengineersresponsiblefortheconstructionandongoingmaintenance
oftheconstituentsystems,andtheyalsopresentmajorchallengestoanyoneconcernedwiththe
measurementandcontrolofriskintheSoSasawhole(i.e.,systemicrisk).
ThatULSsystemsposemajorchallenges,andthattraditionalengineeringpracticeisnotatallwell
developedtomeetthosechallenges,wasfirstrecognisedindefenceandaerospacecircles,butitis
nowclearthatascomputersystemsinallaspectsofmodernlifeareconnectedtogetherviaglobal
telecommunicationsnetworks,soULSissuesandproblemsarestartingtobefeltinotherdomains
suchasinternationalfinancialmarkets,national-scalehealthandsocialcaresystems,andnational-
andinternational-scaleprovisioningofvitalutilitiessuchaselectricalpower,waterandsewage,and
transportinfrastructure.
AprimaryconcerninULSistheoccurrenceofmathematicallynonlinearinteractionsbetweenthe
constituententities:theconstituentsmayhavenonlinearitiesintheirresponses,orintheirinteractions
withoneanother,thatcompoundacrosstheentiresysteminsuchawaythatitisdifficultoreven
impossibletoaccuratelypredictthesystem-levelbehaviourevenifyouhaveperfectknowledgeofallthe
nonlinearitiesintheconstituentsandtheirinteractions:thisisalong-windedwayofsayingthattheULS
systemmaybeacomplexsystem,exhibitingemergentbehaviour.
failures in ultra large-scale complex S
ystems
22 Future risk: Technology
Oneofthemostworryingtypesofemergentbehaviour(i.e.,ofsystem-leveldynamicsthataredifficultor
impossibletopredictfromreductiveanalysisoftheindividualconstituents)iscascadefailure.Itmaybe
thatthesystemisstableifcomponentAfails,andisalsostableifcomponentBfails,butifcomponents
AandBfailatthesametimethenthecombinedeffectsofthesimultaneousfailurecausecomponentsC
andDandEtofail,whichinturncausefailuresincomponentsFandGandHandIandJ,andsoon,until
alargeproportionoftheentiresystem,possiblyallofit,collapsesintofailure.Insuchcircumstances,
thefailurehascascadedovertheentiresystem;themanifestsimilaritybetweenthisandthespreadof
contagiousdiseaseinpopulationsoforganismsmeansthatsuchsequencesofeventsarealsoknownas
contagiouscollapse.
“ Probably the best-known examples of cascade failures are those that have occurred in the electrical power transmission networks of various countries. 2003 was a vintage year for such problems, with cascades causing major power blackouts across Ontario, Canada and a number of north eastern states of the USA on one afternoon in August; in large areas of south London and surrounding counties one evening a couple of weeks later; and then in most of Italy and part of Switzerland one night in September. The biggest such blackout so far (measured by number of people affected) left around 100 million people in Java and Bali without power for six and a half hours in August 2005.
”
Thusfar,majorcascadefailuresinsocioeconomicallycriticalULSsystemshavebeenavoided.
Nevertheless,thereisonenotableeventintherecentpastwhereacontagiouscollapseinaworldwide
ULSsystemswasavoidedbysheerluckytiming:ontheafternoonofMay6th,2010,theworld’sfinancial
marketscamedangerouslyclosetoglobalmeltdown,inasequenceofeventsthatisnowwidelyknown
asthe“FlashCrash”.ThisisaneventdescribedanddiscussedatlengthbyCliff&Northrop:36
“Onthatday,inaperiodlastingroughly30minutesfromapproximately2:30pmto3:00pmEST,the
USequitymarketsunderwentanextraordinaryupheaval:asuddencatastrophiccollapsefollowedby
anequallyunprecedentedmeteoricrise.Inthespaceofonlyafewminutes,theDowJonesIndustrial
Averagedroppedbyover600points,itsbiggesteverintra-daylossofpoints,representingthe
disappearanceofmorethan850billiondollarsofmarketvalue.Inthecourseofthissuddendownturn,
theshare-pricesofseveralblue-chipmultinationalcompanieswenthaywire,withsharesincompanies
thathadpreviouslybeentradingatafewtensofdollarsplummetingto$0.01insomeinstances,and
rocketingtovaluesof$100,000inothers.”
“Thenassuddenlyasthisdownturnoccurred,itreversed,andoverthecourseofanotherfewminutes
mostofthe600-pointlossintheDowwasrecovered,andsharepricesreturnedtolevelswithinafew
percentagepointsofthevaluestheyhadheldbeforethecrash.Thatrecovery,whichtooklessthan
twentyminutes,wasthelargestone-daygainintheDow’shistory.”(Cliff&Northrop,2011)
36 D.Cliff&L.Northrop(2011)“TheGlobalFinancialMarkets:AnUltraLargeScaleSystemsPerspective”,BriefingpaperforUKGovernmentOfficeforScienceForesightprojectonTheFutureofComputerTradingintheFinancialMarkets.http://tinyurl.com/3vwkh6a
failures in ultra large-scale complex S
ystems
23 Future risk: Technology
Whilemanyhumantradersoperateinthecurrentfinancialmarkets,itisalsothecasethatverymany
tradesaremadebyautonomousadaptivecomputersystems,knownasalgorithmictradingsystemsor
lessformallyasrobottraders.VariousanalysesofthemarketeventsonMay6th,2010implicatedrobot
tradingsystemsasbeingatleastpartlyresponsibleforthegreatspeedatwhichtheswingsinprices
occurred.Thatafternoon’seventspromptedtheUSCommoditiesandFuturesTradingCommission
(CFTC)andtheUSSecuritiesandExchangeCommission(SEC)toworktogetheronajointinquiryinto
whathadhappened.Theinquiry’sfinalreportwasreleasedonSeptember30th,2010.37Cliff&Northrop
goontoexplainwhytheFlashCrashissuchaconcern:
“…[T]heFlashCrashcouldhaveoccurredanytimethatday.Certainlythespecifictime-periodduring
whichtheFlashCrashoccurred,roughly2:30pmto3:00pm,wasnotcitedasacausalfactorinthe
officialCFTC/SECreportontheeventsofMay6th,norinthemuchmoredetailedanalysisperformed
byNanexCorp.…wethinkthatinfactthemuch,muchbiggerworryis…whatwouldhavehappened
ifithadoccurredacoupleofhoursorsolaterthatday.Specifically,wethinkthatthetruenightmare
scenariowouldhavebeenifthecrash’s600-pointdown-spike,thetrillion-dollarwrite-off,hadoccurred
immediatelybeforemarketclose:thatis,ifthemarketshadclosedjustafterthesteepdrop,beforethe
equallyfastrecoveryhadachancetostart.FacedwithNewYorkshowingitsbiggesteverone-daydrop
inthefinal15minutesbeforecloseofbusinessonMay6th,andintheabsenceofanyplausiblepublic-
domainreasonforthathappening,combinedwiththegrowingnervousnessthattheGreekgovernment
woulddefaultonitssovereigndebtandthrowtheentireEuro-zoneeconomicunionintochaos,traders
inTokyowouldhavehadonlyonerationalreaction:sell.ThelikelihoodisthatTokyowouldhaveseen
oneofitsbiggesteverone-daylosses.Followingthis,asthemainlandEuropeanboursesandtheLondon
marketsopenedonthemorningofMay7th,seeingtheunprecedentedsell-offsthathadafflictedfirst
NewYorkandthenTokyo,Europeanmarketswouldhavefollowedintoprecipitousfreefall.Noneofthis
wouldhavebeenparticularlyusefulinstrengtheningconfidenceintheGreekdebtcrisisorthefutureof
theEuro,either.And,asfaraswecantell,theonlyreasonthatthissequenceofeventswasnottriggered
wasdowntomereluckytiming.Putsimply,ontheafternoonofMay6th,2010,theworld’sfinancial
systemdodgedabullet.”(Cliff&Northrop,2011).
AlthoughtheFlashCrashwasaparticularlyextremeevent,similarnegativeeventshavebeenwitnessed
inothermajormarketsintheperiodsinceMay,2010.Examplesinclude:asharpdown-spikeand
immediaterecoveryinthepriceofgoldonMay2nd,2011;adramaticcrashinthepriceofsilver
inafter-hourstradingonMay3rd,2011;andabizarreoscillatorypatternsteadilygrowinginamplitude,
followedbyacrash,inthepriceofUSnaturalgasonJune8th,2011.Thereiswidespreadspeculation
that,ineachcase,therootcausewaseitherrobottradersthathadbeenincorrectlyprogrammed,
orunexpectedinteractionsbetweenotherwisebenignrobottraders–thatis,undesirableemergent
behavioursinthemarket.
“ In essence, normalisation of deviance is a “groupthink” failure of process where potentially disastrous deviant events are ever more tolerated on the implicit assumption that, because they have not yet actually caused a disaster, so their future likelihood of causing a disaster is perceived to be diminished.
”37 CFTC&SEC(2010)Findings Regarding the Market Events of May 6th,2010.ReportofthestaffsoftheCFTCandSECtotheJointAdvisoryCommitteeon
EmergingRegulatoryIssues.September30th,2010.http://www.sec.gov/news/studies/2010/marketevents-report.pdf
failures in ultra large-scale complex S
ystems
24 Future risk: Technology
Thesenegativeeventsarenowsufficientlyfrequentthattheyarestartingtofitworryinglywell
withthenotionofnormalisationofdeviancethatthesociologistDianeVaughanintroducedinher
groundbreakinganalysisoftheeventsleadinguptothecatastrophiclossoftheNASAspaceshuttle
Challenger.38VaughanarguedthatstaffatNASA,andatMortonThiokol,thecompanythatsupplied
NASAwiththeshuttle’ssolidrocketboosters(SRB),hadunthinkinglyalloweddeviantevents(i.e.,
negativeevents,suchascomponentfailures,thathadpreviouslybeenarguedtobeavoidedatallcosts
becausetheycouldseriouslycompromisethesafetyoftheshuttlesystem)tobecomenormalised(i.e.,
tobeseenasroutineoccurrences).
Inessence,normalisationofdevianceisa“groupthink”failureofprocesswherepotentiallydisastrous
devianteventsareevermoretoleratedontheimplicitassumptionthat,becausetheyhavenotyet
actuallycausedadisaster,sotheirfuturelikelihoodofcausingadisasterisperceivedtobediminished.
FailuresintheSRBsealshadbeenwitnessedmanytimesbeforethelossofChallenger,andhadcome
tobethoughtofasanissueforfuturerevision,ratherthananimmediatethreattothelivesofthe
astronauts.AfterthesubsequentlossoftheshuttleColumbia,Vaughanwasinvitedontotheofficial
accidentinvestigationboardandshockinglyfoundthatonceagainnormalisationofdeviancehad
allowedaseriousdeviantevent(lumpsofinsulatingfoambreakingofffromtheshuttle’sSRBsand
externalfueltankandstrikingtheheat-insulatingtilesontheshuttle’sunderside,damagingthem)tobe
seenasanormalised,routinemaintenanceissue.
ThereisnothinginVaughan’sanalysisoftheeventsatNASAthatisspecifictotheshuttleprogramor
theaerospaceindustryingeneral:normalisationofdevianceisamalignprocessthatcan,inprinciple,
occurinanyorganisationorgroupoforganisations.
Andsoaquestionthatseemstobeparticularlypertinentforthenextfewyears,andindeedforthe
nextfewdecades,isthis:towhatextentisnormalisationofdevianceoccurringinthemanagementand
maintenanceofsocio-economicallycriticalULSsystems?Eventsinthefinancialmarketsonthedayof
theFlashCrash,andotherstrangemovementssincethen,seemobviouslytobedeviantandyetthe
moretheyoccurwithouttriggeringacatastrophiccascadefailureorcontagiouscollapse,themoresuch
eventsaretolerated,andsothesedevianteventsbecomenormalised.
And,aswasmadeclearabove,thefinancialmarketsarenottheonlylarge-scalecomplexsoftware-
intensivesocio-technicalsystems-of-systemsthatmoderneconomieshavegrowntobecritically
dependentupon:we’veconcentratedonfinancialmarketsheresimplybecausetheFlashCrashandthe
otherdevianteventsthathaveoccurredinthemarketssincethenserveasaforcefulillustrationofa
moregeneralpoint.
“ While a noninterventionist argument has certain appeals, it seems less plausible when applied to national or international ULS systems – failures in ultra large scale systems can easily have ultra large scale consequences, possibly constituting existential threats to entire nations.
”
38 D.Vaughan(1997)TheChallengerLaunchDecision:RiskyTechnology,Culture,andDevianceatNASA.UniversityofChicagoPress
failures in ultra large-scale complex S
ystems
25 Future risk: Technology
Whatcanbedone?Someargueforalaissez-faireapproachthatbordersontheDarwinian:failureswill
alwaysoccur,ingeneraltherewillbemanysmallfailuresandtheoccasionalverybigone,andthisacts
asaselectionpressureinthesurvival-of-thefittestworldthatismoderncommerce.Putbluntly,the
argumentisthatstuffhappensandwejustneedtolearntodealwithit,tolivewithit,whenitdoes.
Whilesuchanoninterventionistargumenthascertainappeals,itseemslessplausiblewhenappliedto
nationalorinternationalULSsystems–failuresinultralargescalesystemscaneasilyhaveultralarge
scaleconsequences,possiblyconstitutingexistentialthreatstoentirenations.Takinga“stuffhappens”
approachtothecollapseofnationalhealthandsocialcaresystems,ortointernationalfinancialmarkets,
seemsrecklesslyincautious.
Instead,perhapslessonscanbelearnedfromlong-establishedindustriesandprofessionswherethe
consequencesoffailurearesohighthattheavoidanceandmitigationoffailuresisdeeplywoveninto
thepractice.Studiesofwhatareknowntechnicallyashigh-reliabilityorganisations(HROs)suchas
surgicalteams,firefightercrews,andaircraft-carrierflight-deckmanagement,haverevealedacoreset
ofcommonvaluesandapproachesthatmarkoutsuccessfulHROs.39Theseincludeano-blameapproach
todealingwithdeviantevents,andconductingpost-eventanalysesofalloperationsorprocedures,
includingthelargenumberofroutinelysuccessfulones,toidentifywhatmighthavegonewrong,and
whetherthingscouldbeimproved,eventhoughnothingwentwrong.
Valuablelessonsmightalsobelearntfrompracticesinnuclearpowerengineering,wherepractitioners
havehadtodevelopadvancedmethodsforquantifyingandanalysingrisksincomplexengineered
systems,asanactofself-preservationinthefaceofwhatveryoftenthreatenstobepotentially
overwhelmingpopularandpoliticaloppositiontonuclearprojects.Inparticular,nuclearengineershave
developedasophisticatedsetoftoolsknownasprobabilisticriskassessment(PRA)initiallybasedon
traditionalfrequentiststatisticsandmorerecentlyextendedtoemploymodernBayesianapproaches.40
ApplyingPRAtomodernULSsystemswouldprobablyrequireextensionofthestate-of-the-art
techniques,butsuchaninvestmentofeffortshouldpaysignificantrewardsinthelongerterm.
“ The worry is that, in the absence of a major failure that scares the public and politicians into action, nothing will be done. If that is the case, normalization of deviance seems likely to deliver us a catastrophe eventually; we need only wait.
”
EffortssuchastheencouragementofadoptionofHROapproaches,and/orthedevelopmentof
PRAmethodsapplicabletoULSsystems,areonlylikelytobeofanyvalueiftheycanbedoneinan
appropriatepoliticalandregulatoryclimate.Publicconcernsatlossesofspaceshipsoraircraftand
worriesaboutnuclearaccidentsquicklyfoundpoliticalsupportandsoappropriateregulationsand
requirementsweresetinplacetogovernriskyengineeringendeavourssuchasnewaerospaceornuclear
projects.Similarly,itwillprobablybenecessaryforsizeableamountsofpoliticalcapitaltobeexpended
ontheintroductionofregulationsforULSsystemsengineering.Theworryisthat,intheabsenceofa
majorfailurethatscaresthepublicandpoliticiansintoaction,nothingwillbedone.Ifthatisthecase,
normalisationofdevianceseemslikelytodeliverusacatastropheeventually;weneedonlywait.
39 See,e.g.K.Weick&K.Sutcliffe(2007)ManagingtheUnexpected,2ndedition,JosseyBass
40 See,e.g.M.Stamatelatosetal.(2002a)Probabilistic Risk Assessment Procedures Guide for NASA Managers and Practitioners.www.hq.nasa.gov/office/codeq/doctree/praguide.pdf;H.Dezfuli,etal.(2009)BayesianInferenceforNASAProbabilisticRiskandReliabilityAnalysis.NASASP-2009-569:http://www.hq.nasa.gov/office/codeq/doctree/SP2009569.pdf;&D.Hubbard(2009)The Failure of Risk Management. Why It’s Broken and How to Fix It.JohnWiley
failures in ultra large-scale complex S
ystems
26 Future risk: Technology
Fooled by lack of randomness
Dr Peter Taylor – Research Fellow at Oxford University and risk specialist
Thiscontributionreflectsonhowwellwedealwithuncertainty.Theprincipalargumentisthatourdrive
forsimplificationcanmaskunderlyinguncertaintyandmisleadusintothinkingweknowsomething
whenwedon’t–webecome“fooledbylackofrandomness”.Wewillexplorehowthiscancomeabout,
andreflectonimplicationsforpolicymakersingeneral,andonthecapitaladequacyofinsurance
companiesasaparticularillustration.
The Uncertain CenturyWehavelongsoughttounderstandtheworldbybreakingitdownintoincontrovertiblefactsandthen
buildingitbackupagaininordertounderstandandmakethings.Wehavesentmentothemoon,built
carsthatparkthemselves,evenengineeredourownDNA.Butaswemovedintothe21stCentury,it
becameclearthata“reductionist”approachdidn’tadequatelyexplainthecomplexitiesoftheworld.Old
certaintieshavemorphedintonewuncertainties.JohnKayputsitstarkly:
“ It is hard to overstate the damage done in the recent past by people who thought they knew more about the world than they really did.41
”Kayisbutoneofawaveofauthorssincetheturnofthecenturywhohastakenourhubristotask.In
Useless Arithmetic,OrinandLindaPilkey42examinemodelswhichwereusedtosupporttheinterests
ofbusinessmenandpoliticiansratherthanadequatelyrepresentreality,withdisastrousconsequences
inareassuchasfishingandmining;inThe Future of Everything,DavidOrrell43challengeswhether
wecaningeneralmakemeaningfulpredictionsaboutreal-lifesystems,notablyclimateandgenetics;
DenisNoble’sThe Music of Life44disputesthecentraldogmaofbiologythatwhatweareissolely
aconsequenceofourgeneticmake-up,andinComplex Systems and the Origin of Wealth,Eric
Beinhocker45debunksthecertaintiesofclassicaleconomicsinfavourofanevolutionarymodel.
OneauthorwhohastappedintothiszeitgeistofthenewcenturyisNicholasNassimTaleb.InThe
Black Swan46,Talebchallengesourviewthattheworldisagameofchancewithknownoutcomeslike
rouletteandarguesinsteadthatweshouldlearntoexpecttheunexpected.InhisearlierbookFooled
by Randomness47hearguedthatselection(“survivor”)biascanfalselyassociatesuccesswithcertain
attributes–forexample,thataparticularinvestmentstrategywasthereasonthatsomeonebecamea
millionairewheninrealitytheybenefittedfromaboomandsomeluckybreaks.
Thebest-sellerlistsshowweprefernarrativeswhichofferlistsofqualitiesasthekeystosuccess
ratherthanpureluck,yetbusinessesbuiltontheseprinciplesandlaudedinoneerafailrapidlyin
another.48Howwedealwithuncertaintiesiswhere“fooledbylackofrandomness”comesintoplay–if
ourmodelssuppressrandomnessinfavouroffindingasimpleexplanation.Theregularity,precision
andseemingaccuracyoftheoutputsfrommodels–especiallywhenproducedbycomputerswhichlend
anapparentobjectivitytotheresults–canleadtofalsebeliefswhichcan,inturn,justifyinappropriate
actionsandpolicies.Onerecentexampleiswherecomputermodelsforratingandcorrelatingfinancial
instrumentsbasedonsubprimemortgagespromotedamassivebubbleofdebt.Anotherexampleis
usingaveragedamagefactorstoestimatethelosstopropertiesintheeventofawindstormsuchasa
repeatofHurricaneAndrew.AndafterHurricaneAndrewin1992,manyunderwritersindeedsettheir
41 KayJ(2010)Obliquity,ProfileBooks
42 PilkeyOandPilkey-JonesL(2006)Useless Arithmetic,ColumbiaUniversityPress
43 OrrellD(2008)The Future of Everything: The Science of Prediction,BasicBooks
44NobleD(2008)The Music of Life: Biology Beyond Genes,OUP
45 BeinhockerED(2005)Complex Systems and The Origin of Wealth,rhbusinessbooks
46 TalebNN(2007)The Black Swan,RandomHouse
47 TalebNN(2006)Fooled by Randomness,Penguin
48 Seeforexample,OrmerodP(2006)Why Most Things Fail: And How to Fix It,FaberandFaber
fooled by lack of randomness
27 Future risk: Technology
excessestotheaverageinjustsuchawaysothattheirmodelsshowedlowexposuretohurricaneloss.
Intherealworld,ofcourse,somepropertiesaredamagedmoreandsomelessthantheaverage,so
underwriterscanactuallyexperienceverylargelosses.Statistics,too,canmisleadwhencalamitiesare
infrequent.IntheLMX(LondonMarketeXcessofloss)spiralofthe1980sthatbroughtLloyd’stoits
knees,itwaspossibletoquoteexcellenthistoricalclaimsstatisticstoarguetherewaslittleornoriskto
ahighexcessoflosslayerwhereasinreality,thevariabilitywasthere,itjusthadn’toccurredinrecent
history.Theperceptionofanapparentlyrisk-freepremiummeant,aswiththemortgagedebtbubblesin
the1990sandagaininthe2000s,moretradeswerecreatedwhichamplifiedthedegreeofsystemicrisk.
Representing RandomnessBy“randomness”wemeanoneoftwotypesofuncertainty–thefirst(aleatory)duetointrinsicchanceof
anoutcomethathasn’thappened,suchasthechanceofheadsbeforeacoinistossed,andthesecond
(epistemic)duetolackofknowledge,suchasthechanceofheadsafterthecoinhasbeentossedbutthe
outcomeisnotyetknown.
Alsoproblematicintherealworld,asopposedtothesimplicityofgamesofchance,isKnightian
uncertaintyaboutoutcomesthatwedon’tknow.Keynesdescribeditasfollows:
“ By “uncertain” knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty: nor is the prospect of a victory bond being drawn. ...Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealth-owners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know.49
”
Allthreetypesofuncertaintycanbeillustratedbyimaginingplacing80redballsand20whiteballsinto
abag,andshakingthebag.The(aleatory)chanceofaredballbeforewepickis80%,the(epistemic)
chanceofaredballwhenwehavepickedoneoutbutnotyetlookedatitisstill80%.Thefurther
(Knightian)uncertaintywouldcomeinif,forexample,theballwhenrevealedturnedouttobecoloured
blue!Hadweknownthattheredcolourontheballswasduetoalitmusdye,andthatthebaghadbeen
usedtostorelime,thenitwouldnothavesurprisedusthattheballwentinredandcameoutblue.That
thiswasthecase,though,wasnotknown,norwastheprospectofablueballappearingatall.Once
suchoutcomesandscenarioscanbeconceived,theycanbebuiltintothemodel.Yetthisisbutoneof
manyscenariosthatcouldhavebeenconjecturedforoneofmanypotentialdifferentoutcomes.
Howdowedealwiththisunforeseeabletypeofuncertainty–the“unknownunknowns”or“black
swans”?Perhapsonecouldconstructafamilyofmodelsandgiveeachmodelitsowncredenceandin
thisway“fuse”themtocreateasuper-model?Butwheredoesonedrawtheline?Wearechasingan
impossibledreamandhaveatsomepointto“takeaview”(or“viewofviews”or…).Whenthisisdone
itstillcomesdowntoasetofoutcomesandnumericchancesofeachoutcomewhichaddupto100%.
TocopewithanyresidualKnightianuncertaintyonecanthenadda“catchall”outcome.Thuswecan
establishawayofdealingwithuncertaintythatcomesdowntoprobabilitiesandstatistics.
49 KeynesJM(1937)The General Theory of EmploymentQuarterlyJournalofEconomics,vol.51pp.212–14
fooled by lack of randomness
28 Future risk: Technology
Ways we can be Fooled by Lack of RandomnessLet’snowtrytocharacterisethecant,diagnosetheduff,andflushoutthefalsegodsthatunderstate
uncertainty.Notthatlongagowehadbutrulesofthumbwithwhichtoestimaterisksandassess
theconsequencesofpolicydecisions.Computers,withtheirevermoreextensivedataandpowerful
programmes,nowprovideavirtualworldwherewecanexplorefromthecomfortofourowndesktops
awiderangeofscenariosandassumptions.Whetherdesigninganewbridge,assessingthestateof
theenvironment,predictingthereturnonfinancialinstruments,ordeterminingcharacteristicsfrom
ourgeneticmake-up,wehavebetterinformationandtoolsthanever.Whatcouldpossiblyupsetour
Panglossianconfidence?TadMontrossofGenReanswereditbluntlyforuswhendenouncing“model
madness”infinancialmarkets:
“ Understanding the models, particularly their limitations and sensitivity to assumptions, is the new task we face. Many of the banking and financial institution problems and failures of the past decade can be directly tied to model failure or overly optimistic judgments in the setting of assumptions or the parameterisation of a model.50
”Commentariesonthe2008financialcrisisinGillianTett’sFool ’s Gold51andMichaelLewis’sThe Big
Short52showhowtheinvestmentbankingindustrywasabletodeludeandcolludeinamassivePonzi
scheme.Whilstsuchoccurrencesarehardlynew,asrecountedinThis Time is DifferentbyReinhart
andRogoff53,moderncomputersandtelecommunicationshaveamplifiedratherthanmoderatedour
recklessness.Ifthere’smoneytobemadewhilepassingroundanever-hotterpotatoeverfaster,then
peoplewillusewhateverargumentstheycanfindtojustifycontinuingwiththegame,andcomputer
modelsaretheiridealcohorts.
Reflectingonrecentevents,herearefourcharacterisationsofflawedthinkingthatledustobe“fooled
bylackofrandomness”:
1. Fooled by Averagesakintotheadvicetosomeonewantingtowadethroughariverthatitsaverage
depthis4feetwheninpracticethemiddleis10feetdeep.Asmentionedabove,averageswere
instrumentalinescalatingthesubprimefiasco54,whereRatingAgenciesusedtheaveragenotthe
distributionofgoodandbadunderlyingriskstoratesecurities.Afewqualityunderlyingloanswere
abletomaketherestseemacceptablethroughtheaveragewheninrealitythebulkoftheloans
wereverypoorrisks.Averagesareseductivetothosewishingforasinglenumberasananswer,but
anaveragedoesnotexpressthechanceofextremebehaviourandcantherebymisleadusastothe
chanceandseverityofthedownside.
2. Fooled by Correlation. Manythingstypicallyhappenatonceintherealworld.Inunderstanding
allofthesemovingparts,isn’titthe“Occam’srazor”viewtoassumetheyareallindependent?
Unfortunately,that’susuallytheworstassumptionthatcanbemadeasitmeansonethinggoing
badwon’taffectanother,oracommoncausemightnotaffectbothtogether.Yetagainthisiswhat
happenedinthefinancialcrisisof2008asthe(nowobviously)erroneousassumptionwasmadethat
defaultsonmortgagepaymentswereindependentbyregion.Theerrorwascompoundedbybanks
estimatingtheirportfoliodiversification(thatisreductionofriskfromindependentrandomness)
usingasimplecorrelationtoolcalledthe“GaussianCopula”55topriceCollateralisedDebt
Obligations,andcompoundedfurtherwhentheRatingAgenciesadoptedthesametool.
Doubleoops.
50 MontrossF(2010)Model Madness,GenRe
51 TettG(2009)Fool’sGold:How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe,LittleBrown
52 LewisM(2010)The Big Short,AllenLane
53 Reinhart&Rogoff(2009)This Time Is Different: Eight Centuries of Financial Folly,PrincetonUniversityPress
54 SeeLewis(2010)
55 SeeSalmonF(2009)RecipeforDisaster:The Formula That Killed Wall Street,WiredMagazine17.03(23rdFebruary2009)
fooled by lack of randomness
29 Future risk: Technology
3. Fooled by History. Thisiswhenweunder/overestimateriskasaresultofrelyingonlimitedhistorical
evidence.Anarrowviewofhistory,forexample,mightlullusintoafalsesenseofsecurityby
showinglittleevidenceofcorrelationbetweenthemovingparts,ornooccurrenceofsignificant
lossesorlargefailures.Wesawthis,forexample,intheLMXSpiralexamplementionedpreviously
andalsowiththe2011Tohokuearthquakewhere:
“ Thus, the short seismological record (the seismometer was invented in the 1880s) misled seismologists into assuming that the largest earthquakes known on a particular subduction zone were the largest that would happen.56
”
4. Fooled by Convenienceinchoiceofprobabilitydistributions–theissuehereisthe“technical”
matterofusingsimplefunctionsforcomputationaleaseandtractability,ratherthanthosejustified
byorappropriatetotheprobleminhand.Acommonerroristouseasimplefunctionsuchasthe
“bellcurve”Gaussianprobabilitydistribution,withitssymmetricsinglepeakandrapidtail-off,
ratherthanthelessconvenientskewed,fat-tailed,multi-peakeddistribution.Thesetechnical
quibblescanmakeallthedifferencetothecalculatednumbers,astheydidwiththe“Gaussian
Copula”mentionedpreviously,anditistheextremesthatcausebusinesses,governmentsand
societiestocollapse.
Turningnowtosomeoftheimplicationsofafullertreatmentofuncertainty,letuslookathowit
affectsthegeneralissueofpolicymakingand,asaparticularillustration,thecapitalrequirementsof
insurancecompanies.
Policymakersprefersimpleexplanationsandaregenerallyuncomfortablewithuncertainty.Whatisthe
pointofallthisscience,afterall,ifnottoprovideprecision?What,though,ifitisinthenatureofthings
thatfactsandpredictionsareunavoidablyfuzzy?Howcanyouevermakepolicy?Whichpoliticiancan
affordtotakeevenasmallchanceofawell-publicisedbadoutcome?Anditturnsoutthatinmanycases
theevidenceisequivocal,theknowledgeuncertain,andthepredictionsdubious.Iftheuncertainty
can’tberemoved,thenit’sfutiletorailagainstthelackofprecision.‘Twaseverso’–wehavetomake
decisionswithimperfectinformation.Therationalansweristoensuretheuncertaintiesarebroughtout
andnotdisguisedbywish-fulfilmentorvestedinterests.
Inlinewiththeconcernovercapitaladequacyinbanks,new“SolvencyII”regulationsarebeing
implementedintheinsuranceindustryintheEUin2014.ThecoreprincipleinSolvencyIIisthatinsurers
musthavesufficientfundstoremainsolventfor199yearsoutof200(ortohavea99.5%chanceof
beingsolventinanyoneyear).Thisiscalleda“1in200AnnualValueatRisk”criterion.Todetermine
thattheliabilitiesofaninsurerfallwithinthiscriterionhasmeanttheadoptionofprobabilisticmodels
–catastrophelossmodelsandMonteCarlo“DynamicFinancialAnalysis”models.Allgoodsofar?Well,
notquite,becausethekeyissueischoiceofmodeland,inparticular,whetherotherassumptionsor
othermodelswouldgivecommensurateestimatesofcapitalrequired.Theissueismodelrisk(the
riskthatthemodelincorrectlydescribesreality),yetregulatorsstillfightshyofrequiringestimates
ofthemodelrisk.Iftheygetitwrong,astheregulatorsdidunderBaselIIfortheBanksbyallowing
fundamentallyflawedmodels,theninsurerswillbeundercapitalised.Conversely,themodelsmight
errtheotherway,too,andthecriterionbecomeuncommercialandinsurancetoocapitalintensiveand
therebytooexpensiveasabusiness.It’sadifficultwiretowalk,butatthemostbasiclevel,keyto
traversingitsuccessfullywillbetoavoidbeing“fooledbylackofrandomness”.
AcknowledgementsAbigthankyoutoAnnieMilan,andespeciallyIanNicol,fortheirincisivecommentsandsuggestions.
56 SteinSandOkalE(2011)The size of the 2011 Tohoku earthquake need not have been a surprise,Eos,Vol.92,No.27,5July2011
fooled by lack of randomness
30 Future risk: Technology
The three scenariosIntheprevioussection,anumberofpre-eminentauthorsidentifiedsignificantandinterrelated
technologicalrisksandopportunities,whichcouldhavesevereimplicationsforlong-termwellbeing
andprosperity.Bypullingtogethersomeoftheirkeyconclusions,itispossibletooutlineafewsimple,
technologicalfuturesfacingtheworld.
Beforesettingoutthesenarrativesafewwordsofcautionarenecessary.Thereareanumberofassumptions
thatunderpinthefollowingscenarioswhich,ifchanged,woulddramaticallyaffecttheoutcomesofour
imaginedworlds.Onecoreassumptionisthattechnologicaldevelopmentis,broadlyspeaking,a“good
thing”becauseithelpsboosteconomicgrowth,increasehumanwellbeingandextendlives.
ThosewholivedthroughtheFirstandSecondWorldWarsmaynotagreewiththisstatement.
Technologicalprogressmadepossiblethedevelopmentofweaponscapableofdestroyingentire
townsandcities.ThebombingsofHiroshimaandNagasakiwouldnothavebeenpossiblewithout
extraordinaryscientificprogressmadebypioneerslikeEinsteinandOppenheimer.Inthiscontext,
scientificandtechnologicalprogress(ifthatistheappropriateterm)directlyledtothedeathsof
thousandsofinnocentcivilians.Itispossiblethen,thatinthefuture,technologicaladvancecreates
theconditionsforevermorecosteffectivewaysofdestroyingeachotherratherthanimprovingand
extendinglives.
Allthreescenariosalsoassumethatunfetteredtechnologicalprogressis,insomecasesatleast,
potentiallydangerous–risksassociatedwithnewtechnologiesmustbemanagedappropriately,we
argue,whichinsomeinstances,meansregulationand/orgovernmentoversight.Again,thisassumption
maynotholdinpractice–alaissezfaireapproachmay,ultimately,bethemostsuitableforensuring
abetterworld.Forexample,ifsafetyregulationsandgovernmentoversightwasremovedfromthe
developmentofnewtechnologiesandfromtheproductsandservicesthatspawnfromthem,the
marketsinwhichtheyoperatemaynaturallyweedoutthegoodfromthebad.Technologicalprogress
may,therefore,becharacterisedbysomefailures,butinthelongrun,wemaybebetteroffandprogress
maybefasterthanitwouldotherwisehavebeen.
Andfinally,itshouldbenotedthatthecausationimpliedbyourscenariosmayalsobeinaccurate.The
numberofvariablesinvolvedandthecomplexrelationshipsbetweenthemaresocomplexthat,for
simplicitiessake,itisnecessarytoexcludemanypossiblepermutationsandinteractioneffectsthat
couldleadtofuturescompletelydifferenttotheonesenvisagedhere.Therefore,ratherthanbeingused
asconcreteforecastsforfutureplanning,thesescenariosshouldinsteadhelpguidedecisionmakers
intoconsideringhowtheymightreactasdifferentpossiblefuturesunfold.
the three scenarios
31 Future risk: Technology
Scenario 1
Upside – technological renaissanceInourbestcasescenario,thereisprolongedinvestmentinnewtechnologybygovernment
andindustryprovidingalong-termsustainableboosttotheglobaleconomy.Thisinvestment
helpstounderpinthecomparativeadvantageofcountrieswhich,liketheUK,haveparticular
capabilityinhightechindustries.Countrieswithrelatively“low-tech”industriesalsobenefit
fromtechnologicaldevelopments–farming,forexample,ismadeincreasinglyprofitablethrough
theuseofbiotechnology,whichhelpstogrowcropsinaridareas.
Whilstrelianceontechnologyincreases,andparticularlyintheareaofICT,thisistemperedby
animprovedunderstandingofwhattechnologycanandcannotdo.Withrespecttolargescale
ITsystems-of-systems,organisationstaketheriskof“cascadefailure”seriouslyandadoptthe
zerotolerancetofailureapproachtakenby“highreliabilityorganisations”.Governmentsand
regulatorsalsounderstandtherisksposedbyrelianceonlargescalesystemsandcarefully
regulatethemtoensurethatsuchsystemsareimplementedandmaintainedwithappropriate
skillandexpertise.
Firmsutilisethelatestcomputationalmodellingsoftwareandtechniquestoestimatethe
risksfacingthemandadapttheirbusinessmodelswiththisinmind.However,riskmanagers
understandthelimitationsofsuchmodellingandundertakecareful,qualitative,horizon
scanningtoseekoutpossible“blackswan”events.Quantitativemodelling,therefore,remains
crucialtosuccessfulriskassessmentbutthisiscomplementedbyamorewide-rangingapproach
tounderstandingrisk–supportedbyfirms’executiveteams.Thereis,therefore,arenewedfocus
onthebehaviouralandculturalelementssoimportantinunderpinninggooddecisionmaking
infirms.57
Implications for the insurance industryInsurersareabletohelpencourageinvestmentinnewtechnology.Byunderwritingnew
technologyandtheequipmentandresourcesnecessarytobuildandsustainsuchtechnology,
theindustryisabletoprovideprotectionincaseoffailure–animportantconditionforinnovation
andthedisseminationoftechnology.Andthroughappropriatepricingstrategies,insurersare
abletoincentivisetherightkindsoftechnology.Muchliketheindustryplayedakeyrolein
bringingaboutseatbeltsincarsandshapingfiresafetyregulationsinbuildings,theindustryis
abletoidentifythekeyrisksassociatedwithnewtechnologiesandprovideeconomicincentives
foruserstolimittheirexposuretothedownsiderisksassociatedwiththem.Thisisinpart,
madepossible,byinsurersbuildinglinkswithuniversitiesandotherresearchcentresincluding
throughdirectinvestmentandsponsorshipofresearch.
57 SeeAshby(2011)Backtobasics:RethinkingRiskManagementandRegulationinaPost-CrisisWorld,CIIThinkpieceSeries,No.61.Inexplainingthefinancialcrisis,Ashbynotesthatriskmanagersplaceasignificantamountofemphasisonthetypesofbehavioursandsocialnormswhichgoverndecisionmakinginorganisations
the three scenarios
32 Future risk: Technology
Insurersremainawareofthepossibilityof“cascadefailure”inlargescaleITsystems-of-systems
andtakeprecautionstoraiseawarenessabouttheirpossibilityandtoprotectpolicyholders
intheeventofsuchfailurestakingplace.Workingcloselywithgovernmentandtherelevant
regulatorybodies,insurersbecomewellplacedtounderstandsomeoftherisksassociated
withlargescalesystemsandimparttheirwisdomabouthowtopreventasystemicfailure
fromoccurring.
Inthiscontext,insurersarealsosmartusersofICT.Theyembracenewcomputationalmodelling
technologytoimprovecorebusinessfunctionslikemarketingandunderwritingbuttheyare
carefulnottoplacetoomuchrelianceontheoutputsofsuchmodellingprocesses.Indeed,
theymakeconsiderableefforttocombinethisquantitativeapproachwithaconsiderationof
someoftherisksandbusinesspracticesthataremoredifficulttomeasure.Insurers,therefore,
remainwellsuitedtoidentifying“blackswan”typeevents,oratleastpreparingtheirbusinesses
insuchawaythattheybecomebetterabletosurviveinextremecircumstances.Theindustryis,
therefore,abletocontinuallystriketherightbalancebetweenbeingwellcapitalisedyet
costeffective.
the three scenarios
33 Future risk: Technology
Scenario 2
Central – the status quoInthecentralscenario,thereissomeinvestmentinnewtechnologyandinnovationby
governmentandindustrystimulatingglobaleconomicgrowthbutinvestmentisnotasextensive
asinourupsidescenario.IndeedwhilsttheUKisstillabletodemonstrateacomparative
advantageinhigh-techindustryandinnovation,thereisroomforimprovement.Similarly,
low-techindustrieslikefarmingareunabletofullyutilisethebenefitsofnewdevelopmentslike
biotechnologytoincreasereliabilityandproductivity.
Asintheupsidescenario,relianceontechnologywillincrease,andparticularlyinICTbutthisis
notsetagainstsignificantimprovementsinlevelsofunderstandingandcareintheuseofthat
technology.RegardinglargescaleITsystems,organisationsmakesomeprovisionstoassessthe
likelihoodofsystemicfailurebutdonotapplytheprinciplesofhighreliabilityorganisations.So
called“normalisationofdeviance”remainsaworryingcharacteristicofthisscenario,andthis
leadstoanumberoflargescalesystemsfailures.EpisodesliketheFlashCrashleadtosudden
fallsinconfidence,andwill,forshortperiodsoftime,disruptthenormalfunctioningofthe
economy.Thesituationiscompoundedbygovernmentsfailingtoputinplaceproperregulation
andoversightinthisarea.
Firmsplaceincreasingrelianceoncomputationalmodellingtoassessrisksfacingtheir
businessesandadapttheirbusinessmodelsaccordingly.Thereareparallelswiththedecade
leadinguptothefinancialcrisis,asfirmscontinuetorelytoorigidlyoninadequatemodelsto
determinecapitalallocationandregulatorsremaintooconcernedwithcomplianceratherthan
understandingthechangingnatureofrisk.Intheabsenceofappropriatehorizonscanninganda
properappreciationofthehumanandsocialfactorsinfluencingbusinessdecisionmaking,firms
donotmanageriskappropriatelyandthefinancialsystemischaracterisedbyoccasionalcrises
affectingparticularinstitutionsandsometimesthreateningthesystemasawhole.
Implications for the insurance industryInthisscenario,insurersareabletohelpstimulatesomeinvestmentinnewtechnologythrough
theunderwritingofresearchanddevelopmentprocessesandprovidingcoverforthoseusingnew
technology.However,withfirmsandgovernmentslesswillingtoinvestininnovationinthefirstplace,
insurancecanonlygosofarinstimulatingtechnologicalprogress.Indeed,insurersdevelopsome
linkstouniversitiesandresearchcentresbuttheyrarelydirectlyinvest,orsponsornewresearch.
Asintheupsidescenario,throughappropriatepricing,theindustryisabletoincentiviseimproved
technologybyhighlightingparticularlyriskyareas,thoughbecauseinsurershavelessstringent
linkstothelatestresearchanddevelopment,theirassessmentoftherisksposedbynew
technology,productsandservicesislessreliable.Insurers,therefore,sometimesgetthepricingof
productswrongleadingtounderwritinglosses.
the three scenarios
34 Future risk: Technology
the three scenariosWithtechnologybeingusedlessreliably,insurersfaceincreasedclaimscosts.Forexample,with
respecttolargescaleITsystems,occasionalfailurescauselossesforindividualsandbusinesses
affected–andsomeoftheselosseswillbecoveredbyinsurers.Unfortunately,inthiscentral
scenario,insurersarelesspreparedforthe“cascadefailure”ofsuchsystems.Insurersunderstand
someoftherisks,butdonottakesufficientefforttogainin-depthknowledgeofthisrisk,raise
awarenessamongstpolicyholdersorpressforgreatergovernmentoversight.Occasionallosses
emanatingfromsystemsfailures,therefore,eatintoinsurers’capitaltoagreaterextentthaninthe
firstscenario.
InsurersarealsolesssmartusersofICT.Whilsttheyutilisemoresophisticatedcomputational
modellingtechniques,theyplacetoomuchemphasisontheoutputsofsuchanapproach.They,
therefore,becomelessabletoidentifypotentialblackswanevents–suchaslargescalesystems
failures–becausetheybecomeoverlydependentonquantifyingrisk.Theindustryis,therefore,
characterisedbybeingrelativelyundercapitalisedinthe“goodtimes”andovercapitalisedin
the“bad”.Firms,therefore,failtostriketheappropriatebalancesetoutinthefirstscenario–
occasionalinstitutionalfailurewillresult.
35 Future risk: Technology
Scenario 3
Downside – the great reversalInourworstcasescenario,investmentinnewtechnologyislimited.Fewgovernmentsorindustries
arepreparedtotaketheriskandinvestinresearchanddevelopmentsoinnovationisrestricted.
Theconsequencesofthisaredepressedlong-runratesofglobaleconomicgrowthandcountries
suchastheUKareunabletodeveloptheircomparativeadvantageinhigh-techindustries.
Relianceonexistingtechnologyincreases–particularlywithregardstoICTandthisisnot
temperedbyacarefulconsiderationofthelimitationsofthisoutdatedtechnology.Withrespect
tolargescaleITsystems,organisationsfailtotaketheriskofcascadefailureseriously–indeed
thereissignificantcomplacencyacrossthoseoperatingsuchsystemsaswellasamongstthose
likelytobeaffectedbytheirfailure.Governmentsdonot,therefore,takemeasurestoensure
thatlargescalesystemsarecarefullyregulatedandcontrolledandhouseholdsandbusinesses
donotthinkabouthowtoprotectthemselvesincaseacascadefailureoccurs.
Normalisationofdevianceiscommonplace,leadingtomultiplesystemsfailures.Episodeslike
theFlashCrashwillbefollowedbysystemsfailuresinotherrealmslikepowerstationsand
airliners.Theresultisnotjustaglobaleconomicdownturnbutsucheventswillacttoundermine
overallconfidenceintechnologyrelatedtothedamagedindustries.Therewillbecallsto
abandoncertaintechnologies–likenuclearpowerforexample–wheresystemsfailuresare
likelytocausethemostextremetypesofcatastrophes.Asignificantslow-downintechnological
developmentwillleadtoglobalproblemswithresourceallocationwhichmay,inturn,spark
geopoliticaltension.
Inthisdownsidescenario,firmsincreasinglyrelyoncomputationalmodellingasthebasisfor
makingbusinessdecisionsdespitethefactthatthesoftwareandassumptionsdrivingthose
modelsareoutofdate.Unfortunately,withoutundertakingsufficienthorizonscanningfor
emergingrisksthatarelargelyimmeasurable,firmsareunabletopreparefor“blackswan”type
eventsorevenseesomeoftheinadequaciesoftheirnormalday-to-daybusinessoperations.
Implications for the insurance industry Inthisscenario,insurersareunabletostimulateincreasedinvestmentintechnology.Givenlittle
effortbygovernmentorindustry(includinginsurance)intheareaofsupportingresearchand
development,insurershavefewrisksrelatedtonewtechnologiestounderwrite,which,assuming
allelseremainsequal,resultsinafallinpremiumincome.Depressedglobaleconomicgrowth
ratesstemmingfromlowlevelsofinvestmentininnovationandtechnologyalsoaffectspremium
growthacrossotherbusinesslines.
Therealprobleminthedownsidescenariothough,isnotsomuchthefallinpremiumincome,
butariseinclaimsstemmingfromthefailuresoflargescalesystems,andtheindustrybeingill
equippedtodealwithsuchfailures.Insurersareunprepared,failingtofullyunderstandtherisks
towhichtheyareexposedthroughtheirpolicyholders.Insurers,therefore,failtobuild-inthisrisk
whenwritingproductsanddonotholdenoughcapitalintheeventoflargelossesstemming
fromsystemicfailures.Largescalesystemsfailures,therefore,acttounderminethesolvencyof
insuranceinstitutions.
the three scenarios
36 Future risk: Technology
the three scenariosOnereasonwhyinsurersfailtospot“blackswans”likethoseassociatedwithlargescalesystems,
isbecauseofanoverrelianceonoutdatedcomputationalmodels.Byfocusingonlyonwhat
outcomesthemodeldelivers,ratherthantheassumptionsunderpinningit,andengaginginwider
qualitativehorizonscanning,insurersareblindtobigpotentialriskstotheircapital.Inshort,a
worldrigidlyrelyingonoutdatedtechnology,withoutaproperunderstandingofthelimitationsof
thattechnology,risksthestabilityoftheinsuranceindustryitselfwithdireconsequencesforthe
restofsociety.
37 Future risk: Technology
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prac
tice
s.
✖
Impr
oved
und
erst
andi
ngo
ftec
hnol
ogic
alri
sks.
✔Im
prov
edu
nder
stan
ding
oft
echn
olog
ical
risk
s.[y
esb
ut
only
up
toa
poi
nt]
✔Im
prov
edu
nder
stan
ding
oft
echn
olog
ical
risk
s.✖
Larg
e S
cale
IT S
yste
ms
Larg
e S
cale
IT S
yste
ms
Larg
e S
cale
IT S
yste
ms
Syst
ems
are
man
aged
wit
ha
zero
tole
ranc
eto
failu
re
appr
oach
✔Sy
stem
sar
em
anag
edw
ith
aze
roto
lera
nce
tofa
ilure
ap
proa
ch.
✖Sy
stem
sar
em
anag
edw
ith
aze
roto
lera
nce
tofa
ilure
ap
proa
ch.
✖
Enha
nced
regu
lati
ona
ndo
vers
ight
.✔
Enha
nced
regu
lati
ona
ndo
vers
ight
.✖
Enha
nced
regu
lati
ona
ndo
vers
ight
.✖
Ris
k m
anag
emen
tR
isk
man
agem
ent
Ris
k m
anag
emen
t
Firm
sad
optt
hela
test
com
puta
tion
alm
odel
sto
m
odel
risk
.✔
Firm
sad
optt
hela
test
com
puta
tion
alm
odel
sto
m
odel
risk
.✔
Firm
sad
optt
hela
test
com
puta
tion
alm
odel
sto
m
odel
risk
.✖
Firm
sun
ders
tand
the
limit
atio
nso
fmod
els.
✔Fi
rms
unde
rsta
ndth
elim
itat
ions
ofm
odel
s.✖
Firm
sun
ders
tand
the
limit
atio
nso
fmod
els.
✖
Und
erta
keq
ualit
ativ
e,h
oriz
ons
cann
ing
for
emer
ging
risk
s.✔
Und
erta
keq
ualit
ativ
e,h
oriz
ons
cann
ing
for
emer
ging
risk
s.✖
Und
erta
keq
ualit
ativ
e,h
oriz
ons
cann
ing
for
emer
ging
risk
s.✖
Rigo
rous
app
roac
hto
risk
man
agem
ents
uppo
rted
by
seni
or
man
agem
entt
eam
.
✔R
igor
ous
appr
oach
tori
skm
anag
emen
tsup
port
edb
yse
nior
man
agem
entt
eam
.✖
Rig
orou
sap
proa
chto
risk
man
agem
ents
uppo
rted
by
seni
orm
anag
emen
ttea
m.
✖
The
role
of i
nsur
ers
The
role
of i
nsur
ers
The
role
of i
nsur
ers
Ale
adin
gpl
ayer
ina
sses
sing
and
adv
isin
gth
ird
part
ies
onth
eirt
echn
olog
ical
risk
s.✔
Ale
adin
gpl
ayer
ina
sses
sing
and
adv
isin
gth
ird
part
ies
onth
eirt
echn
olog
ical
risk
s.✔
Ale
adin
gpl
ayer
ina
sses
sing
and
adv
isin
gth
ird
part
ies
onth
eirt
echn
olog
ical
risk
s.✖
Bui
ldli
nks
wit
hsc
ient
ific
rese
arch
cen
tres
✔B
uild
link
sw
ith
scie
ntifi
cre
sear
chc
entr
es.[
yes
butn
ota
sex
tens
ive]
✔B
uild
link
sw
ith
scie
ntifi
cre
sear
chc
entr
es✖
Embr
ace
new
tech
nolo
gyto
impr
ove
unde
rwri
ting
,cla
ims,
m
arke
ting
...✔
Embr
ace
new
tech
nolo
gyto
impr
ove
unde
rwri
ting
,cla
ims,
m
arke
ting
...✔
Embr
ace
new
tech
nolo
gyto
impr
ove
unde
rwri
ting
,cla
ims,
m
arke
ting
...✖
Del
iver
app
ropr
iate
pri
cing
oft
echn
olog
ical
risk
s.✔
Del
iver
app
ropr
iate
pri
cing
oft
echn
olog
ical
risk
s.✖
Del
iver
app
ropr
iate
pri
cing
oft
echn
olog
ical
risk
s.✖
Wor
kcl
osel
yw
ith
gove
rnm
enta
ndre
leva
ntre
gula
tory
bo
dies
toid
enti
fyb
igte
chno
logi
calr
isks
.✔
Wor
kcl
osel
yw
ith
gove
rnm
enta
ndre
leva
ntre
gula
tory
bo
dies
toid
enti
fyb
igte
chno
logi
calr
isks
.✖
Wor
kcl
osel
yw
ith
gove
rnm
enta
ndre
leva
ntre
gula
tory
bo
dies
toid
enti
fyb
igte
chno
logi
calr
isks
.✖
Take
aw
ide
rang
ing
appr
oach
tori
skm
anag
emen
t.✔
Take
aw
ide
rang
ing
appr
oach
tori
skm
anag
emen
t.✖
Take
aw
ide
rang
ing
appr
oach
tori
skm
anag
emen
t.✖
the three scenarios
38 Future risk: Technology
conclusionConclusionOurtechnologicalfuturewillbeacarefulbalancingact.Ontheonehand,thisreporthasarguedthat
continuingdevelopmentsintechnologywillhelpspureconomicactivity,improvewellbeingandunderpin
longerlives.Ontheotherhand,therearelikelytoberisksassociatedwithnewtechnology,whichwillneed
carefulassessmentandmanagement.Inmanyways,continuinginnovationwillensurethattechnology
evolvesintoevermoresafeanduser-friendlyversionsofitself.But,complacencycanbedangerous,
especiallyifwebasecorehouseholdandbusinessdecisionsupontechnologywedonotfullyunderstand.If
wegetthisdrasticallywrong,failurescouldleadtoadangerousslowdownininnovationandresearchand
development,asmistrustintechnologygrows.Thisistheresultofourworstcasescenario.
Howwebalancetheopportunitiesandrisksaffordedbytechnologicalchangewillshapeourfutureand
theinsuranceindustrycanplayakeypartingettingthisbalanceright.Theindustryhasamultifacetedrole
toplay.Embracingtechnologywillbeimportantfortheindustrytoimprovethewayitunderwritesrisks,
processesclaims,marketsproductstoconsumersandidentifiesriskstoitsownsolvency.Andbyacquiring
expertiseinnewtechnologiesaswellasresearchanddevelopmentprocesses,theindustrywillalsobe
wellplacedtoraiseawarenessamongstthewidergeneralpublic,whetherthisisthroughtheappropriate
pricingofriskorthroughcollaborativeeffortswithotherindustries,sectorsandgovernmentbodies.
But,growthintechnologyandexpertiseintheuseofthattechnologywillnotbeenoughtoprepare
usforsomeofthe“blackswans”whichcouldlurkahead.AsDrPeterTaylorhasarguedinthisreport,
modellingthefuturebasedondatatakenfromthepastwillalwaysbefraughtwithpotentialpitfalls.
Evensomethingrelativelysimpletomodellikelongevity,hasprovenchallenginginrecenttimeswiththe
InternationalMonetaryFundarguinginearly2012thatmostmodelshaveconsistentlyunderestimated
theextenttowhichpopulationsaregrowingolder.58Inshort,wheretherisksaredifficulttoquantify,
adeep,qualitativeunderstandingoftheworldaroundus,informedbyreliableempiricalevidenceand
takingintoaccountcompetingviewpointsonthesameproblemislikelytobecriticaltosuccess.Inthis
respect,technologycanonlytakeussofar.
Thisshouldnot,however,downplaytheextenttowhichtechnologycanmakeadifferencetoour
lives.Indeed,technologyhastrulytransformedthewayinwhichwelive.Foralargeproportionofthe
world’spopulation,howwework,eat,sleepandinteractisvastlydifferenttodayfromwhatitwas
whentheCIIwasgranteditsRoyalCharterahundredyearsago.Butweshouldnotforgetthataccessto
technologyisfarfromequallydistributed–forsome,particularlythoselivinginpartsofthedeveloping
world,accesstoaphonelineoratelevisionsetisrare.Andevenacrossthedevelopedworldthereare
somewhocannotaffordapersonalcomputerwithaccesstheinternet.Thankfully,progressonthis
frontisgainingmomentum.Smartphones,forexample,arethreateningtoleveltheplayingfieldby
providinganaffordablewayforpeopletoaccesstheinternetinlocationswithoutphonelinesandbasic
infrastructure,butthefactremainsthattherearestillmanywhoareatanimmediatedisadvantage
becausetheylackaccesstotechnologythatotherstakeforgranted.
Allthisunderlinesthecentralargumentofthisreport:governments,industriesandthesocietieswhich
theyservemustcontinuetoespousethebenefitsofinnovationandencouragethedisseminationofnew
technologywhichhasthepotentialtoimprovelives.Butthismustnotbedonewithoutunderstanding
themanyrisksandlimitationsoftechnologyandanactiveapproachtoensuringthatthebenefitsare
reapedbyeveryone.
58 IMF(April2012)“TheFinancialImpactofLongevityRisk”estimatesthatonaveragepeoplelivethreeyearslongerthanexpected
39 Future risk: Technology
Next report in the series Inournextreportwithinthecentenaryseries,wewilllookatpossibledemographicfutures.Similarto
thisreport,expertswillsetoutdiverseandcompellingnarrativesonwhatthefuturemighthold,and
wewillseektobuildanumberofsimplescenariostosetoutsomeimplicationsfortheinsuranceand
financialservicesindustry.
Previous reports within the Future Risk series
Future risk: learning from historyThefirstreportwithinourcentenaryseriesreflectsonpasttrends
andtheirpotentialimplicationsforfutureriskaswellasdiscussing
someinitialfindingsfromaglobalsurveyintotheriskperceptions
ofmembersofthepublicfromacrosstheglobe.Itsetsoutthe
methodologyfortheentireseriesandidentifiesthemesforfurther
investigation.
Reportaccessiblevia:
http://www.cii100.com/wp-content/uploads/2012/Future%20risk.pdf
Future risk: social and economic challenges for tomorrow Thesecondreportinthecentenaryseriesfocusesonsomeofthebig
socioeconomicrisksidentifiedbythefirstreport.Utilisingexpertanalysis
fromGeorgeMagnusofUBSBankandDavidSmithofTheSundayTimes
amongstothers,weoutlinedthreepossiblesocioeconomicscenariosand
theirpotentialimplicationsfortheinsuranceindustry.Wethendiscussed
howtheindustrycanplayakeyroleindeterminingabetterfuture.
Reportaccessiblevia:
http://www.cii.co.uk/knowledge/policy-and-public-affairs/articles/
future-risk-social-and-economic/17413
Future risk: Climate change and energy securityThethirdreportinthecentenaryseriesfocusesonclimate
changeandenergysecurity.Worldleadingexpertsincludingthe
Government’sChiefScientificAdviser,ProfessorSirJohnBeddington,
andtheInternationalEnergyAgency’sChiefEconomist,DrFatih
Biroloutlinewhatthefuturemighthold.Againweusetheexpert
analysisasthebasisfortheconstructionofthreescenariosandtheir
implicationsfortheinsurancesector.
Reportaccessiblevia:
http://www.cii.co.uk/knowledge/policy-and-public-affairs/articles/
future-risk-climate-change-and-energy-security-global-challenges-
and-implications/19188
1912
1914
1939
19451918
19601950 20001960
1970
19801929 20101990
End of first age of
globalisation
WWI started
WWII started
WWII ended
WWI ended
Marked increase in civil wars
Average life expectancy 41
Average life expectancy 67
World population around 3 billion
Worldwide average 4.5 children per
woman
Start of Iran-Iraq warMt St. Helens erupts
Black Thursday stock market crash
World wide
average 2.5
children per
woman
2011
World population of 7 billion
?Rise in international peacekeeping
2005
Half of Sub-Saharan
Africa live on less than $1.25 a day
20522012
Future risk Learning from history
Future risk Learning from history Centenary Future R
isk Series: Report 1
Ref: CII_futureriskLFH (02/12)CII_6420
The Chartered Insurance Institute 42–48 High Road, South Woodford, London E18 2JPtel: +44 (0)20 8989 8464 email: [email protected] website: www.cii.co.uk
© The Chartered Insurance Institute 2012A CENTURY OF PROFESSIONALISM
Centenary Future Risk Series: Report 1
CII_6420 100 Years - Key Trends Cover ARTWORK V1.indd 1 06/02/2012 13:34
Future risk Social and economic challenges for tom
orrow Centenary Future R
isk Series: Report 2
The Chartered Insurance Institute 42–48 High Road, South Woodford, London E18 2JPtel: +44 (0)20 8989 8464 email: [email protected] website: www.cii.co.uk
© The Chartered Insurance Institute 2012A CENTURY OF PROFESSIONALISM
Ref: CII_socioeconomicLFH (03/12)CII_6414
Future risk Social and economic challenges for tomorrowCentenary Future Risk Series: Report 2
CII_6414 Socioeconomic Report Cover V3.indd 1 02/04/2012 15:16
Future risk Climate change and energy security – global challenges and im
plications Centenary Future Risk Series: R
eport 3
The Chartered Insurance Institute 42–48 High Road, South Woodford, London E18 2JPtel: +44 (0)20 8989 8464 email: [email protected] website: www.cii.co.uk
© The Chartered Insurance Institute 2012A CENTURY OF PROFESSIONALISM
Ref: CII_environmentLFH (06/12)C12J_7194
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C12J_7194 Environment Report Cover V4.indd 1 14/06/2012 11:23
40 Future risk: Technology
CIIBen Franklin
PolicyandResearchManager
CharteredInsuranceInstitute
20Aldermanbury
London
EC2V7HY
Email:
About the Chartered Insurance Institute (CII)
Professionalism in practice
TheCIIistheworld’sleadingprofessionalorganisationforinsuranceandfinancialservices,withover
100,000membersin150countries.
Wearecommittedtomaintainingthehigheststandardsoftechnicalexpertiseandethicalconductinthe
professionthroughresearch,educationandaccreditation.
OurCharterremitistoprotectthepublicbyguidingtheprofession.FormoreinformationontheCIIand
itspolicyandpublicaffairsfunction,includingexamplesoftherangeofissuesinfinancialservicesand
insurancethatwecover,pleasesee:
www.cii.co.uk/policy
Who to contactw
ho to contact
The Chartered Insurance Institute 42–48HighRoad,SouthWoodford,LondonE182JPtel:+44 (0)20 8989 8464email:[email protected]:www.cii.co.uk
©TheCharteredInsuranceInstitute2012Ref:CII_technologyLFH(08/12)C12J_7412