how technology could make or break our world future risk

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


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


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.


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.


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


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


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


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


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.



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.



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.

”



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.



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.



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

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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


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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


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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


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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


K


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


K


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.

”


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.


ystems


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


ystems


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


ystems


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


ystems


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


ystems


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


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



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)



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



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


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


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


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


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.


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


the three scenariosOnereasonwhyinsurersfailtospot“blackswans”likethoseassociatedwithlargescalesystems,

isbecauseofanoverrelianceonoutdatedcomputationalmodels.Byfocusingonlyonwhat

outcomesthemodeldelivers,ratherthantheassumptionsunderpinningit,andengaginginwider

qualitativehorizonscanning,insurersareblindtobigpotentialriskstotheircapital.Inshort,a

worldrigidlyrelyingonoutdatedtechnology,withoutaproperunderstandingofthelimitationsof

thattechnology,risksthestabilityoftheinsuranceindustryitselfwithdireconsequencesforthe

restofsociety.


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the three scenarios


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


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.


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.


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



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



Ref: CII_environmentLFH (06/12)C12J_7194

Future risk Climate change and energy security – global challenges and implicationsCentenary Future Risk Series: Report 3

C12J_7194 Environment Report Cover V4.indd 1 14/06/2012 11:23

http://www.cii100.com/wp-content/uploads/2012/Future%20risk.pdf

http://www.cii.co.uk/knowledge/policy-and-public-affairs/articles/future-risk-social-and-economic/17413

http://www.cii.co.uk/knowledge/policy-and-public-affairs/articles/future-risk-social-and-economic/17413

http://www.cii.co.uk/knowledge/policy-and-public-affairs/articles/future-risk-climate-change-and-energy-security-global-challenges-and-implications/19188




CIIBen Franklin

PolicyandResearchManager

CharteredInsuranceInstitute

20Aldermanbury

London

EC2V7HY

Email:

[email protected]

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

how technology could make or break our world future risk

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