Today’s catastrophes – in the air, at sea, and on roads now traveled by driverless cars – are increasingly visible and complex. The root causes of such events, which disrupt business operations and erode shareholder value, can take months to identify, especially when the technology involved is new. You could argue that the root cause is instead a single one, and as old as humankind’s inventiveness: innovation. For all of its desirability, innovation often triggers unintended consequences.
In 2022, innovation often involves digital-based business technologies interacting with the physical world in fields like transportation, robotics, augmented reality, and remote monitoring and operation of industrial equipment. Stunning technology innovations like these are the Holy Grail of successful business, often propelling companies to new levels of profitability. But typically the focus is solely on the obviously foreseeable: revenue benefit compared to implementation cost.
That ROI calculation doesn’t figure in risks that the innovation could backfire in unforeseen ways. A disproportionate number of disasters involve what is considered at the time as the “latest and best technology.” Adverse events of this type are broadly classified as resulting from technological risk, ie, risk due to the failure of a man-made system.
This is a type of risk that the actuarial models most often used by insurers and the financial industry can’t accurately assess. That’s because these models by definition are based on past experience – that is, prior to the innovation arriving. The result is that the ability to transfer innovation-related risks via insurance is difficult and expensive, constituting yet another hurdle for innovators. (Of course, innovation in the insurance industry is subject to the same risks.)
An increasingly frequent subset of technological risk is risk due to failure of the core digital technology on which the man-made mechanical system relies. Autonomous vehicle software problems are an easy example to visualize, but the far greater relevance lies in the rapid automation of both physical and financial business processes. Practical examples include the collision of industrial robots with each other and/or other warehouse components. Past examples have included massive failure of power and financial systems, with impact far exceeding the system in which the technology was deployed.
Technological risk is further compounded by exposure to natural hazards, resulting in what is referred to as natech risk. A natural event can both provide the initiating event for the failure or amplify adverse consequences. The consummate example is the 2011 Tōhoku earthquake and tsunami in Japan, the costliest disaster on record. Natech risks for business owners could include a lightning strike that damages a system for digital processing and control, or more mechanical impacts such as wind/hail damage to solar panels or wind turbines that result in power outages and business interruption.
Losses like these increasingly cause cascading damage beyond the failed system due to highly interconnected components. The damage can disrupt business for months, potentially costing a company revenue, reputation, market share, and investor confidence. It’s not the return on investment that new innovation should provide.