Digital revolution: The second machine age and its effects on business

It took decades for humans to unleash the potential of the electricity in the first machine age. Initially, electrical engines were simply substituted for steam ones, with no understanding of the advantages that the new technology afforded. In the first wave of the second machine age, machines were taught to do what humans could do – codify knowledge. Now machines can learn and solve problems based on experience, also known as deep learning, rather than just follow instructions. The biggest advances have been in three broad areas: perception, cognition and interaction with physical work.

Machine, platform, crowd: Harnessing our digital future

Source: Erik Brynjolfsson

The main threats in this new era are cyber risks, the manipulation of humans, and weapons (imagine swarms of slaughter bots equipped with facial recognition technology). Artificial intelligence, however, is more powerful than electricity and its potential for disruption is far greater. Already, the historical link between productivity and income is decoupling. The pie is getting bigger, but there is no economic law that everyone will share it equally. It will not be a world without work though, with emotional intelligence and creativity being critical skills for success. Machines can provide answers, but at least for the foreseeable future, they cannot come up with the questions.

Human psychology and the internet age

In the early days of the internet, there was the hope that more information would make us smarter and more productive, as well as usher in a new era of democracy. Fast forward to the present and there are mounting fears that computers are eliminating jobs, privacy is a luxury of the past, relationships are being distorted by social media, and democracy has been poisoned rather than enriched by artificial intelligence. Understanding the perils and potential pitfalls of the information age requires a deeper understanding of both how humans deal with information and make sense of these developments.

The field of behavioural economics, which assumes that people are not always rational and are often influenced by seemingly irrelevant factors, is becoming increasingly important as an analytical tool in this new environment. In particular, four phenomena that are now driving human behaviour — curiosity, privacy, the desire to reveal, and information avoidance — do not fit into standard economic models that operate on the presumption that people are unbiased and rationally update beliefs based on new information. The opposite in fact may now be true, as evidence suggests that we are selectively using information to confirm strongly held opinions and beliefs, rather than expand our world view.

Cyber risks in critical infrastructure

The general perception is that a major cyber attack will be apocalyptic, and it may well be. Just a few years ago, however, cyber risk analysis was deemed impossible. Now the question is how it can be done better. Securing everything is impossible and most likely inefficient, so priorities must be set for risk management investments. Five elements are key in modelling an organisation’s cyber risks: the nature of the organisation, the risk to be protected, the physical and cyber structure of the system, the potential adversaries, and the consequences of a successful attack.

There are two distinct kinds of cyber attacks: operational and catastrophic. Operational attacks (which are fairly constant) are assaults on an organisation’s systems, for which statistical data may be available. Preparing for a catastrophic attack however, requires a different analysis in that no such event may have occurred. In the absence of data, an in-depth analysis of various attack scenarios is required using Bayesian networks; Probabilistic Graphical Models built from data and/or expert opinion to generate potential attack scenarios.

In developing countermeasures for operational risks, a balance must be struck between network defence and the optimal level of connectivity, which enables communication, but makes a system more vulnerable. When combatting catastrophic events, such as financial, political and military attacks, timing is crucial. Connectivity here also increases the risk as approximately 51% of the global population now has access to the internet. Allocation of resources to counter attacks, such as fake news may depend on the nature of the event with priority perhaps being given to events such as an election cycle. For both types of risks, the known vulnerabilities are as important and the unknown ones.

Health and genetics: What are the promises and challenges of genetic modification?

There have been few major genetic developments in the history of mankind. Scientists traditionally sought to reduce chronic diseases by understanding their risk factors, but very little was known about how genetic characteristics contribute to human disease. Now genetics is playing a larger role, but until recently there were few tools for the easy deleting, replacing or otherwise editing of DNA. A tool called CRISPR has proven to be one of the most successful ways to do genome engineering. Short for Clustered Regularly Interspaced Short Palindromic Repeats, it permits scientists to make precise changes in DNA much more easily and faster than ever before.

Recently CRISPR has proven successful in conferring resistance to powdery mildew in wheat, engineering mushrooms that will have a longer shelf life and resist blemishes, developing T cells that detect and treat cancer, creating gene-driven mosquitoes to eradicate malaria. CRISPR is particularly useful in treating rare monogenetic disorders caused by a mutation in a single gene, such as sickle cell anaemia. Polygenic traits, such as height are controlled by many different genes at different loci on different chromosomes. So for the time being at least, designer babies are not very likely.

The future of work and leadership in the digital age

For companies, particularly large, established ones ‘becoming digital’ is a journey with several milestones in the progression from being digitally efficient, which involves the digitalisation of existing operations and processes to gain efficiency, to digital transformation that enables an organisation to create, rather than respond to or anticipate, a digital ecosystem by enabling partners’ and/or customers’ digitisation. For knowledge-based companies, a rapidly evolving set of technologies are fundamentally impacting this progression. At the same time the workforce is changing with a growing number of jobs requiring a significantly more complex set of interdisciplinary skills, coupled with the evolving attitudes, wants and expectations of workers.

Source: Endeavour Partners

Cloud computing enables startups to effectively compete with large, established organisations. To survive in the digital age, existing companies should focus on acuity and agility, which place a premium on dynamic employee staffing, open innovation, crowd sourcing, and multi-point communication (e.g. social networks). For any company collaboration, creativity and cooperation are essential to succeed in the digital age.

Perils, pitfalls & opportunities in the digital age

  • The re/insurance industry is facing an unprecedented era of disruption that will yield opportunities, including the growth of peer to peer insurance, solutions for the risks created by the sharing economy, and customer interest in on-demand insurance. The jobs-to-be-done (J2BD) opportunity matrix is a conceptual model that can use to identify attractive strategic possibilities in this new environment.
  • Data will be the single largest driver of economic value in the coming decades. It should be viewed as any other new entry with a 20-year window, when quality is prized for a limited time. For purveyors of data the focus should be on using sparse, small cuts of data from data available from free, decentralised web sources. Be wary of people that are in the business of selling data, as it is often cheaper and quicker to use what is available from free sources with comparable accuracy.
  • Food tops the list of health risk factors across the globe. Over the last decades, emerging economies such as China and India have undergone a significant dietary transition that is now resulting in a high prevalence of obesity, increasing type 2 diabetes incidence rates and overall cardiovascular mortality. The re/insurance industry can provide incentives and services to their customers on healthy diets and lifestyles to reverse this trend. Sources such as Tufts' Health & Nutrition Newsletter and Harvard’s School of Public Health The Nutrition Source provide excellent information on diet and nutrition.
  • Wearables, such as Biovotion’s vital sign monitor and Striiv’s portable fitness device and mobile-enabled applications have significantly improved in recent years and are now able to provide medical-grade information to users, as well as their physicians and insurers. For re/insurers the issue is no longer the accuracy of the devices, but rather how this dynamic, real-time data may reveal patterns that will improve mortality and morbidity estimates for use in the underwriting process. For more information, visit Health monitoring in insurance: Unlocking the power of your customers’ data.
  • Natural disasters are resulting in higher losses due to the growing concentration of population and assets in highly vulnerable areas. The insurance protection gap is particularly pronounced in developing markets that present different supply and demand barriers for insurance solutions, including affordability, lack of awareness, behavioural biases and institutional/regulatory constraints. Public- and private-sector stakeholders must work together to build effective systems to expand the availability of risk transfer solutions in emerging markets.
  • The Blockchain Insurance Industry Initiative (B3i) is a collaboration of insurers and reinsurers formed to explore the potential of using distributed-ledger technologies for the benefit of all stakeholders in the industry’s value chain. Thirty-eight companies are engaged in testing a prototype to simulate the creation and management of property catastrophe insurance contracts. B3i will begin to develop projects that extend beyond P/C reinsurance in 2018.

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Summary from the Swiss Re Institute Symposium Boston on 28 and 29 November 2017. Summary written by Rick Perdian

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