Many of those risks are already reality but even within them are hidden new risks that have yet to impact mainstream insurers.
Emerging technologies can present a real challenge for insurers due to a lack of historic data upon which to base risk assessments, but lessons can be applied from other areas of the business even when data is very thin.
Just below the surface under the technology heading are emerging risks that will soon be measured in billions of dollars, such as the huge growth in esports, the rapid development of crypto currencies and assets and advances in smart medical devices.
Among the reasons why insurers’ nerves start jangling when they explore the potential impacts of these risks are the lack of data and the way they frequently cross multiple classes of business, says Tom Hughes, who leads the International Underwriting Association’s (IUA) Developing Technology Monitoring Group:
“Emerging technologies can present a real challenge for insurers due to a lack of historic data upon which to base risk assessments, but lessons can be applied from other areas of the business even when data is very thin.
“The risks cut across so many different areas that it has put a renewed emphasis on collaboration. It is the horizontal exposures that really concern our members.”
Unexpected Implications of Climate Change
Across the industry, climate change is nurturing many emerging threats to the insurance market, many of which have the potential to pose a systemic threat to its viability. This has brought it into much sharper focus according to the IUA’s end-2021 survey of its members.
Asked about the emerging risks that most concern them, there were two dominant answers which together accounted for over 80% of all responses: climate risk and cyber but the switch in emphasis since the last survey in 2017 is dramatic. Four years earlier, cyber was the top concern, with 60% of the total, followed by artificial intelligence and non-physical bodily injury. Climate change in 2017 made up just 7% of total responses.
In 2021 climate risk had leapfrogged to the top of the list of important emerging risks with 45% putting it out in front.
This is no surprise to Hélène Galy, Global Research Hub Lead at insurance brokers WTW.
“Climate related risks are a more tangible systemic threat, as all parts of the world are being affected to varying extents, all lines of business.
Galy also highlights the need to look across the whole sector, as the impacts of climate change, like technology, cannot be siloed:
“For example, exploring the impact on business models, impacts on supply chain, litigation risk and some of the sector-wide changes that are needed if net zero targets are to be met. The example of aviation shows that this requires more than action by individual actors, more than insurance, but also policy changes, concerted investment and co-ordination.”
The latter point hints at the need for greater co-operation between the insurance market and the state. This is nothing new as many countries have state-backed schemes to cover terrorism risk or pools for flood and earthquake hazards. Climate change is already forcing this co-operation to new levels. For instance, there is a partnership between the World Bank and a group of insurers led by Australian firm QBE, to offer cover through a parametric insurance scheme to the Pacific islands threatened by rising ocean levels.
The impacts of climate change cannot be detached from the causes, drawing insurers into another minefield of emerging risk. The battle over the future of fossil fuels was already raging around the insurance industry before the Ukraine conflict threw energy policy into even sharper focus, says Hughes:
“It is hard for our members to talk to their clients without talking about ESG [environmental, social and governance] issues with a real emphasis on the environmental aspects. Transitional risk and the journey to renewable energy are the key topics. There is an enthusiasm and a willingness on the part of underwriters to get involved in these areas”.
Many renewables are right at the cutting edge of research and technological advances and challenge data-hungry underwriters who always tend to look at the downsides, especially when they have no data. This need not always be the case, says Hughes:
“It is easy to look at these new risks from the perspective of a worst case scenario but there are opportunities for the market too.”
Shifting Demographics
The world’s largest reinsurer, Munich Re, puts a range in inter-related demographic factors high on its list of emerging risks insurers are going to have to face up to.
Aging populations are one dimension of the challenge and it goes beyond how to support people in their old age through state and private pensions, social and health care:
“Demographic change is transforming our society and calling for new solutions from the insurance industry … Demographic change impacts a country’s infrastructures, economic performance, and working environment”, says Munich Re, again highlighting the inter-connectivity of many emerging risks.
Population growth, economic development, and the onset of extreme climate change are placing increasing pressure on finite, non-renewable resources. Delivery bottlenecks for fossil fuels, rare earth elements, and industrial metals are expected to increase over the coming decades.
Where demographic change meets climate change and geo-political risks is where some of the most threatening emerging risks are hidden, according to Munich Re.
“Population growth, economic development, and the onset of extreme climate change are placing increasing pressure on finite, non-renewable resources. Delivery bottlenecks for fossil fuels, rare earth elements, and industrial metals are expected to increase over the coming decades.
“However, a key concern of global impact is water scarcity. The lack of — or lack of access to — fresh water to meet water demand is a crucial factor in global food insecurity. The scarcity of resources comes with potentially crippling social effects — from mass migration and civil unrest to economic stagnation or decline.”
Civil Unrest and War
The global insurance industry assumes that the world is globalised and aspires to be neutral. But recent events have shown that in the new geopolitical setting, it’s not only countries that take sides. Corporates may also find they have to.
The need to face up to issues that disturb the conventional wisdom in the insurance market has been brought to the fore by the Russian invasion of Ukraine, says Galy:
“The global insurance industry assumes that the world is globalised and aspires to be neutral. But recent events have shown that in the new geopolitical setting, it’s not only countries that take sides. Corporates may also find they have to. This doesn’t sit well with an aspiration for finance and insurance — like technology — to be neutral.
“The current armed conflict in Ukraine is only confirming dynamics that were already at play, the easternisation of the world, end of globalisation, the difficulty for companies to remain neutral. Economic or hybrid wars and information wars — for instance, Russia and China developing their versions of SWIFT and the internet for their zones of influence” are all risks insurers now must face up to, says Galy.
Above all, she says the last two years have exposed the lack of imagination in plotting risk scenarios for emerging risks and the danger of the industry falling back into its traditional silos.
These recent experiences have, she says, “exposed the weakness of traditional risk registers, which give the wrong impression that each risk is independent and get too little attention and engagement from the decision-makers”.
