Current economic factors and technology make Swiss Re’s list of key risks

Some of the key risks that the global insurance and reinsurance industries should have on their radar include the rise of national economic protectionism, the return of inflation and growing water stress, according to a report released by Swiss Re.

Those are three of the six top risks with the highest potential impacts that are explored in the report, New emerging risk insights, released on Tuesday.

“Ignoring emerging risks is not an option, neither for political decision-makers, the insurance industry, nor society as a whole. The earlier we adapt to these changes, the better prepared we will be,” says Patrick Raaflaub, Swiss Re’s group chief risk officer, in a statement.

“Sharing knowledge through a proactive risk dialogue across stakeholders can help the insurance industry create a proactive and pre-emptive risk management culture that enables disciplined risk-taking,” he adds.

One key risk is the rise in economic protectionism within some western countries that could lead to trade barriers and market access issues for insurance companies, which may find it harder to expand internationally.

“In the long run, diminished diversification effects will make insurance products more expensive, which will dampen insurance growth and hinder the industry’s efforts at bridging the protection gap,” the report states.

From the archives: Just how prepared are we?

The regulatory fragmentation that is beginning to occur in light of the rising nationalist attitude is another key risk as cited by Swiss Re. The insurance industry entered a period of coordinated regulatory policy following the financial crisis of 2008 but that attitude is starting to show cracks. A fragmented regulatory environment could threaten the global diversification of risk pools and the efficient management of capital for the reinsurance industry, according to the report.

The rise of headline consumer prices, another key risk, after years of low inflation and even fears of deflation will add pressure to insurers’ profitability. Inflation affects insurers’ investment returns, asset valuations and future, longer-term insurance liabilities, the report states.

Swiss Re also studies the potential effect of the widening popularity of cloud services. As the cloud grows thanks to the increasing amounts of data that it holds, it can generate a variety of risks that may accumulate to a “perfect storm” through a cyber attack or power blackout.

Another critical risk is what Swiss Re refers to as the “big drying” from lack of water. The scarcity of this natural resource in addition to ensuing droughts and wildfires already lead to significant economic losses.

The final major risk, as cited by Swiss Re’s report, is the potential of an epidemic or pandemic thanks to bugs and the viruses they hold. “The question isn’t whether another deadly infectious disease will appear, but when and how well society is prepared to cope with it,” the report states.

The potential impact would be increased mortality and health costs for society overall and the insurance industry in particular. In an extreme scenario, a major epidemic or pandemic also has significant relevance for P&C-related lines of business and the financial markets, according to the report.

This story was originally published by Canadian Insurance Top Broker.