Deglobalization, super nat-cats among emerging risks with highest potential impact: Swiss Re report

New economic, technological, socio-political and environmental developments, as well as the growing interdependencies among them, are expected to be the key drivers of a changing risk landscape that the global reinsurance industry will face over the next few years, notes a report released Wednesday by Swiss Re.

The Swiss Re SONAR report identifies the four emerging risks – defined as newly developing or changing risks that are difficult to quantify and whose potential business impact is not yet sufficiently taken into account – with the highest potential impact as de-globalization and political conflict, large natural catastrophes and financial repression (in the 0-3 years range) and the challenge of the Internet of Things (in the 3+ years range).

Exploring 21 emerging risk themes, their potential impact and cascading effects across the industry, the report is based on the SONAR process, a crowdsourcing tool drawing on Swiss Re’s internal risk management expertise to identify and evaluate new threats. This is the third edition of the annual emerging risk update.

“The report should not be understood as a forecast that accurately reflects what the future will bring. It rather seeks to provide an early indication of what might lie beyond the horizon and could become relevant going forward,” it states.

“In a future in which change is the only constant, foresight information is crucial to prepare for tomorrow’s challenges,” Patrick Raaflaub, Swiss Re’s group chief risk officer, notes in a company statement. “While many of the topics presented might never materialize into significant risks, some definitely will. The earlier we start adapting to these changes, the better prepared we will be,” Raaflaud says.

Beyond the four aforementioned risk with high potential impact, are those with medium potential impact (Brazilian drought, lifestyle drugs, predictive maintenance, rising pandemic risk, wildfires and sinking cities in the 0-3 years range and genetic engineering, challenges of energy transition, the antibiotic boomerang, decaying infrastructure and hydrofracking fluids in the 3+ years range), as well as those with low potential impact (fossil fuel management and the dangers of LED light in the 0-3 years range and the office of the future, traffic jam in the skies, chemicals in the environment and scarcity of raw materials in the 3+ years range).

The report explores all 21 areas and provides a rundown on the current environment and potential impact:

• Super nat-cats: Large natural catastrophes represent major threats to the economy and society and create significant losses. Two cases in point are atmospheric river events and volcanic eruptions, both of which are not yet sufficiently taken into account as serious disruptors by a wide range of stakeholders, notes the report. The potential impact includes that atmospheric river events may lead to extensive flooding with large-scale property damage and business interruption, while volcanic eruptions may lead to significant property damage and business interruption and could have far-reaching repercussions throughout the economic system, interrupting global travel and supply chains and – in the case of super eruptions – even affecting global weather patterns.

• Challenges of the energy transition: The report states that increasing energy storage capacity will be crucial, and this capacity needs to adapt to various forms of energy production. Many innovations are needed, ranging from high-tech batteries to low-tech solutions, such as heat storage in bedrock, soil and water. The potential impact includes that necessary innovations to support energy transition may open up business opportunities, and if uncertainties around energy transition continues, the future of the split between fossils and renewables will remain open.

• Decaying infrastructure: Critical infrastructure in various countries is in bad condition, giving rise to potential for large losses, Swiss Re notes in the report. All forms of infrastrucuture can be affected, ranging from energy and utilities, transportation, ICT and food security to social services and health care. The potential impact includes increasing claims frequency and severity for property and casualty covers, environmental damage due to aging pipelines and other failing critical infrastructure, and increasing demand for infrastructure financing, providing an opportunity for both the investment and insurance sides of the business.

• Traffic jam in the skies: The sky gets more and more crowded with drones, weather balloons and microsatellites, the report states. Appropriate regulation is essential to ensure safe air traffic, but is currently still lagging behind technological developments. The potential impact includes that increasing use of drones may add an “aircraft” fleet exposure to companies that had no airborne operations before, a higher number of flying objects is likely to increase collision risks, and privacy concerns due to more remotely controlled or autonomous small flying objects equipped with cameras.

• Scarcity of raw materials: Various raw materials are running out, including sand for concrete production and helium for various technical applications, notes the report. The shortages create an incentive for alternative procedures, such as waste mining/recycling, with currently unknown implications across the value chain. The potential impact includes natural catastrophes hitting coastal areas harder, due to reduced natural protection, rising construction costs due to increasing prices for concrete and/or deterioration of building quality due to use of substandard concrete, and the shortage of helium will increase the price and make alternative production attractive, but no long-term insurance impact is expected.

The report also breaks down the 21 emerging risks by general area, namely overarching concern, property, casualty, life & health, financial markets and operations.

The report also breaks down the 21 emerging risks by general area, namely overarching concern, property, casualty, life & health, financial markets and operations.

The topics presented “may not only bring additional downside risk exposure,
but could also give rise to new opportunities,” notes the report. Given the breadth of the risk landscape, “possibilities for solutions are vast, and the insurance industry could expand its role of mitigating others’ risks and enabling society to advance. By providing re/insurance for new and innovative products, our industry plays a vital role as innovation enabler while bringing its risk management expertise to the table to avoid losses from occurring in the first place,” it suggests.

The insurance business “needs to constantly monitor an evolving risk landscape and adapt its behaviour, market conduct and product portfolio,” recommends the report. “This poses significant and permanent challenges for our industry, which can no longer rely solely on historical data to assess tomorrow’s exposure.”