Swiss Re calls for industry focus on future risks

“This is not what will happen but what might happen,” said Sandra Burmeier, senior risk manager, Group Risk Management at Swiss Re. “We are providing an early warning for both the reinsurance and insurance industry, as well as risk managers. But we are not suggesting any specific mitigation measures, there are no silver bullets. It is about creating a starting point for a dialogue between insurers, brokers and risk managers.” The report highlights 21 emerging risks covering societal, economic, technological and political environments, and categorises them in terms of potential impact and the likely time it will take for this impact to be realised (up to three years and greater than three years). The interest in emerging risks has been consistently increasing of late, said Ms Burmeier. “It used to be a niche topic but now people are much more interested. With technology advancing so quickly, it is essential to build up an awareness of emerging risks.”hideThe area of emerging risks has long been problematic for the insurance industry, given that it presents two difficult challenges. “Firstly, there is by definition a lack of historical data to call upon and this makes it difficult to build risk models or to fully quantify the risk. It is really about picking up early signals and then making judgement calls on whether you take any mitigating action,” said Ms Burmeier. The second challenge is how you encourage a risk manager or insurance buyer to purchase coverage for a risk that may be low impact and may not even materialise at all, let alone within the next three years. On the plus side, the quality and quantity of analytics are improving all the time, although it doesn’t address the inherent problem, said Ms Burmeier. “More data doesn’t solve the issue that events in the future will be different from what we have seen in the past.” In fact, the increasing data may even create new emerging risks of its own. “It opens the door for more risk around the reliability and integrity of data. It should always be kept in mind that the more data there is, the more potential for inaccuracy.” Another challenge facing insurers is the interconnectedness of many of these emerging risks, especially for those insurers that are focused on specific lines of coverage, said Ms Burmeier. “A lot of these risks cut across lines so you have to have people that are able to look on risk in a broader context and not within silos. Otherwise there is a danger that you create bigger risks.” Several of the 21 emerging risks highlighted in the report are of particular relevance for Asian companies and insurers, including ‘emerging markets crisis 2.0’, which is identified as one of three emerging risks with the highest potential impact. China is especially vulnerable to adverse external developments such as a rapid rise in US interest rates and oil prices, as well as internal issues like slower economic growth, capital outflows, rising corporate debt and the depreciation of the renminbi. For insurers, emerging markets turmoil would hinder their market entry and penetration strategies and also affect its balance sheet in terms of both understanding and asset management, and may also trigger detrimental regulatory consequences. The report also examines another risk pertinent for Asian companies – meat production, a key part of the agricultural industries of India, China, Malaysia, Vietnam, Australia and Indonesia. Meat production is under pressure both in terms of its consumption and also its impact on the environment. Increased awareness of the cardiovascular risk caused by high levels of saturated fat and cholesterol has created a greater risk of reduced meat consumption and made it a hotly debated topic. “Large-scale dietary shifts would have a significant impact on livestock farmers and the entire associated supply chain, including insurance,” states the report. “Class actions against stakeholders in the meat value chain are possible, similar to those that already shook the tobacco industry.” Placing meat in the same hazardous health bracket as tobacco may seem far fetched but the potential fallout of a greater focus on the ill effects of meat consumption was exemplified by the recent ‘Bacongate’ case, when a World Health Organisation (WHO) report linked the consumption of processed meats with cancer. The subsequent fallout led the WHO to clarify its findings and stress that it was advocating a reduction rather than a ban on the consumption of processed meats. Another area of concern is human-induced earthquakes, such as those that have occurred in Oklahoma as a result of hydrofracking activity and also in parts of Asia as a result of energy policies. The concern is that these areas have not had any historical exposure to earthquakes so they are not prepared. Many of the remaining emerging risks in the report relate to technology. Developments like blockchain, cyborgisation, fintech and the shared economy may actually cause more of a risk to insurers’ business models than any insureds. The threat of disruption to incumbent insurers from non-traditional newcomers is a popular theme in the insurance market at present and one that is propelling a call for greater innovation. At the same time, there is a greater use of alternative risk transfer than ever before and a greater input from the capital markets in terms of providing capacity for covering risks. However, Ms Burmeier believes that traditional insurance and reinsurance still has an important role to play in mitigating emerging risks. “The traditional approach to coverage has served corporates and consumers well over many years and it is essential that insurers remain and are able to continue serving their customers,” she said. The insurance industry has at times struggled to offer corporates adequate coverage for new and emerging risks. A report issued by the UK’s Association of Insurance and Risk Managers in Industry and Commerce (Airmic) found that just a fifth of its members feel that insurers are displaying enough innovation to cover new risks. According to Airmic chief executive John Hurrell, one of the problems is that the nature of risks has changed far quicker than insurance policies. Consequently, many of the top risks identified by corporate buyers – reputation, intellectual property and supply chains – have a relatively small selection of insurance programmes available to them. A considerable part of the challenge is that many emerging risks involve intangible assets, such as digital data, brands and reputations. Furthermore, these intangible assets are rising in value – according to consultant Ocean Tomo, 84% of the S&P 500’s market value is made up of intangible assets, whereas 40 years ago it accounted for just 17%. The Airmic report also shows that the majority of its members have discussed a number of emerging risks with their brokers but only a minority have actually purchased any policies. The lack of coverage is particularly acute when it comes to reputational risk, where just one in ten has purchased a policy despite nine out of ten managers having discussed the issue with their brokers.

Swiss Re calls for industry focus on future risks

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