Uncapped government backstop needed for ‘uninsurable’ cyber and climate risk: Geneva Association

Systemic and emerging risk is reaching the limits of insurability, in particular for climate and cyber threats, says a new report from The Geneva Association. Governments will need to step in to replace commercial insurance for the most severe risks, the body warns.

“For some risks such as terrorism and natural disasters, a limited government backstop may be sufficient. For systemic risks, however, an uncapped (or very high) government backstop is critical if the PPP’s objective is to harness the specific capabilities of the insurance industry,” The Geneva Association says.

It adds: “Catastrophic cyberattacks on critical infrastructure could be associated with maximum possible losses that go far beyond the risk-bearing capacity of the global insurance industry.”

In a poll of about 1,000 corporates and retail customers in each of the six largest insurance markets of the US, China, Japan, UK, France and Germany, more than 50% said they expect buying insurance to become more difficult or even impossible in the future for natural catastrophes, longevity and cyber risk.

Systemic risks are challenging the traditional insurance model, the report says, making it more difficult to pool growing risks from cyber and climate and intangible risks, such as reputational risk, from increasing digitalisation and ESG disclosures. Insurance for such risks will become either prohibitively expensive or even unavailable, with this already starting to play out for property cat risks in the catastrophe hit regions in the US.

Publishing The Value of Insurance in a Changing Risk Landscape, which models emerging risks and the future of their insurability, The Geneva Association reveals that climate and cyber risks present the most significant obstacles to insurability, largely because of their lack of independence and potential for massive losses.

Kai-Uwe Schanz, director, socio-economic resilience at The Geneva Association and author of the report, says: “Our theoretical analysis found that climate and cyber risks in particular present major obstacles to insurability.” Climate and cyber are also two of the top risks buyers say raise the biggest concerns about availability and affordability.

The Geneva Association identifies an “increasing and emerging gap” between what customers and governments expect the industry to do and what it is technically able to do.

“In the presence of systemicity, the fundamental mechanism of risk pooling and redistribution – spreading the losses of the few among the many unaffected by disaster – no longer works,” it warns.

The Geneva Association makes several recommendations for insurers to expand their relevance to the changing risk landscape; in particular it suggests insurers:

• Increase their provision of risk services to include risk assessment, prediction, prevention and mitigation as well as assistance and education;
• Provide dedicated risk and investment products to promote sustainable development, in particular in product design, underwriting, claims and asset management;
• Engage in public-private partnerships (PPPs) to address the largest and most complex risks facing modern societies, including enabling commercial risk transfer and replacing it by removing extreme and volatile risk from the insurance market.

Historically, PPPs have seen governments step in to make sure risks remain commercially viable, or provide a backstop, for private insurers to continue cover. But the report proposes structures for large-scale and systemic risks that exceed the boundaries of insurability, such as economic losses from pandemics, climate change or large-scale attacks on critical infrastructure.

These would require “significant government funds”, the report says, if they are to address systemic risk in a meaningful way. “Risks that can be insured need not be legislated; uninsurable risks, however, have to be dealt with by nation states,” The Geneva Association says.

“Governments need to get involved as ‘insurers of last resort’ and could draw on insurers’ potential and limited risk-bearing capacity but, and more important in the context of this report, also mobilise insurers’ vital, non-risk-bearing contributions to risk preparedness and resilience building.”

The Geneva Association argues insurers can still play a relevant role in systemic risk, urging the sector to look beyond traditional risk transfer to address systemic risks, incorporating risk prevention services, and working with governments to tackle the most severe risks.

“The survey findings provide strong support for these approaches, with more than 80% of customers expressing interest in non-traditional risk services,” The Geneva Association says, adding that there is a clear opportunity for insurers to expand in these additional risk management areas.

Jad Ariss, managing director of The Geneva Association, says: “The increasing intensity and impact of risks today, from climate to cyber, are creating testing conditions for insurers. Yet the case for the continued value of insurance is clear. By leveraging their expertise to offer services that help to mitigate risk and drive positive change among their customers, insurers can maintain, and even strengthen, their societal relevance.”

The Geneva Association’s buyer survey also reveals strong support for PPPs. “Most customers are in favour of PPPs aimed at promoting the availability and affordability of insurance… They want their insurers to collaborate more with governments to mitigate emerging insurability issues,” the report says.