Reduced market access, regulatory fragmentation, the return of inflation and cloud risk accumulation pose the largest challenges with the highest downside risk potential in the short term, according to experts at Swiss Re.
Other risks further out on the time scale are in the health and environmental area, such as the potency of underestimated infectious diseases, growing water stress and legislation affecting artificial intelligence.
These and other observations are from Swiss Re’s latest SONAR report featuring 20 new emerging risks that the re/insurance industry should have on its radar.
Swiss Re says its yearly SONAR report is intended to spark discussion about the future risk landscape.
The publication is based on the SONAR process, a crowdsourcing tool drawing on Swiss Re’s unique internal risk management expertise to pick up early signals of what lies beyond the horizon.
Emerging risks are newly developing or evolving risks that are difficult to quantify and sometimes not fully understood, but potentially have an impact on the industry and society.
“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. “Sharing knowledge through a proactive risk dialogue across stakeholders can help the insurance industry create a pro-active and pre-emptive risk management culture that enables disciplined risk-taking. That is an important step to help society as a whole to become more resilient.”
Top 6 Risks
The six top risks with the highest potential impact:
Reduced market access – protecting one’s own backyard: The use of regulation to control capital flows and encourage protectionism could eventually undermine the business models of international corporations.
Island solutions – regulatory fragmentation: Increased fragmentation in regulation could undermine re/insurers’ ability to support economic activity and act as stabilizers in the financial markets. In a fragmented regulatory world there is also much less opportunity to efficiently pool risks.
Return of inflation – the effect on insurance business: After years of low inflation and even fears of deflation, we see signs of headline price increases here and there. Inflation can affect insurers’ profitability, in particular on long-term liabilities (life, casualty). It can also have an adverse impact on asset management.
The perfect storm – cloud risk accumulation: Cloud services have become widespread, for business and households alike. But as the cloud accumulates data-sets and services on an ever-increasing scale, it also generates a variety of risks that may accumulate to a “perfect storm”, e.g. by a cyber-attack or a power blackout.
The big drying – growing water stress: While the U.S. Southwest is in an on-going water crisis, similar situations can be found today and in the future around the world – from Southern Europe and the Mediterranean to Africa, parts of Asia and Latin America. The risks range from wildfires, competition for water among the energy and agricultural sectors to mass migration and wider conflict potentials.
Bugs on the march – underestimated infectious diseases: The question is not whether deadly infectious diseases will appear, but when and how society is prepared to cope with them. In an extreme scenario, each epidemic or pandemic has high relevance for life and health insurance and the financial markets.
The identified risks are relevant to life and non-life insurance areas as well as asset management, according to Swiss Re analysts.
Overview of the 20 new emerging risks and their potential impact over time:
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