Emerging risks with the highest short-term potential impact for insurance are so-called super natural catastrophes, de-globalization and the “great monetary experiment,” according to SwissRe.
The wholesale provider of reinsurance and insurance said it crowdsourced its own risk managers to identify and evaluate new threats in the third edition of its SONAR report. Highlights include pandemic risks, the proliferation of vertical cities and the dangers of LED light.
“This report seeks to provide an early indication of what might lurk beyond the horizon,” said Patrick Raaflaub, SwissRe’s group chief risk officer. “While many of the topics presented might never materialize into significant risks, some definitely will.”
But the threats most closely associated with executive risk are longer term (unlikely to be realized in less than three years) and stem from the Internet of Things, including hacking and malfunctions. These could have a significant impact on traditional P&C polices that have some coverage for cyber risks, as well as on ‘pure’ cyber products in both P&C and L&H, the insurer said.
While IoT could make the physical world safer, other risks may increase in the digital world with people increasingly relying on data and digitally supported processes.
“Concerns focus particularly on patching and ‘secure development’ because security is not the top priority of device developers,” the report said.
By 2025, it is estimated that a family of four could have more than 100 connected devices while individuals may be in daily contact with 3 000-5 000 connected things, the insurer said.
Potential impacts from IoT also include information asymmetry between insurers and consumers, and regulations addressing data availability, usability and privacy that could limit the upside potential of big data and make claims handling more difficult.
“Accumulation control will be a key challenge for insurers–as well as a key differentiator,” SwissRe said.
A related risk of “medium” potential impact is “predictive maintenance,” according to the insurer, in which machines are equipped with sensors to monitor deterioration.
Improved safety from better maintained machines and buildings may reduce losses and thus dampen insurance demand in the long term, ultimately shrinking the top line of insurers, it said. But inadequate predictive maintenance could lead to unexpected property and casualty losses, as well as employers’ liability/workers’ compensation claims.
Liability claims may also be leveled against the developers and vendors of predictive maintenance software, the insurer said.
Among the medium-impact environmental risks enumerated in the report–including Brazilian drought, sinking cities and wildfires–the one most closely associated with casualty and executive risk is hydrofracking fluids. This involves “gradual contamination of groundwater” as one pollution scenario, the insurer said.
“Liability exposure from fracking activities is potentially severe and systemic,” SwissRe said. “In a mass tort claims complex, the principle targets would likely be well operators followed by drilling contractors; suppliers of fracking chemicals (manufacturing and/or blending and mixing activities) would likely to also be exposed through product liability.”
The near-term super natural catastrophes anticipated in the report include atmospheric river events, or narrow corridors of concentrated moisture in the atmosphere. These can lead to extensive flooding with large-scale property damage and business interruption.
Volcanic eruptions were also cited as having potential not just for significant property damage, but business interruption.
SwissRe placed these events on a par in terms of potential near-term impact with de-globalization and monetary experimentation. The former involves a trend toward nationalist policies and interventionist tendencies.
“The post-Cold War consensus–i.e., that the global economy works best and most efficiently when the political system limits itself to principle-based regulation while fostering cooperation and competition–is fraying,” the insurer said.
The latter risk involves deployment of more radical monetary strategies as the effectiveness of traditional policies wane.
“The consequences of such policies are highly uncertain and could range from deflation to inflation or even both–one after the other. Short- to-mid-term consequences include extremely low interest rates, profound distortions of risk-return profiles, potential asset price bubbles, an impaired credit intermediation channel and increasing economic inequality.
“Continuous low interest rates strongly impact the balance sheet of conservative, large asset managers like insurers, particularly life insurers, whose business model and long-term profitability and survivability is fundamentally put into question,” SwissRe said.
