The risks of tomorrow
A high potential for loss but one that is difficult to quantify
Emerging risks often go unrecognised until they materialise in unexpected large-scale, high-impact risk events, or spontaneously developing trends.
- Increasing cyber attacks due to the rise of digitalisation worldwide
- 2013: Grounding of Dreamliners
- 2011: Flood in Thailand
- 2001: Attack on the World Trade Center
Floods and landslides in Thailand in 2011 resulted in the highest flood losses of all time
What they have in common: their occurrence probability, loss amount, and potential impact are exceedingly difficult to quantify, not least because cases of this particular risk type have yet to – or rarely – occur. When emerging risks do materialise, they tend to come with devastating consequences – for people and assets.
Emerging risks can have a substantial impact on underwriting and investment. Most often, they materialise as long-tail risks with the losses settled over a medium- to long-term period. Conventional risk management is ineffective without a clear understanding of risk factors. Growing global interconnectedness, increasing complexity and geopolitical risks make their identification even more complicated in a rapidly changing risk landscape.
Product innovation is challenging. Tailoring an effective cover for an emerging risk requires investing in a wide range of tools and methods, from crowdsourcing and mining data to networking with researchers and institutions across the globe.
Emerging risk trends
Population growth, economic development, and the onset of extreme climate change are placing increasing pressure on finite, non-renewable resources. Delivery bottlenecks for fossil fuels, rare earth elements, and industrial metals are expected to increase over the coming decades. However, a key concern of global impact is water scarcity. The lack of – or lack of access to – fresh water to meet water demand is a crucial factor in global food insecurity. The scarcity of resources comes with potentially crippling social effects – from mass migration and civil unrest to economic stagnation or decline.
In their wake, insurers will face higher loss ratios in agro insurance, higher property losses from riots, looting, and social unrest. The consequences expected for industries include, for example, business interruptions and higher investment costs to finance production. As a result, risk experts are foreseeing a widening insurance gap, as insurers and reinsurers reconsider their risk appetite.
Energy production facilities, methods of transport, and buildings are growing in size, efficiency, and complexity. As the scale of infrastructures and facilities grows, the technology itself becomes less manageable and more vulnerable to the environment. Current losses from oil platforms or wide-body aircraft, as well as the accumulation risks in mega projects, prove that technological peak performance comes with new levels of risk exposure. Environmental risk is more substantial – as is the potential for reputational damage.
With the payment and frequency of related claims rising, insurers are under increasing pressure to innovate to meet new risk needs. Industry cedants, on the other hand, have to come to terms with the fact that their mega project comes with higher premiums, more vulnerabilities, and more substantial environmental and reputational risks.
The evolution of offshore energy operations
People are living longer, while birth rates are falling. Demographic change is transforming our society and calling for new solutions from the insurance industry. Faced with an ageing population, governments seek to future-proof provision for old age and prepare the health sector for new challenges. However, the long-term consequences are much more far-reaching. Demographic change impacts a country’s infrastructures, economic performance, and working environment.
Industries have to create new products to cater to customer groups with drastically different needs. Entire target groups are disappearing, giving rise to sales problems, which, in turn, are likely to impact employment levels. At the same time, insurers need to adapt to changes in their legacy portfolio.
Digital technologies are fast transforming our lives, from how we experience the world to how we interact. As our dependencies on connectivity and instant data access proliferate, so do security vulnerabilities. Cyber risks to IT systems – and the information they hold – are among the most significant security risks today – and are notoriously difficult to identify and assess.
Threats can be physical, electronic, or stem from technical failures or human error. And they are everywhere. Do-it-yourself virus kits make hacking so easy that even non-coders can create malware and automate cyber attacks.
The new standard, 5G, ushers in a new era in the Internet of Things. It enables data streams for connected cars, smart factories, homes, and cities; and drives augmented reality and other new technologies. However, 5G’s very capabilities – direct device-to-device communication, frequent software updates, and a soon-to-be-encrypted International Mobile Subscriber Identity (IMSI) – make protecting 5G from cyber espionage a significant challenge.
With the dawn of quantum computing on the horizon, industries ponder how high-speed computing benefits their businesses. However, the very first application of quantum computing will most likely include cracking the encryption codes that protect these businesses today.
Artificial intelligence (AI), too, enables the internet of things and the industrial internet of things. It helps us to make sense of the mass of data generated by social media and also powers social bots. As a key technology, it enables biometrics, data mining and analytics, intelligent automation, self-learning machines, and strategic reconnaissance. At the same time, it is the enabling technology behind disinformation, fake news, deep-fakes, and voter manipulation on an unprecedented scale.
Insurers cannot slow the speed of society’s technological evolution. What they can do is leverage the latest technology – from AI to cloud computing to big data, to help businesses mitigate IT and cyber risks. Insurers and reinsurers raise awareness, contribute to the definition of security standards, model cyber risks, and create new risk transfer solutions. The goal must be to develop robust risk solutions able to evolve as the pace of technological advance accelerates.