Swiss Re’s 2018 SONAR Report identifies emerging geopolitical risks
Swiss Re in June 2018 published its SONAR Report, which identifies emerging geopolitical risks, the re-emergence of asbestos, especially in high growth markets, and the risks arising from new technologies such as cyber risks, biased algorithms, and the erosion of risk diversification as some of the key risks facing the re/insurance industry as well as society at large.
The SONAR report is a publication based on the SONAR process, a crowd-sourcing tool that draws on Swiss Re’s internal risk management expertise to pick up early signals of what lies beyond the horizon.
The report offers insights into emerging risks and highlights a number of emerging trend spotlights and is distributed among clients and the wider stakeholder community to inform the debate about emerging risks and ease the finding of solutions.
Emerging risks potentially have a significant impact on the industry and society. Emerging trend spotlights look at early development, which may offer both opportunities and risks for the insurance industry in the future.
The common thread through these risks is their relevance for life and non-life insurance areas as well as for asset management, whether this be an uptick in workers’ compensation medical claim costs, increasingly difficult market access or pressure on insurers’ profitability.
Emerging Risks – Food for Thought
The report features 20 new emerging risk themes, and 6 emerging trend spotlights that are meant “to spark an informed dialogue of what might lie ahead for the insurance industry and society.” Emerging risks are defined as “newly developing or changing risks which are difficult to quantify and whose potential business impact cannot be yet fully estimated with any certainty, but may have a major business impact to the insurance industry”, and while some of the emerging risk themes and trends may never materialize, “others definitely will.”
The five top risks with the highest potential impact are:
- A brave new world? – Emerging geopolitical risk: A new multi-polar world is evolving in the geopolitical landscape as power drifts to Asia, democratic influences decline, and the relevance of global governance institutions erodes. Possible turmoil in financial markets and possible erosion of legal rules could threaten the ability to run global businesses.
- A slow poison – the erosion of risk diversification: Broad diversification and the free flow of capital are key to run a global re/insurance business. National protectionism and regulatory fragmentation are jeopardizing the benefits of international diversification.
- Asbestos reloaded – USD 100 billion in losses and counting: Not all countries have banned asbestos. The UN estimates that one third of the people living in Europe are potentially exposed to asbestos at work or in the environment.
- Coming back to bite us – lurking cyber risks: Some flaws and vulnerabilities in hardware and software may remain undetected for a long time. These dormant threats can have a very long tail risk.
- Algorithms are only human too – opaque, biased and misled: An increasing number of business processes are driven by algorithms. Often, algorithms are portrayed as being objective, without human bias. But algorithmic applications are not infallible, they base their actions on human judgment as well. Discriminatory bias may also translate into defective modelling and prediction, bringing a two-fold risk to insurance and other industries.
Per lines of business, the SONAR report identifies the top emerging risk themes as:
- Property: Growing water stress
- Casualty: Cloud risk accumulation
- Life & Health: Underestimated infections diseases
- Financial Markets: The return of inflation and its effect on the insurance business
- Operations: Island solutions: regulatory fragmentation
The report also lists the opioid epidemic, antimicrobial overuse in animal farming, stress and fatigue in safety-relevant jobs, carcinogens in artificial turf, the persistence of cancer, and digital risk (working in the gig economy), human longevity and end-of-life care, and hard-core gaming as emerging risks that need to be monitored.
Risk Also Are Opportunities
“Our SONAR report is not about forecasting the future or covering all emerging risks, but rather about preparing for its potentialities”, says Patrick Raaflaub, Swiss Re’s Group Chief Risk Officer. “Ignoring emerging risks is not an option, either for political decision-makers, the insurance industry or society. Sharing knowledge through a proactive risk dialogue across stakeholders can help the insurance industry create a pro-active and preemptive risk management culture that enables disciplined risk-taking. That is an important step to help society become more resilient. ”
Raaflaub points out that risk factors such as the rise of nationalism and protectionism were once emerging risks, and were flagged in earlier SONAR reports (2014 through 2016). And while these risks pose significant threats, they also present new opportunities. The report states that “possibilities for solutions are vast, and the insurance industry could and should expand its role of mitigating risks … while bringing risk management expertise to the table to avoid losses in the first place and increase the resilience of societies.”
The 2018 SONAR report can be downloaded here (registration required).