Emerging geopolitical risks are the top threat to financial markets, and one of five top emerging risk themes identified in this year's Swiss Re SONAR report as posing the largest challenges globally.
The other four top risk themes are the re-emergence of asbestos (particularly in high growth markets), cyber risks, biased algorithm and the erosion of risk diversification. The identified risks are relevant to life and non-life insurance areas as well as asset management. They were identified via Swiss Re’s proprietary SONAR process, an internal crowdsourcing platform that collects input from risk experts across the company to pick up early signals of what lies byond the horizon.
The risks are presented with the goal of helping industry players prepare for new scenarios by adapting their behaviour, market conduct and product portfolios.
Top five risks with highest potential impact
- A brave new world? – Emerging geopolitical risk
For emerging geopolitical risks, the SONAR report noted that 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 – $100bn 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 judgement as well. Discriminatory bias may also translate into defective modelling and prediction, bringing a two-fold risk to insurance and other industries.
Top five risks by lines of business
Other risks identified are in the health and environmental area, such as people sleeping less and issues around environmental liability. By lines of business, the top emerging risk themes in this year’s SONAR are:
- Financial Markets: A brave new world? – Emerging geopolitical risk
- Casualty: Asbestos reloaded – $100bn in losses and counting
- Property: Towering infernos – combustible cladding
There are tens of thousands of buildings in the world wrapped in combustible cladding. This presents a smouldering danger in the insurance industry’s books. At risk are property policies, contractor all risks policies, professional indemnities for architects and engineers who recommend/use the material, professional indemnity for faulty workmanship, because the risk can increase if the material is not installed properly, product liability and recall because it is now clear that the use of the material is problematic and directors and officers policies.
The situation is further complicated by the different regulatory standards in fire protection worldwide and the fact that current standards to test the flammability of such materials are not adequate. In other words: An approved material which has successfully passed small scale fire tests may still burn in reality.
- Life & Health: Eyes wide shut – the world is sleeping less
Two out of three losses worldwide are due to human failure. Tired people make more errors and insomniacs are at a greater risk of dying earlier than would otherwise be the case. Lack of sleep is associated with increased rates of heart attacks, strokes, obesity and other conditions like Alzheimer’s.
If these trends change the loss patterns in property and casualty or mortality rates, this could have a multi-billion dollar impact on the insurance industry in the long run. Moreover, there are indications that the risk is real. The world is indeed sleeping less due to trends like flexible work schedules, more artificial lighting and new light technologies as well as extensive use of smartphones and computer games.
- Operations: A slow poison – the erosion of risk diversification
"Our SONAR report is not about forecasting the future or covering all emerging risks, but rather about preparing for its potentialities", said Swiss Re’s Group Chief Risk Officer Patrick Raaflaub, "The more transparency and the more time we have, the better we can adapt to the changing risk landscape.”
The SONAR report offers insights into 18 emerging risks and seven emerging trend spotlights. Emerging risks are defined as newly developing or evolving risks that are difficult to quantify, but potentially have a significant impact on the industry and society. Emerging trend spotlights examine early development, which may offer both opportunities and risks for the insurance industry in the future.