Market and reg risks pose highest downside risk potential, says Swiss Re
Written by staff reporter
Reduced market access, regulatory fragmentation, the return of inflation, cloud risk accumulation, but also emerging liability legislation for artificial intelligence, are some of the key risks identified in this year's SONAR report, published by Swiss Re today.
This new report is based on the SONAR process, a crowdsourcing tool that picks up early signals of risks on the horizon. The identified risks are relevant to life and non-life insurance areas as well as asset management, whose identification can help the industry prepare for new scenarios by adapting their behaviour, market conduct and product portfolios.
"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 group chief risk officer of Swiss Re, Patrick Raaflaub. "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."
The six top risks with the highest potential impact (Source: Swiss Re's SONAR Report)
Reduced market access – protecting your 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.
The 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.