Emerging risks and trends in the wake of coronavirus
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Periods of rapid change lead to new and evolving risks that are difficult to quantify but could have a major impact on the insurance industry and those it seeks to protect.
One of the emerging risks highlighted in the very first edition (2013) of Swiss Re's SONAR report – the risk of emerging infectious diseases – is now upon us.
In its aftermath, the coronavirus pandemic is fast-tracking other emerging risks across almost every sector, including business, health and technology, as well as challenging existing societal and governmental structures.
At the same time, there is a risk that the urgency of dealing with COVID-19 will mean other emerging issues are overlooked.
In order to address these risks, the insurance industry itself will need to innovate and forge new partnerships and risk solutions with both the public and private sector.
These are some of the emerging risks identified in this year’s SONAR report, issued by Swiss Re Institute, and based on early signals collected over the course of a year:
Firstly, the coronavirus pandemic has shone a light on the vulnerabilities of the world’s public healthcare systems, with many countries ill-prepared to cope with the scale of events.
It is important to act on the learnings to date, such as the need for testing, contact tracing and sufficient stocks of personal protective equipment.
Insurers can partner with the healthcare sector, both public and private, to help increase resilience. For example, they could support widespread community testing by covering the individual costs of such schemes. And they can develop risk pools, creating a pre-agreed risk-sharing arrangement between corporates, the public sector and the re/insurance industry to cover losses from any future pandemic.
Once the immediate strain on healthcare systems has passed, other health issues such as mental health will come to the fore.
Mental health among children and young adults was already rising before the pandemic, and the stress and isolation caused by the outbreak are likely to further increase that trend.
Without early intervention, there may be reoccurring episodes of mental illness and an inability to work later in life, as well as an increased likelihood of physical conditions such as obesity, diabetes or back pain. This could lead to additional disability claims or even claims related to early mortality.
“The hope is that we find ways to tackle and treat problems such as anxiety and loneliness early on, so that people don’t get stuck in far harsher problems,” says Rainer Egloff, Senior Emerging Risk Manager at Swiss Re.
E-cigarettes – a new wave of addicts?
With respiratory health in the spotlight due to coronavirus, there is increasing controversy over other emerging health risks. One of these is the rise of e-cigarettes – with an estimated 41 million global vapers in 2018, about six times more than in 2011. While pre-existing health conditions are known to increase the risk of a more severe reaction to the COVID-19 virus, the effects from smoking or vaping are not yet conclusive. This underlines the general uncertainties about the potential benefits and risks of e-cigarette use in comparison to regular tobacco smoking.
The high nicotine content of some e-cigarette devices could be creating a new generation of addicts who may later switch to traditional tobacco products, the report suggests.
The risk for insurers is that the long-term effects of e-cigarettes and vaping are still largely unknown. Many chemicals present are considered a cancer risk, while there is a risk that rogue devices may explode and cause facial disfigurement, or that the devices will be misused, for example by vaping cannabis liquid.
“The liability landscape is dynamic and developing quickly, and we still have little long-term data about the health effects,” Egloff explains, adding that the field is continually changing with new ingredients, new equipment or badly cloned devices.
2. Wider society
The coronavirus shock looks set to profoundly reshape society and governmental policy, accentuating some of the pre-existing trends in the political environment.
“The coronavirus pandemic is not a black swan event– this is something the insurance industry described quite accurately. But what is really new is how strongly governments have reacted and the economic implications of that action,” explains Weymann.
One such area is the increase of public debt, as governments act to support and stimulate their economies. Even before the COVID-19 crisis, the ratio of global debt to GDP had hit an all-time high of over 322% in the third quarter of 2019.
There is significant uncertainty about how quickly governments will withdraw their support, and whether central banks will monetise the high public debt, opening the door to inflation, at the same time as more localised supply chains risk making goods more expensive.
Another trend is the shift towards nationalist or populist policies. The report says COVID-19 is likely to strengthen these tendencies, potentially leading to increased protectionism and closed borders. This same trend emerged during the lengthy economic recovery after the global financial crisis of 2008-9, as job losses began to bite, prompting increased hostility towards a migrant workforce.
Protectionism may also lead to more local regulation and a fragmentation of global standards, which in turn increases the complexity of the insurance landscape and hinders the scalability of solutions.
Millennials in the firing line
Within this challenging economic and political environment, the millennial generation is likely to be the hit hard, with a prolonged economic downturn affecting earnings at the beginning or middle of their career.
This generation has already suffered the fallout from the global financial crisis and austerity. Many have debts from university fees or have been unable to afford independent living. The pandemic and subsequent downturn could further exacerbate the intergenerational divide.
It is also possible that the frustration of millennials and a distrust of governments could foster social unrest or politically motivated violence, leading to possible property damage or other insurance impacts, the report warns.
Added to this, insurance spending may become unaffordable for this generation, widening the insurance protection gap.
“We need to come up with affordable solutions for personal protection. If the insurance industry doesn’t help here, it will lose out in the end,” says Egloff.
Another impact of the coronavirus pandemic is the acceleration of digitalization. While universal connectivity has helped many businesses, schools and families continue to function during the pandemic, it also increases digital risk.
Many of these emerging technology risks were on the risk radar ahead of COVID-19, but now need further scrutiny.
For example, edge computing – where data is processed closer to source rather than just transferred to the cloud – could increase the risk of cyber-attacks and make liability more difficult to assign.
AI-generated deepfakes, meanwhile, could lead to financial and reputational loss to individuals or organisations and may even influence political decisions and cause social unrest. Insurers themselves could also be at risk from deepfakes that present fraudulent claims.
Liability issues with software are also likely to become more frequent. Smart intelligence technology such as driver-assistance systems has increased safety, but also needs to be continuously maintained to avoid future defects.
4. Climate change
Finally, the urgent need to address climate change has been on the backburner during the pandemic. And there is a clear risk that international climate agreements could suffer if this crisis is not used to build back in a more resilient way.
“What we have seen with coronavirus is a very compressed version of what we could see with climate change in future,” says Weymann.
The transition to a low-carbon economy is vital, but also necessitates a reliance on emerging technologies with limited loss histories. Will green buildings or 3D-printed houses stand the test of time? New environmentally friendly construction materials may thrive or fail in 10 years’ time, for example, creating long-tail exposure.
Carbon capture and storage is another such promising technology that carries risk. Some of the carbon removal solutions come with significant trade-offs and side effects, the report warns, while some of the technology is still at a prototype stage.
That means that carbon removal solutions will need to be further developed and tested before upscaling is possible. And investing in them – or buying ‘green’ certificates – before that testing has taken place could lead to financial loss.
However, just as the re/insurance industry can facilitate future solutions to protect against pandemics, it can also help in the fight against climate change by providing risk transfer solutions for climate adaptation and for the transition to a low-carbon economy. For example, by developing insurance to protect against weather-related volatility for renewable energy, or by developing an insurance solution to fund the urgent repair of coral reefs in the aftermath of a severe storm.
A resilient world
The emerging risk themes and trends highlighted in this report, while worrying, also represent a huge opportunity for the re/insurance industry as it spawns innovation by offsetting risk.
These innovations – together with pre-empting pitfalls and protecting against new risks – are key to helping the world become more resilient.
“Humanity often doesn’t act unless something is really visible,” says Weymann. “But if we think now about what we can do and how to invest more in prevention than in the cure, I think we will help build society in a way that is more resilient to future shocks.”