Swiss Re's 2018 SONAR Report: re-emerging or new risks - mostly related to new technologies or lifestyle trends - pose the largest challenges for the re/insurance industry

"While our trust in assistance systems remains unbroken, and their usage increases, humans are still held accountable and are expected to be able "take over the wheel" any time. While the law treats drivers mainly as it used to, actual driving practice and alertness are decreasing. The consequent widening skills gap not only impacts insurance risk, but also operational risks." This is just one of the risk evolving trends identified by the Swiss Re's 2018 SONAR report.

If the above excerpt may sound somehow funny for many techy-fans or may give technophobics some satisfaction, Swiss Re's report latest edition identifies 18 emerging risk themes and 7 emerging trend spotlights the re/insurance industry needs to have on its radar because they have the potential not only to heavily affects the industry's financials, but also to impact on its inner philosophy, changing the rules of the game.

Emerging geopolitical risks, the re-emergence of asbestos, especially in high growth markets, but also risks arising from new technologies such as cyber risks, biased algorithm and the erosion of risk diversification are some of the key risks identified in this year's SONAR report, relevant to life and non-life insurance areas as well as asset management.

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 judgement 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 top emerging risk themes in this year's edition are:

  • for Property: Towering infernos - combustible cladding : there are potentially tens of thousands of buildings around the world wrapped in combustible cladding. This presents a smouldering danger in the insurance industry's books. 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.
  • for Casualty: Asbestos reloaded - USD 100 billion in losses and counting: asbestos almost proved to be the nemesis of the insurance industry, the deadly cancer diseases asbestos caused almost bringing down Lloyds twenty-five years ago. And the industry is still counting losses. The latest total loss estimates for the US alone are approaching USD 100 billion. Workers' exposure happens while working with asbestos, but the illness only develops 40 to 50 years later and claims only come in then. Has society since learned its lesson and banned asbestos? Reality shows that there is still much to be done
  • for 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. If these trends change the loss patterns in property and casualty or mortality rates, this could have a multi-billion USD impact on the insurance industry in the long run. There are indications that the risk is real. The world is indeed sleeping less.
  • for Financial Markets: A brave new world? - Emerging geopolitical risk: A new paradigm is evolving in the geopolitical landscape as power drifts to Asia, democratic influences decline and the relevance of global governance institutions erodes. This coincides with new forms of diplomacy and business attitudes. If you add the emergence of populism as a political force to this mix, the geopolitical risk landscape has become far more unpredictable and difficult to navigate.
  • for Operations: A slow poison - the erosion of risk diversification: Without international diversification, the insurance industry's business model, especially for P&C primary and reinsurance, would be much less efficient and resilient than it is today. Any erosion of the ability to diversify risk internationally is unwelcome for the industry and costly for society and economies. For example, the cost of providing necessary protection from natural catastrophes could become prohibitive. After a period of globalization, trend reversal and backlash are threatening the re/insurance business model. National protectionism and regulatory fragmentation are jeopardizing the obvious benefits of international diversification.
Some of the emerging risk themes and trends presented in this and previous reports may never materialize, reads the report's foreword. But others definitely will. The earlier the re/insurance industry starts adapting to new risks, the better prepared it will be to successfully protect its bottom line, develop new products and write profitable business.

About the SONAR Report

Swiss Res 2018 SONAR Report is based on the SONAR process, a crowdsourcing tool drawing on Swiss Re's unique internal risk management expertise to pick up early signals of what lies beyond the horizon.

"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. "The more transparency and the more time we have, the better we can adapt to the changing risk landscape", RAAFLAUB adds.

The report offers insights into emerging risks and highlights a number of emerging trend spotlights. Emerging risks are 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. The report is distributed among clients and the wider stakeholder community in order to inform the debate about emerging risks and facilitate the finding of solutions.

Click here to get the full versions of the SONAR Report 2018.

Follow XPRIMM Publications on LinkedIn, for more data on the insurance and financial industry.

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