Key Emerging Risks: Cascading Effects of Natural Disasters, Supply Chain Resilience

Key emerging risks facing global economies, businesses and the re/insurance industry include the cascading effects of natural disasters, the weakening resilience of supply chains and the repercussions of persistent underfunding of healthcare systems, according to Swiss Re’s 12th SONAR — new emerging risk insights report.

“We live in an age of poly-crisis, in an environment characterised by record-breaking temperatures, extreme weather events, war, terrorism and social discontent, not least due to increases in the cost-of-living. One crisis nourishes others, a chain reaction of greater uncertainty, risk accumulation and loss potential, both of human lives and of economic/financial value,” said a forward to the report, signed by Patrick Raaflaub, Swiss Re’s group chief risk officer.

“Weather-related natural catastrophes are increasing in frequency and severity. While floods, wildfires and storms can lead to property damage and loss of life, the cascading effects of such events pose additional risks,” said a press release accompanying the report.

“Wildfires can impact the water infrastructure by contaminating water sources or cutting access to it. Floods and storms can likewise damage energy grids and disrupt transport networks, bringing production lines to a standstill due to lack of power, leading to lost production time, materials spoilage and delays to deliveries. If critical infrastructure and supply chains are affected, the accumulation of damage can be significant,” the release added.

Swiss Re identified five of the top emerging risk themes that could affect insurance and reinsurance business lines:

1. Beyond broken infrastructure — the cascading effects of natural catastrophes.

This risk theme mainly impacts property and specialty re/insurers and was rated as having a high potential impact within the next three years.

Floods, wildfires, severe convective storms and other natural peril events inflict widespread property damage as well as large economic and insurance losses. These events also cause negative effects on critical infrastructure and supply chain disruptions. “Where there is coverage, damage to critical infrastructure like transmission lines and power plants from natural peril events result in claims in property and business interruption insurance,” the report said.

2. AI — unintended insurance impacts and lessons from ‘silent cyber.’

This risk theme mainly impacts casualty re/insurers and was rated as having a high potential impact over the next three years.

The increasing use of artificial intelligence (AI) could trigger claims across many lines of business. Some of the AI-related events listed in the report include:

Operational shutdowns resulting from AI-system malfunctions could trigger business interruption claims

Professionals could face claims for i) erroneous advice or misinterpretations; and ii) unexplainable decisions delivered by AI-driven research or other tools that have negatively impacted end users.

Corporate leaders could face accusations of failing to oversee/mitigate the risks associated with implementation of AI-driven processes that have led to financial losses or reputational damage. D&O and liability claims may be triggered.

AI-driven hiring practices that inadvertently introduce bias could trigger discrimination lawsuits and claims against employers for unfair employment practices.

Insurers could face claims increases due to erroneous advice or misinterpretations delivered by AI-driven underwriting tools. AI-driven underwriting models that inadvertently introduce bias could trigger discrimination lawsuits and claims against insurance companies.

3. Underfunding of public health — harmful to morbidity, mortality and GDP.

This risk theme has the most impact on life and health re/insurers and was rated as having a medium potential impact over the next three years.

The report said a robust healthcare system requires countries to spend around 7% to 7.5% of gross domestic product, but 132 countries spend less than this threshold. “Over time, consistent underinvestment could lead to higher morbidity and mortality rates, potentially exacerbating future pandemics and also resulting in lower global GDP,” it said.

4. Risky bets — democratizing financial information through social media.

This risk mostly impacts financial markets, which include insurers’ assets. It was rated as having a medium potential impact within the next three years.

While social media is entrenched in daily life, it also opens the door to potential financial market and insurance sector risks. For example, information overload at speed and scale can lead to irrational investment decisions, losses on assets and financial market volatility, which could have repercussions on insurers’ profitability. In addition, there could be increased claims for directors and officers (D&O) and credit and surety lines if there are bank-runs and fallout from a financial market crisis.

“On the upside, insurers can use social media data to more accurately identify potential risks and tailor insurance products accordingly, and also to identify claim inconsistencies and fraud,” the report said.

5. Cyber-enabled fraud — a new era for organized crime.

This risk theme mainly impacts operations and was rated as having a medium potential impact over the next three years.

“The vulnerability of operating systems to technology dependency is central to macro-trend risks. That includes cyber risk, with ongoing digital innovation generating more and also new exposures,” according to the report.

The potential impacts of this risk theme include operational fraud losses that may be directly monetary — for example, if criminals hack business emails that involve money-transfer instructions. Losses may also involve business-line claims fraud such as when criminals create fake emails from a hospital to healthcare insurers, requesting reimbursements for the provision of fictitious care treatment/services. “Depending on the circumstance of a fraud incident, insurance covers for liability, cyber etc. may be triggered.”

SONAR’s full list of 16 emerging risks are listed as follows:

• Underfunding of public health — harmful to morbidity, mortality and GDP
• Smart drugs — wrong fix for cognitive enhancement?
• Social isolation and loneliness — a growing health crisis
• FemTech: bridging the gender gap in healthcare
• Climate change — an evolving threat to international security
• Global supply chains — resilience against business interruption risk is weakening
• Big Tech — a dependency risk
• No room left — competition for space generates infrastructure accumulation risks
• Risky bets — democratizing financial information through social media
• Beyond broken infrastructure — the cascading effects of natural catastrophes
• Cyber-enabled fraud — a new era for organized crime
• Alluring abyss — deep sea mining’s murky future
• Recycling — when energy infrastructure becomes hazardous
• Next generation nuclear
• AI — unintended insurance impacts and lessons from “silent cyber”
• Insurance fairness: challenge and opportunity

SONAR stands for Systematic Observation of Notions Associated with Risk, which is Swiss Re’s process for identifying, assessing and managing emerging risk.