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May 29, 2015 at 08:05 AM
De-globalization and political conflict, large natural catastrophes, financial instability and the challenges posed by the “Internet of Things” are some of the risks identified in this year’s Swiss Re SONAR New emerging risk insights report. The in-depth analysis seeks to provide an early indication of what might lie ahead and could become relevant going forward in the global marketplace. While many of the issues presented might never materialize into significant risks, some definitely will.
“Swiss Re’s annual SONAR report updates the most important emerging risks for the global re/insurance industry,” according to Rolf Tanner, Senior Risk Manager at Swiss Re. “The study rates the risks according to their potential impact (high, medium, low), though it is in the nature of emerging risks that precise quantification in terms of impact and frequency are not possible yet (that is the reason why they are emerging risks). The report also tries to identify in which line of business the impact could possibly be strongest going forward.”
This report looks not only at distinct economic, technological, environmental and socio-political developments, but also at how their interconnectedness is changing the risk landscape.
The follow emerging risks may not only bring additional downside risk exposure, but could also give rise to new opportunities. Can and should the insurance industry expand its role of mitigating these risks and enable society to advance?
21. Scarcity of raw materials
Low impact | Time frame: >3 years
Various raw materials are becoming scarce, including sand for concrete production and helium for various technical applications. Sand is the one of the main ingredients in concrete, and the construction industry’s demand for concrete is growing. Helium is used for various purposes, ranging from manufacturing semiconductors to cooling superconducting magnets for MRI medical imaging. Available helium has become scarcer in recent years. This is partly due to the fact that the U.S. — the world’s largest supplier — is increasingly focusing on shale gas, which contains relatively little helium.
Potential outcomes:
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Natural catastrophes hitting coastal areas harder, due to reduced natural protection
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Rising construction costs due to increasing prices for concrete and/or deteriorating building quality due to use of substandard concrete
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The shortage of helium will increase the price and make alternative production attractive, but no long-term insurance impact expected
20. Chemicals in the environment
Low impact | Time frame: >3 years
Due to our longer life expectancy we are exposed to certain chemicals for longer, which may lead to negative consequences for our health. Better diagnostic tests might also result in more people successfully suing large corporations.
With ongoing research in the field of environmental chemistry, scientific insights might fuel new liability claims. All of this may influence the re/insurance risk landscape, particularly with regard to product liability claims.
Potential outcomes:
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Chemical companies could be sued for putting damaging products on the market
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Genetic changes (epigenetic) might be used as a marker or as a forecast tool for diseases that have not yet manifested, improving diagnostics and treatment options. However, changes in a person’s gene’s may also cause cross-generational damage and significantly increase the lag time between exposure to a substance and damage manifestation
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Increased number of workers’ compensation/employers’ liability claims from people exposed to chemicals at the workplace
See also: The 5 biggest challenges agents are facing now (and how to overcome them)
19. Traffic jam in the skies
Low impact | Time frame: >3 years
The sky gets more and more crowded with drones, weather balloons and microsatellites. Appropriate regulation is essential to ensure safe air traffic, but is currently still lagging behind technological developments. In regions without proper regulations, an increased risk for collisions and accidents may occur, resulting in higher claims frequency for re/insurers.
The rapidly increasing number of drones is prompting fears about a heightened collision risk for commercial airplanes, as reports about drones getting close to airplanes make headlines. There is also increasing worry about drones being used as weapons by terrorists.
The number of microsatellites has also increased rapidly since the early 2000s. These miniature satellites are primarily used for research purposes, but more commercial players are appearing on the scene. Currently, the market is largely unregulated, giving rise to a growing risk of collisions as the number of microsatellites keeps soaring.
Potential outcomes:
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Increasing use of drones may add an aircraft fleet exposure to companies that had no airborne operations before
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A higher number of flying objects is likely to increase collision risks
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Privacy concerns due to more remotely controlled or autonomous small flying objects equipped with cameras
18. Office of the future
Low impact | Time frame: >3 years
The office of the future is on the way. The number of workplaces will be reduced, home offices encouraged and flexible working schedules will be commonplace. The latest trend is flexible open plan offices where employees no longer have their own designated desks, but may use any of the available workplaces. This brings even more cost savings as the number of desks in such a setup is generally lower than the number of employees working in the building, factoring in part-time work, business travel and vacation absences.
For employees, ill-designed open office spaces may cause frustration, as they are perceived as disruptive, stressful and cumbersome. To be workable, open offices need to address sightlines, acoustics and recognize different work styles.
The physical setup of the office space is not the only thing that is changing. Pervasive interconnectivity and digital work environments mean that many people no longer separate work life and leisure time. They are always online and accessible 24/7/365, with potentially negative implications for their health and well-being. This could ultimately lead to a decrease in productivity, an increasing number of sick days, burnouts and, last but not least, trigger workers compensation and employer’s liability claims.
Potential outcomes:
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Improved cost-benefit ratio and performance gains in case of well-managed workplace setups
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Decreasing productivity in case of ill-managed workplace setups
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Ill-designed open office solutions and digital work environments may trigger employers’ liability/workers’ compensation claims
See also: Why disconnecting can actually help business
17. The dangers of LED light
Low impact | Time frame: 0-3 years
LEDs have a longer life span and are more efficient than conventional incandescent light bulbs and fluorescent lamps, and their prices have declined significantly over the last years. As a result, the market share of LED lighting has increased significantly. This development is likely to continue.
The growing use of LEDs has triggered concerns regarding their impact on human health. LEDs emit blue wavelengths which are beneficial during daylight hours because they boost attention, reaction times and mood, but which seem to be most disruptive at night. Recent scientific studies have indicated that white LEDs could also be problematic, due to the potential risks for the eye.
Considering the fact that LEDs are likely to become the major domestic light source in many parts of the world, there is potential for a serious risk exposure. Billions of conventional lamps will be replaced by LEDs in the near future, and even if adverse health effects are rare, the total number of bodily injury claims could be very high.
Potential outcome:
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Potential for large serial losses in different markets as there are only a few major players in the light bulb market
16. Fossil fuel mismangement
Low impact | Time frame: 0-3 years
A growing number of investors and regulators worry that untapped deposits of oil, gas and coal could become stranded assets as governments adopt stricter climate change policies. A majority of known oil, gas and coal deposits may have to stay underground, becoming worthless, unless there is significant progress in technologies to capture waste gases from combusting fossil fuels.
Potential outcomes:
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Lack of income might lead to reduced inspection and cost-intensive preventive maintenance in the fossil fuel industry
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Increased theft, including unauthorised drilling into pipelines, with corresponding losses
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Reduced mining investments slowing economic growth in affected countries
15. Hydrofracking fluids
Medium impact | Time frame: >3 years
Hydraulic fracturing — commonly known as hydrofracking — is a technology to extract natural gas from unconventional reservoirs. The potential impact of hydrofracking on humans and the environment remains controversial. The main focus of concern is ground water contamination, poor waste handling and induced seismic activity.
Lately, fracking fluids have received growing attention, resulting in an increased risk exposure for the respective industries, and ultimately the insurance industry. Due to the fact that large amounts of fracking fluids leak underground, gradual contamination of groundwater is one of the pollution scenarios, with potential long-term health effects for local populations, including cancer and birth defects.
Potential outcome:
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Liability exposure from fracking activities is potentially severe and systemic.
14. Decaying infrastructure
Medium impact | Time frame: >3 years
Critical infrastructure in various countries is in bad condition, giving rise to potential for large losses. To ensure continued safe operations, massive investments are necessary.
In addition to the risks arising from aging, poor maintenance and investment lags, cyber-attacks are also a growing concern for critical infrastructure businesses such as power utilities, telecommunications and water suppliers.
Potential outcomes:
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Increasing claims frequency and severity for property and casualty covers
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Environmental damage due to aging pipelines and other failing critical infrastructure
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Increasing demand for infrastructure financing, providing an opportunity for both the investment and insurance sides of the business
See also: What will Americans look like in 2030?
13. Sinking cities
Medium impact | Time frame: >3 years
Mostly due to groundwater mismanagement, and in some cases also caused by oil and gas extraction, big coastal and delta cities are sinking, with soil subsiding up to 10 times faster than sea levels are rising.
While the sea level rise due to climate change has been well advertised and also calculated for the world’s coastal cities, soil subsidence is often underestimated and probably also not adequately factored into many natural catastrophe models and property insurance portfolios. Soil subsidence and sea level rise also often happen at the same time, leading to increased coastal flood risk. Human-induced coastal subsidence is particularly strong in urbanized river deltas with soft sediments.
Potential outcomes:
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Damage to buildings, foundations, infrastructure and subsurface structure like sewerage and gas pipes; disruption of water management; coastal floods with increased salt water intrusion
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Impact on property and casualty business lines with potential for large claims — but given that damage and erosion are a consequence of groundwater mismanagement happening over several decades, it could be challenging to assign responsibilities
12. The antibiotic boomerang
Medium impact | Time frame: >3 years
Antibiotic resistance is a worldwide problem for both human and animal health, primarily caused by excessive use of antibiotics. Furthermore, the classes of antibiotics used in food-producing animals as well as in human medical treatment are the same, and worldwide transmission of resistance is accelerated by intercontinental travel of humans, animals and food.
