21 emerging risks for the insurance industry and global economy

Turmoil in emerging markets, increased localization of internet networks within country borders and financial repression are some of the risks identified in this year’s Swiss Re SONAR “New emerging risk insights” report. 

The report offers insights into emerging risks, those newly developing or evolving risks whose potential impact and scope are not yet fully acknowledged.

The report also highlights human-induced earthquakes, mass migration, a crisis of trust in institutions, and technology-related topics, such as the rise of precision medicine and distributed energy generation.

Anticipating future risks

“Risk management is not just about managing risks in the present. It is about anticipating future ones to make sure we will be in a position to deal with them,” says Patrick Raaflaub, Swiss Re’s group chief risk officer. “These risks may only fully reveal themselves to future generations. That doesn’t mean that we shouldn’t act today to reduce uncertainty and alleviate their burden.”

The identified risks are relevant to life and non-life insurance areas and are presented with the goal of helping industry players prepare for new scenarios.

Here are the 21 emerging risks that Swiss Re says could have the biggest impact on the insurance industry and the wider global economy…

See also:

Swiss Re completes IHC stop-loss acquisition

1. Risks of the sharing economy

Medium impact | >3 years

While the sharing economy may provide new business opportunities for the insurance industry, it also brings legal risks and challenge to adequately model and price the associated risks. For insurers, the rise and increasing sophistication of the sharing economy raises questions regarding the appropriate form of coverage. 

The sharing economy has also reached the very foundations of insurance. Peer-to-peer insurance is gaining traction — a model that is similar to traditional mutual insurance, but takes it to another level by using new technology. Peer-to-peer insurance raises questions of adverse and self-selection, pricing and reserving adequacy, and its ability to cope with catastrophic events.

Potential impacts:

• • Traditional insurers may face pressure from new players that can access new client segments through a sharing economy set-up.
  • Insufficient loss experience could expose insurers to inadequate pricing models for the “hybrid risks” posed by the sharing economy.

Traditionally, insurers absorbed some of the risks associated today with the sharing economy into their general risk pool. (AP Photo/John Locher)

See also:

4 reasons income annuities might be the retirement equivalent of Airbnb

2. Crisis of trust

Medium impact | 0-3 years

Citizens increasingly distrust public institutions, particularly governments, large corporations, especially banks and multinationals and the traditional media.

While there are many reasons for the decline in trust, at least part of it is because of rising inequality, a sense of disenfranchisement and rising job insecurity, resulting in a growing alienation between the elites and middle classes. 

Potential impacts:

• • A decline of trust in insurance in general may hurt business.
  • A more-predatory attitude may lead to an increased number of unwarranted claims.

Opposition supporters wave flags during an opposition protest in Belgrade, Serbia, April 30, 2016. Thousands of opposition supporters have protested in front of the Serbian state electoral commission what their leaders are saying is widespread vote rigging by the ruling populists. (Photo: Darko Vojinovic/AP Photo)

See also:

The 5 best ways to earn a client’s trust

3. Mass migration

Low impact | 0-3 years

Migration is a global phenomenon and has become a pressing economic issue, particularly in light of the recent refugee flows from the Middle East and North Africa to Europe which have reached a level unprecedented in recent history.

Migration pressures across borders will likely continue to increase due to a number of unresolved, protracted crises in many regions of the world.

Potential impacts:

• • While this is a major issue for society as a whole, Swiss Re expects only minor impacts on the insurance industry.
  • Variations in populations because of a massive inflow of migrants may affect insurance by shifting the characteristics of the insured, such as life expectancy, immunization/vaccination status, prevalence of specific diseases, lifestyle choices or product preferences.
  • The risk exposure of buildings used as refugee accommodation might need to be reassessed because of higher-than-expected occupancy. The insurance industry could offer expertise to ensure that adequate loss prevention measures are established.

Women queue as they wait for distribution of hygiene kits at the premises of the old international airport which is used as a temporary camp in Athens, on May 3, 2016. Germany and some other EU countries are planning to ask the European Commission for an extension of border controls within the Schengen passport-free travel zone for another six months because they fear a new wave of migrants. (Photo: Yorgos Karahalis/AP Photo)

See also:

20 cities Americans are flocking to and fleeing

4. Viral leaderless mobilization

Low impact | 0-3 years

The technological capabilities of smartphones and the impact of social media increase the number of communication channels and the power of ”leaderless mobilizations” — the viral spreading of messages and calls for action that can result in “flash mobs” or public shaming. This could seriously damage corporate reputations.

Rallying people is easier in a social environment where distrust towards governments, corporate institutions and organizations is widespread, and individual frustration, youth unemployment and disillusionment are high. Particularly the young and the digitally savy are easily mobilized. But also among the broader middle class, trust in the ability of elites to govern is evaporating fast, fueling a general sense of distrust and alienation from the elite. This may result in more and more violent riots and demonstrations that are difficult to contain, which in turn could result in more property losses.

Potential impacts:

• • More property and business interruption losses from riots are to be expected.
  • Campaigns that hurt a company’s reputation and lead to customer and stock valuation losses, with liability suits by shareholder activists as secondary effects.
  • Manufacturers and distributers of smartphones and apps developers may be held liable for violent events from viral leaderless mobilization, resulting in more liability claims.

Bahraini anti-government protesters burn old furniture during clashes with riot police in Daih, Bahrain, March 14, 2016. Bahraini police detained a political activist and her year-old son on Monday in an operation that came on the fifth anniversary of Saudi and Emirati soldiers putting down Arab Spring-inspired protests in the tiny island kingdom. (Photo: Hasan Jamali/AP Photo)

5. The future of work

Medium impact | >3 years

With the rise of artificial intelligence and robotics, industrialized countries are on the verge of a fourth industrial revolution, also known as the industrial Internet of Things or Industry 4.0. This gives rise to “smart manufacturing” where automation, machine-to-machine communication and other high-tech applications dominate industrial production.

While the fourth industrial revolution will create new jobs and transform work qualitatively, a high portion of paid labor jobs is also expected to vanish. This will affect the middle classes, and ultimately the insurance customer base: if people have no jobs they cannot buy insurance.

Potential impacts:

• • The digital industrial revolution will increase demand for information and communication technology and corresponding insurance products. Mass unemployment could result in a shrinking customer base for personal insurance and a reduced portfolio for employers’ liability if newly created jobs are not outweighing the loss.
  • Insurance might find new opportunities in supporting the growth of a new informal economy.

Youth march during a protest against proposed changes to France’s work week and layoff practices, in Paris, Tuesday, April 5, 2016. Socialist President Francois Hollande’s government, desperately trying to lower unemployment, says the bill will encourage hiring, especially of young people. But unions and students say it erodes hard-fought worker protections. The banner reads: “Labor law. Out”. (Photo: Christophe Ena)

6. Precision medicine

Medium impact | >3 years

Precision medicine is an emerging approach for disease treatment and prevention that takes into account a person’s genes, environment and lifestyle. The potential for precision medicine is regarded to be huge, but there are still some drawbacks. 

Potential impacts: 

• • New data types and new data sources will create information management challenges, and data protection and transfer might become a bigger liability issue.
  • For insurers, personalized diagnostics and therapies may increase costs for health insurance in the mid-term, but could reduce overall health care expenditure in the long-term by increasing treatment effectiveness and efficiency.
  • With an increase of the predictive value of personalized genomic data, the insurance industry will be increasingly faced with anti-selection in life insurance and an increased lapse risk. Ultimately, it might even lead to a creeping erosion of the solidarity principle on which insurance is based.

Dr. Michelle Griffin, a plastic research fellow, demonstrates for photographs seeding stem cells onto a synthetic polymer ear at her research facility in the Royal Free Hospital in London, March 31, 2014. In a north London hospital, scientists are growing noses, ears and blood vessels in the laboratory in a bold attempt to make body parts using stem cells. (Photo: Matt Dunham/AP Photo)

See also:

On the Third Hand: Precision collision

7. Nutraceuticals

Low impact | 0-3 years

Ageing and increasingly health conscious populations make for a growing market for products which promise to help prevent lifestyle-related diseases. Nutraceuticals are products deriving from food sources that claim to contain extra medical or health benefits in addition to a basic nutritional value.

The global market for nutraceuticals is expanding rapidly and is expected to reach $278 billion by 2021, from $172 billion in 2014.

Potential impacts:

• • How should nutraceuticals be regulated and classified? The answer has an impact on the corresponding insurance covers.
  • The novelty of the products and the lack of consistent rules make underwriting nutraceuticals challenging for re/insurers.
  • Claims can be unique and complicated because of the composition of the products, labelling and advertising issues, lack of clarity on health effects and difficulty demonstrating causation.

Who does and does not benefit from taking supplements of omega-3 fatty acids, the good oils found in fish such as salmon, tuna and sardines? (Photo: Ted S. Warren/AP Photo)

See also:

7 corporate fitness trends to watch

8. Gene drives

Medium impact | >3 years

Gene drives are genetic systems that circumvent the rules of normal sexual reproduction and greatly increase the odds that a particular trait will be passed on to offspring.

Gene drives have the potential to fix difficult biological problems. For example, they could be applied to genetically modify mosquitoes and other disease vectors so they can no longer transmit diseases such as malaria, dengue fever or the Zika virus. They could also be used to exterminate invasive species or to break the herbicide resistance of common weeds by altering their genetic make-up.

Gene drives are a very powerful tool which could get out of control. Scientists have begun to call for increased regulation, but international governance is still lacking.

Potential impacts:

• • Huge upside potential, but also uncertainties, mainly regarding the environmental impact.
  • For insurers, a commercial application of gene drives could trigger genetically modified organism-related losses, such as under the EU’s Environmental Liability Directive.

In this photo provided by the Centers for Disease Control and Prevention, a feeding female Anopheles stephensi mosquito crouching forward and downward on her forelegs on a human skin surface, in the process of obtaining its blood meal through its sharp, needle-like labrum, which it had inserted into its human host. A powerful new technology holds the promise of rapidly altering genes to make malaria-proof mosquitoes, eliminate their Zika-carrying cousins or wipe out an invasive species, but advisers to the government say these so-called “gene drives” aren’t ready to let loose in the wild just yet. (Photo: James Gathany/CDC via AP Photo)

See also:

What genetic testing means for life insurers

9. Meat consumption

Medium impact | >3 years

While traditional diets are increasingly replaced by ones higher in refined sugars, refined fats, oils and meats in many parts of the world, meat consumption is coming under pressure in many parts of the Western World. There is pressure on meat eaters in some parts of the world to cut down their consumption — be it for health or for environmental reasons. 

Further changes in dietary patterns are to be expected, with some implications for the farming industry and all stakeholders in the associated value chain.

Potential impacts:

• • Large-scale dietary shifts would have a significant economic effect on livestock farmers and the entire associated supply chain, including insurance.
  • Class actions against stakeholders in the meat value chain are possible, similar to those that already shook the tobacco industry.

In this Jan. 18, 2010 file photo, steaks and other beef products are displayed for sale at a grocery store in McLean, Va. The meat industry is seeing red over the dietary guidelines. The World Health Organization’s cancer agency said on Oct. 26, 2015, that processed meats such as ham and sausage can lead to colon and other cancers, and red meat is probably cancer-causing as well. (Photo: J. Scott Applewhite/AP Photo)

See also: 

10 towns where A LOT of people got fat

10. The great monetary experiment

High impact | 0-3 years

The uncertainty from unconventional monetary policies continues to increase. What is certain is the negative impact of low interest rates on pension funds, retirees and insurance companies.

Potential impacts:

• • Negative interest rates will further undermine the conventional business model of the insurance industry, particularly life insurers, and pension funds.
  • M&A activity may become more intense as insurance companies partner in order to increase economies of scale and retain earnings power.

People check an electronic stock indicator of a securities firm in Tokyo. (Photo: Shizuo Kambayashi/AP Photo)

See also:

How to address the middle class income depression

11. Emerging market crises 2.0

High impact | 0-3 years

For years, emerging markets have attracted capital inflows due to low interest rates in advanced economies. Many emerging market commodity producers have also benefited from high commodities prices.

Excess supply of commodities along with the slowdown in economic growth in China have lowered commodity prices (e.g., oil, metals), stressing many emerging markets. This, along with a tightening bias to U.S. monetary policy, has led to net capital outflows from emerging markets for the second consecutive year in 2015.

Parallels have been drawn to the emerging market crises in the late 1990s, triggering fears of an “emerging market crisis 2.0.”

As exposure to emerging markets has grown over the past two decades, such effects are likely to be bigger than in the past.

Potential impacts:

• • Political turmoil and riots may result in higher underwriting losses, especially in property, personal and commercial lines. Corporate defaults may produce credit losses, and interruptions to infrastructure projects would have adverse impacts on surety books.
  • Large-scale investment losses in emerging markets may trigger lawsuits from shareholders, resulting in liability and Directors & Officers claims.

In this Aug. 27, 2015 file photo, a man walks past a bank’s electronic board showing the share index around the world at Hong Kong Stock Exchange. Investors have yanked $40 billion from emerging-market stocks this year, a record pace of withdrawals, as a slowdown in China has hammered companies that supply raw materials. (Photo: Vincent Yu/AP Photo)

See also:

Tapping into emerging markets

12. Internet fragmentation

High impact | >3 years

Cyber crime and cyber espionage have grown strongly over the last few years and have made the internet less safe. Governments are concerned about this development and have been building up their capabilities to prosecute criminals and hackers in the cyber space.