What are the major risks shaping insurance today?

The insurance sector is currently facing a range of significant risks that are reshaping the industry’s landscape. Cyberattacks have become a pervasive threat, requiring robust defences against ever-evolving vulnerabilities. Climate change is introducing complex challenges with far-reaching impacts, while economic pressures from supply chain disruptions and geopolitical tensions are driving up costs and creating an unpredictable business environment.

Insurers must reassess their risk management strategies to effectively navigate these emerging threats and maintain stability. Robert Muir-Wood (pictured above), chief research officer for Moody’s RMS, addressed the evolving risk landscape and its implications for the insurance industry.

Muir-Wood highlighted the need for insurers to re-evaluate their approach to risk, noting that traditional lists of top risks and opportunities often spark debate over ranking rather than focusing on the actual risks.

“Risk is changing, and the business environment is changing,” Muir Wood said. “Supply chain shocks, the overhang of the pandemic, and geopolitical risk have escalated economic issues that have been fairly benign in many countries, driving inflation, wages, and raw material price rises, with insurers reaching for an inflationary business playbook that they haven’t used for 20-30 years.”

Insurers frequently encounter risks perceived as too distant to consider or too obvious to require further evaluation. Muir-Wood stressed the importance of reconsidering these risks in light of recent global developments.

The questions facing insurers are multifaceted: which risks are driving these changes, and are insurers focusing on the right factors? Muir-Wood raised critical issues such as the ability of pre-existing infrastructure to withstand new extreme pressures, like the dam failures in Libya and India.

“Another question, what’s next for life insurers after the major global catastrophe of a global pandemic not seen since 1918?” he asked. “Insurance is a business, and relies on its customers – be they homeowners, life policyholders, or businesses. Customers face the same risk and economic pressures, but for some, as climate peril risk rises along with losses, insurers have looked to pass premium increases or tighten coverage – with customer satisfaction falling and 6 million uninsured homes in the US.”

The risks shaping insurance

Economic pressures have also intensified, driven by supply chain shocks, lingering pandemic effects, and geopolitical risks. Muir-Wood notes that these factors have escalated economic issues, leading to inflation, wage increases, and rising raw material costs. Insurers are now relying on inflationary strategies that have not been employed for decades.

Cyber risk has become pervasive with global reliance on the internet. Muir-Wood said that organisations face constant cyberattacks, requiring robust defences. Insurers must develop frameworks to manage this evolving risk effectively.

“The challenge for insurers is to use frameworks that best capture this peril, as understandably, organizations are looking to their insurers for protection against the worst excesses and losses from cyber risk, and to better manage the risk overall, to make it hard for the criminals perpetrating these attacks,” he said.

Climate change, on the other hand, involves multiple feedback loops that accelerate global warming. Insurers must understand these interactions to assess the urgency of mitigating risks and the impact on stakeholders. Muir-Wood said that achieving net zero carbon emissions is both a scientific and socio-political challenge.

“Examining the complex network of feedback loops that can accelerate global warming will prove vital to establish whether we are moving fast toward true tipping points. Any accelerations mean less time to mitigate risk, resulting in increased transition risk due to the urgency to respond – potentially impacting insurers and stakeholders including governments,” he said.

Muir-Wood also noted that the “Great Moderation” period of economic stability has ended, replaced by frequent and unpredictable shocks. Insurers now face inflationary pressures, rising construction costs, and higher interest rates, affecting their business planning.

“Similar to any other product, insurance costs have to compete with other demands on a consumer’s income. In an economic environment where housing, food, and fuel costs are rising, insurers run the risk of being seen as expensive, offering no immediate value for a risk they perceive won’t happen to them. Insurers need to be viewed as partners in allowing for the economic viability of homeowners, businesses, and the community,” he said.

Threats for supply chains and long-tail claims

Global supply chains have shown vulnerability to disruptions, as seen during the COVID-19 pandemic and Russia’s invasion of Ukraine. Insurers must help businesses build resilience against future supply chain shocks.

“Businesses are rapidly relearning how they approach global supply chains, assuming that nothing is certain, and building resilience and contingency into their systems. Identifying the new vulnerabilities in each supply chain, recognizing that the leanest approach may not be the best fit, and that supply continuity is now the best outcome, will help to minimize future supply shocks,” Muir-Wood said.

Aging infrastructure in developed nations and new infrastructure in developing countries both present challenges. Muir-Wood notes that insurers face increased risks from inadequate infrastructure failing under extreme conditions.

“There is a growing need for (re)insurers to be prepared and even ensure reserves for the rise of ‘long-tail’ claims from many potential sources,” he said. “Social inflation factors, where awarded losses, higher litigation rates, or simply the backlog of court cases post-COVID seeing legislators extending claim deadlines or adjusting claim eligibility dates allowing more claimants to gain redress, bring uncertainty.”

Advances in healthcare have increased life expectancy, but issues like obesity and insufficient healthcare access are countering these gains. Muir-Wood said that insurers must balance the positive impact of medical breakthroughs with emerging health risks.

“These risks are designed to challenge, raise debate, call for analysis, and help start conversations on embracing a risk landscape that seems more complex and opaque than in previous times,” he said.

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