The Big Question: How do (re)insurers react to an era of more complex risks as demands for support increase?

The publication of the World Economic Forum’s Global Risks Report is a traditional precursor to the WEF’s annual meeting in Davos. As governmental and business leaders gather to discuss the pressing issues of today and the future, this year’s risks report warns that optimism is low and that the fear is the world’s risks will only worsen in the coming decade

The report, produced in partnership with Zurich Insurance Group and Marsh McLennan, draws on the views of over 1,400 global risks experts, policymakers and industry leaders surveyed in September 2023.  This year the results highlight a predominantly negative outlook for the world in the short term that is expected to worsen over the long term. Indeed it found while 30% of global experts expect an elevated chance of global catastrophes in the next two years, nearly two thirds expect this in the next 10 years.

Against this backdrop the report found that fears around the rise in the use of artificial intelligence and its potential use by cyber criminals and nation states to spread disinformation to disable rivals nations in an environment of heightened geopolitical risks, is a pressing concern. However the threat posed by climate change and with it natural catastrophes is still high on the corporate and governmental risk agenda.

The WEF reports the coming years will be marked by persistent economic uncertainty and growing economic and technological divides. Lack of economic opportunity is ranked sixth in the next two years. Over the longer term, barriers to economic mobility could build, locking out large segments of the population from economic opportunities. Conflict-prone or climate-vulnerable countries may increasingly be isolated from investment, technologies and related job creation. In the absence of pathways to safe and secure livelihoods, individuals may be more prone to crime, militarisation or radicalisation.

It is an ever more complex risk environment and one that will test (re)insurers.

For John Scott, Head of Sustainability Risk at Zurich Group, the key when it comes to the world’s ability to meet the current and emerging risks it faces will be an understanding that all have a part to play and that there is now a collective responsibility to take action.

“They may be classified as global risks but there is a need for local strategies, national action and international cooperation,” he explains. “Local strategies will make a difference, for example, in terms of flooding windstorm, drought and wildfire risks. These are far better tackled at a local level where there is a specific knowledge of the threat.

“The construction of flood barriers and wider defences and the implementation of system which are designed to save lives should an event occur, are done at a local level and it will be at a local level where new risks will be identified such as if a new flood barrier deflects the water to other areas putting properties and lives at risk.

“However as we have seen in recent years international collaboration can make a huge difference to risks which threaten across borders. The prime example is the rapid development of vaccines to fight the COVID pandemic. These were developed in the space of a year to 18 months when conventional wisdom is that such a vaccine can take over a decade to come to market.

“It was achieved through the collaboration of government, which expedited the authorisation process, and the private sector, in this case the drug companies and academia which worked in tandem to develop, test, manufacture and distribute the vaccines.”

He adds that in 1998 the World Meteorological Organisation and the United Nations Environment Programme combined to create what is now the IPCC that was the driver behind the Paris Agreement at COP21.

“As an individual you may decide to buy an electric vehicle, remove meat from your diet or install solar panels,” he explains. “Individually it will be viewed as a drop in the ocean but when enough individuals take action it can have a profound effect. Individual companies need to do the same. Look at the ways in which they can reduce their carbon footprint and make changes that support the fight against climate change.

“We have seen cross border cooperation in recent months with COP28 seeing the first agreement which recognises the need to transition away from fossil fuels, which is a significant step.

“It is positive, but we need to do a lot more. We need to bring the different strands together and if we do so we can finally start to move the needle.

“There are opportunities to address the risks we face but we will all have to play our part.”

Scott says the insurance industry has a part to play.

“We have a number of ways we can support business and government in tackling the risks that we face,” he explains. “The first is the transfer of risk. It remains the fundamental role of our industry – to share the risks of the few amongst the many. It has worked for so long and continues to do so.

“However we are also big investors. That provides us with the ability to influence business as investors and shareholders.

“We also have the benefit of huge amounts of knowledge and data about risks of all kinds and all sizes.  It allows us to support and advise companies and governments on the risks they face and the steps needed to mitigate those threats.”

Scott continues: “We have the opportunity to guide emerging and developing nations and support their economies to drive growth backed by (re)insurance capacity. We have the ability to effect policy and work with governments around risk management.”

He adds: “We can influence change via risk management behaviour.

“For instance we already use deductibles to make insurance cheaper. We can encourage individuals, businesses and governments to assume more of their risks, as long as they are risks, they feel they are able to assume.  It would come with a need for the creation of greater resilience and again with the industry’s data and expertise we can support them in the building of that resilience.”

He adds that as weather events become both more frequent and severe, the industry has to find new solutions for clients.

“We cannot engage in dollar swapping  exercises, where the premium is paid in the knowledge that it will simply be paid back in claims within a year to two,” Scott explains. “It doesn’t help people manage their risks and it is not sustainable.

“If you are getting flooded then there needs to be the creation of public/public solutions similar to Flood Re and Pool Re in the UK.”

He adds increasingly resilience and risk management will come to the fore as systems and solutions will be developed to increase the ability to reduce the impact of events, be that natural disasters or other emerging threats such as cyber-attack.

“We have the skills, data and analytics to be at the heart of those efforts,” he adds.