Swiss Re’s emerging risks round-up flags a ‘silent’ danger and the fallout from natural catastrophes
By Miranda Maxwell
“We live in an age of polycrisis, 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.”
So says Swiss Re chief risk officer Patrick Raaflaub, who explains this combination is creating a particularly complex risk environment in which “one crisis nourishes others, a chain reaction of greater uncertainty, risk accumulation and loss potential”.
Geopolitical tensions are at a peak, he says, with “new wars and frontiers drawn”.
“Global society is becoming increasingly fragmented just when international collaboration is critical to face off the existential challenge of climate change.”
The question for insurers is how their solutions can help alleviate negative outcomes and make the world more resilient, says Mr Raaflaub in the 12th edition of Swiss Re’s annual Sonar report.
Sonar stands for Systematic Observation of Notions Associated with Risk. The 2024 report identifies 13 key risk trends, based on discussion with in-house experts, scientists, clients and industry peers.
Risk trends are newly developing or changing risks that Swiss Re says are difficult to quantify yet could have a major impact on society and industry. It chooses its annual themes based on early signals collected over a year. The risks are then classified as having a high, medium or low potential financial, reputational and/or regulatory effect on the insurance industry.
“The risks have been categorised according to their estimated time horizon, overall potential impact and by the lines of business that we think will be most exposed,” Swiss Re says.
HIGH-THREAT EMERGING RISK TRENDS
This year, two risk trends are ranked as having high potential impact. The first is “artificial intelligence: unintended insurance impacts and lessons from silent cyber”. This is deemed a business risk for insurers, and Swiss Re also rates it the top threat to casualty underwriting lines.
This is because while AI risks are not explicitly mentioned, limited or excluded in insurance policies, exposures may be covered. It echoes the painful underwriting episode of “silent cyber”, when insurers found some risks were covered by non-cyber policies even though that was not the intention.
Swiss Re is warning the industry to be wary of a similar “silent AI” episode.
“With silent AI, it is time to prevent repetition of the same mistakes by understanding which risks traditional policies already (silently) cover. With the fast development of AI and associated regulations, some of today’s assumptions may turn out to be wrong or incomplete,” the Sonar report says.
“Insurers will need to develop an understanding of intended and unintended effects, and design products that mitigate the risks.”
Operational shutdowns resulting from AI system malfunctions could trigger business interruption claims, while professionals may face claims for AI-driven negative impacts on end users.
Manufacturers of AI-enhanced products could be subject to property damage and/or bodily injury claims. Directors’ and officers’ and liability claims may also be triggered.
AI-driven hiring practices that inadvertently introduce bias could lead to discrimination lawsuits and claims against employers – and insurers could face claims due to erroneous advice or misinterpretations delivered by AI-driven underwriting tools.
“Models that inadvertently introduce bias could trigger discrimination lawsuits and claims against insurance companies.”
Other liability claims could stem from copyright violations and/or patent infringement caused by AI models, while corporate leaders may face accusations of failing to oversee or mitigate the risks associated with implementation of AI-driven processes.
“Generative AI that produces text, images, videos or other outputs comes with a multitude of benefits, but also risks,” Swiss Re says, adding harm caused by AI can be “physical, psychological, societal or economic, and it is unlikely a single insurance policy will cover all potential risks that AI presents”.
“Beyond broken infrastructure – the cascading effects of natural catastrophes” is another high-threat trend for insurers.
Deemed the number one emerging risk to property and specialty underwriting lines, this refers to the effects on systems such as energy, water and transport from floods, bushfires and other natural catastrophes that generate losses in property and business interruption insurance.
Bushfires leave a “toxic legacy”, polluting water and cutting access, while floods can clog rivers and basins with sediment, inundating treatment plants and leaving communities vulnerable to disease.
These “cascading effects” can include critical service outages, potentially generating claims for business interruption, blackouts, water contamination and transport issues, as well as property damage such as food spoilage, and life insurance liability.
Where there is coverage, damage to critical infrastructure such as transmission lines and power plants from natural perils results in claims. Organisations reliant on continuous power supply, such as hospitals, data centres and security systems, may lodge contingent business interruption claims, and insurers themselves may face operational disruptions.
MEDIUM-THREAT EMERGING RISKS
Six of the 13 emerging risk themes identified this year are deemed medium risk to insurers.
“Cyber-enabled fraud: a new era for organised crime” is most likely to affect insurer operations, specialty lines, and regulation. Swiss Re says scaling of criminal activities with new technology means the costs to victims can be huge as organised crime “goes digital”.
Cyber-enabled fraud “no longer requires high technical acumen”, the Sonar report says, and crime-as-a-service products or “business models” can be bought online.
For insurers, covers for liability, cyber and so on may be triggered. In-house preventive measures can increase operational costs.
“Big tech – a dependency risk” poses most threat to casualty lines, insurer operations and regulatory change.
The Sonar report, written before the CrowdStrike outage led to global chaos in July, states that Microsoft, along with Alphabet, Amazon, Meta and Apple, has “become omnipresent in daily life … and they are quasi-monopolistic …
Microsoft computers run 73% of desktop operating systems worldwide”.
Swiss Re says issues around algorithms offered as a service could lead to professional indemnity, product liability or employment practices liability claims; feeding of data into open-source AI or social media platforms can cause intellectual property and duty claims, and trigger cyber, D&O and PI exposures.
Heightened scrutiny could lead to an increase in D&O claims, while overuse of digital platforms could cause accidents and affect motor and general liability, PI and employer liability/workers’ compensation.
“Increasingly, the companies behind digital platforms may be held liable for the negative effects – mental and physical – experienced by users.”
“Global supply chains – resilience against BI risk is weakening” is chiefly a threat to specialty and casualty lines.
Drivers of supply chain risk are often external, such as natural catastrophes or politics, and beyond the direct influence of management. Swiss Re says for many of these drivers, the current outlook is negative.
“Besides the headline conflicts like Ukraine or Gaza, the Red Sea or the future of Taiwan, the political environment in many parts of the world has become less stable.”
Business, contingent and non-damage business interruption loss ratios could rise, the risk of D&O claims increases – and could be considered gross negligence or even intentional neglect by management – and morbidity and mortality rates can increase if deliveries of medical supplies are interrupted.
More frequent extreme weather events can impact production facilities and transport routes, and digitalisation presents areas of systemic vulnerability.
“If drivers accumulate, the losses incurred by insurers can increase considerably. An example would be a pandemic coinciding with a period of drought.”
“Risky bets – democratising financial information through social media” is a threat to casualty lines, and insurer investments.
Swiss Re warns social media “herd mentality” and “information overload at speed and scale” can lead to irrational investment decisions, losses and volatility that may hurt insurer profitability.
The collapse of the Silicon Valley Bank in March last year was dubbed the world’s first “Twitter-fuelled bank run”, and increased claims for D&O and credit and surety are possible after future bank runs or financial crises, though insurers can expect more demand for cyber insurance and use social media data to more accurately tailor insurance products, and identify fraud.
“Climate change – an evolving threat to international security” is a threat to property lines and insurer investments.
Swiss Re says geopolitical uncertainties and evolving climate change dynamics will “prompt shifts in the composition of demand for insurance”.
Potential food scarcity and higher prices, competition for natural resources and mass migration are likely to mean demand for drought, flood and tropical cyclone cover rise; so too will demand for political risk insurance, and strike, riot and civil commotion cover.
“Strategic interest and economic activities in the Arctic region … is likely to grow as warmer temperatures continue to melt icebergs, opening up new travel routes and risk pools,” the report says.
“Underfunding of public health – harmful to morbidity, mortality and GDP” is a threat for casualty and life insurers.
Swiss Re says delayed and/or inadequate care can lead to more morbidity and mortality claims amid “healthcare systems crumbling under overwhelming demand pressures”.
Medical malpractice claims may be triggered, while health-related absenteeism raises the risk of accidents, leading to property and casualty losses, and workers’ compensation and employers’ liability claims.
A further five emerging risk themes identified by Swiss Re are deemed – for now – to present low potential risk to insurance underwriting lines. They are: “recycling – when energy infrastructure becomes hazardous”; “alluring abyss – deep sea mining’s murky future”; “smart drugs – wrong fix for cognitive enhancement?”; “social isolation and loneliness – a growing health crisis”; and “no room left – competition for space generates infrastructure accumulation risks”.
