Swiss Re forecasts unpredictable and multi-faceted threats for insurers as global uncertainties broaden

By Harris Pozderovic

At a time when emerging technologies threaten to disrupt markets, climate change devastates communities and reignited geopolitical tensions drum up war, insurers have had to find ways to adjust to an ever-evolving risk landscape.

But how can insurers prepare for risks they don’t see coming? This year’s Swiss Re Sonar report references a period of “turbulent times” for the insurance market, where “expectations are challenged, and predictions fail”.

The reinsurer notes potential widescale fallout from identified “high-impact risks” such as financial market volatility, AI vulnerabilities, and a multitude of sectors affected by the ongoing conflict in Ukraine. If that wasn’t enough, the report also highlights a new hotbed region for global superpower tension emerging in the melted caps of the Arctic and warns about the potential causes of the next pandemic. 

In his commentary on the report, Swiss Re Group Risk Officer Patrick Raaflaub says the unpredictable nature of these new risks will “tax the resilience of individuals, organisations and society at large”. 

“Since the pandemic, big risks our industry has long modelled have materialised in rapid succession,” Mr Raaflaub says.

“A sampling of topics we tackle this year underscores why re/insurers must stay agile and proactive as they scan the horizon for future hazards – those that are known as well as those that are unknowable.”

He says the report, now in its 11th edition, demonstrates why foresight remains critical to reducing the impact of future risks. 

“Whether global or local, all risks have something in common: Identifying them early so they can be properly mitigated remains a cornerstone of resilient societies,” Mr Raaflaub says.

“Sonar emphasises scenario thinking to better grasp the uncertainties associated with specific emerging risks.

“This helps us not only to better grasp the uncertainties that accompany emerging risks, but also to create flexible, long-term strategic plans to prevent them from gaining the upper hand so that the human costs of risk don’t spiral out of control.”

Here’s some of the key risks identified in the report:

An unexplored risk frontier:

In last year’s Sonar report, reported in the October 2022 edition of Insurance News, Swiss Re outlined how increasing global temperatures are causing permafrost to thaw, carrying the potential for disastrous outcomes, including the release of extinct pathogens and chemical sickness.

Now the report says global warming in the Arctic is resulting in a range of new risks for insurers. With its sea ice melting at an accelerated pace, previously inaccessible parts of the polar region have begun to open, bringing new trading, tourism and mining opportunities. The impacts of the opening have already seen traders establish new shortcuts for shipping lines across the top of North America, while marketing for exclusive (and expensive) trips to the North Pole has also popped up. 

For insurers, this means new and potentially dangerous risk profiles are emerging, with concerns over rising sea levels and remnants of toxic waste dumped decades ago affecting nearby communities.

The increased attention on the opening-up of ice-free Arctic areas has also courted the attention of neighbouring nations – such as the United States, Russia, Canada and Scandinavian countries – with control over the region for military purposes being increasingly prioritised.

Tensions have been further heightened by the joint decision of Arctic Council members to suspend collaboration with Russia following its invasion of Ukraine. The suspension has prompted a halt in decision-making on matters affecting the region, such as environmental monitoring and standardisation for shipment for oil and gas projects, leaving a gap of exposure.

“The coinciding increases in economic interests, environmental change and geopolitical tensions make the Arctic a hotbed for emerging risks and potential risk accumulation,” Swiss Re says.

Artificial intelligence and machine learning:

The era of machine learning and artificial intelligence is well and truly here. With the incorporation of systems such as ChatGPT into everyday work life, businesses are now facing a technological gold rush to figure out how these new tools can be implemented to enhance their operations.

But Swiss Re says the hurry to maximise productivity has marked an opportunity for hackers and fraudsters to capitalise on the vulnerabilities of these systems. New research into adversarial machine learning has highlighted how hostile actors can manipulate data patterns through a backdoor process that alters pre-determined outcomes and instead produce malicious responses.

The effects of exposures in these systems go far beyond just cyber policies, with the report noting an increasing risk for reputational damage and claims in professional indemnity and Errors and Omissions lines for machine learning failures and data breaches. Swiss Re says suitable mitigation against hostile artificial intelligence should look to reduce areas that are vulnerable to attacks, highlighting strong data governance and limited access to models as potential methods to protect systems.

The reinsurer acknowledges that finding a suitable mix between security and maximising the value of the technology is “by no means an easy feat”, and says it will be a necessity to ensure that future machine learning systems are resilient enough to be used safely.

Bird flu: the next pandemic?

A recent outbreak of H5N1, an avian strain of influenza, has seen a devastating increase in bird deaths globally, with tens of millions of wild and domestic flocks killed last year.

The dangers of a widespread disease among domesticated flocks saw governments and businesses worldwide enact mass culling events to prevent further virus spread and ensure that supply lines remain intact.

For affected farmers, the loss of revenue was usually covered by insurers if no government-provided compensation was available. But as the world faces a worsening outbreak, the increased pressure placed on private funding to support affected businesses is being felt. However, Swiss Re’s worries about bird flu fly far beyond the financial risks to farmers, with the disease being detected in various mammals, including humans. 

The possibility of another zoonotic pathogen (one that jumps from non-human animal to human) spreading worldwide sends shivers down the spine. The report says worries over a covid-like pandemic event are not to be ignored, and while currently there have been no reported cases of human-to-human spread of H5N1, new infectious variants from shifting migration routes and increased human contact with infected carriers increase the possibility.

Next pandemic? Swiss Re flags bird flu as a potential threat

Further concerns surround the world’s responsiveness to another pandemic so soon after the last, with the impacts of “pandemic fatigue” very real.

“It’s sobering to think we’re already in the midst of another vector-borne disease outbreak, the largest-ever wave of Avian influenza,” Mr Raaflaub says.

“After Covid-19 exposed weaknesses in global disease defences, our new Sonar report serves as a reminder to insurers to implement learnings of the past three years so they’re ready for all eventualities.”

Nuclear release – human threat to an atomic problem:

The dangers of a nuclear radiation release event don’t need a convoluted scientific explanation to grab the attention of insurers. Catastrophic incidents such as the Chernobyl nuclear power plant disaster in Ukraine in 1986, which saw many thousands of people exposed to hazardous radiation and left nearby towns permanently abandoned, serve as haunting reminders of its devastating nature.

While lessons have been learned from the event, worries around the safety of operating nuclear facilities continue to impact its reputation as an alternative energy source to carbon. 

But for Swiss Re, it is the multi-faceted risk landscape of nuclear release that has caused its report to identify it as an “ever-present threat”. The reinsurer notes Russia’s continual threats to use nuclear weapons in its conflict with Ukraine, as well as its ongoing shelling of the Zaporizhzhia nuclear plant, as potential sources of exposure.

It also highlights unintentional incidents such as the mishap that set off a frantic search for a missing radioactive capsule in Western Australia’s Pilbara region earlier this year. Swiss Re says whether accidental or intentional, incidents like these have potentially catastrophic implications and exposures for everal insurance sectors.

Potential consequences from such releases can include an uptick in claims relating to cancer and other damaging diseases, property damage, food production disruptions, business interruptions and slowing economic activity in nearby affected areas.     

Other identified trends and risks in the Sonar report

  • Longer lives: As populations continue to age, life insurers have had to adjust policies relating to financial care, with added risks to product liability and medical malpractice claims due to adverse reactions to treatments from older, more vulnerable groups.
  • Global debt distress: The report warns that ongoing cost of living crises and record levels of debt carry the potential for the global economic system to be “ill-prepared for a next shock event,” causing a significant impact on businesses and increasing the likelihood of social unrest.
  • Exclusive markets: Geopolitical tensions have seen countries incorporate protectionist policies to financially hamper opponents, limiting market growth and also the freedoms of global reinsurers.
  • Hooked online: Younger generations’ over-exposure to social media, gaming, dating and streaming platforms raises concern about possible mental health impacts.
  • Solar radiation management (SRM): New technologies that aim to limit the effects of climate change by reducing the amount of incoming sunlight and lowering temperatures could bring unintended harmful consequences.
  • Toxic chemicals: Scientific advances have strengthened the ability to attribute chemical exposures to property damage, illness and environmental destruction, placing greater liability exposure on insurers.
  • Cashless economy: As the transition to digitalised payment systems accelerates, Swiss Re warns that apart from the potentially paralysing impacts of cyber attacks, infrastructure and digital capability issues could cause some community groups to be excluded from access.
  • Embedded insurance: Partnerships between insurers, tech groups and manufacturers to provide integrated insurance options have provided consumers with improved access to risk protection. However, there are fears that customers are receiving over-simplified solutions.