What are the biggest risks affecting insurance today? | Insurance business America
“Risk is changing and the business environment is changing”
Risk management news
By Kenneth Araullo
The insurance sector is currently facing a number of significant risks that are changing the landscape of the industry. Cyberattacks have become a pervasive threat and require robust defenses against constantly evolving vulnerabilities. Climate change presents complex challenges with far-reaching impacts, while economic pressures from supply chain disruptions and geopolitical tensions drive up costs and create an unpredictable business environment.
Insurers must reassess their risk management strategies to effectively manage these new threats and maintain stability. Moody’s RMS Chief Research Officer Robert Muir-Wood (pictured above) discussed the evolving risk landscape and its impact on the insurance industry.
Muir-Wood highlighted the need for insurers to re-evaluate their approach to risk, noting that traditional lists of key risks and opportunities often spark a debate about ranking rather than focusing on the actual risks.
“Risk is changing and the business environment is changing,” Muir Wood said. “Supply chain shocks, the pandemic overhang and geopolitical risks have escalated economic problems that were fairly benign in many countries, leading to inflation, wages and commodity price increases. It hasn’t been used for 20-30 years.”
Insurers often encounter risks that are considered too remote to consider or too obvious to require further assessment. Muir-Wood stressed the importance of revisiting these risks in light of recent global developments.
The questions facing insurers are diverse: What risks are driving these changes and are insurers focusing on the right factors? Muir-Wood raised critical issues such as the ability of existing infrastructure to withstand new extreme stresses, such as the dam failures in Libya and India.
“One more question: what happens 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 insurance holders or businesses. Customers face the same risk and economic pressures, but for some, insurers have sought to enact premium increases or tighten insurance coverage as the risk of climate hazards increases along with losses – with customer satisfaction falling and 6 million uninsured homes in the USA.”
The risks that shape insurance
Economic pressures have also increased, caused by supply chain shocks, ongoing pandemic effects and geopolitical risks. Muir-Wood notes that these factors have exacerbated economic problems, leading to inflation, wage increases and rising raw material costs. Insurers are now relying on inflation strategies that have not been used in decades.
Cyber risks have become ubiquitous due to global dependence on the Internet. Muir-Wood said companies face constant cyberattacks and therefore robust defenses are needed. Insurers must develop frameworks to effectively manage this evolving risk.
“The challenge for insurers is to use frameworks that best cover this risk, as companies understandably expect their insurers to protect against the worst excesses and losses from cyber risks and want to better manage the risk overall to make it difficult for them make criminals who carry out these attacks,” he said.
Climate change, on the other hand, involves multiple feedback loops that accelerate global warming. Insurers need to understand these interactions to assess the urgency of risk mitigation and the impact on stakeholders. Muir-Wood said achieving net-zero carbon emissions is both a scientific and sociopolitical challenge.
“Studying the complex network of feedback loops that can accelerate global warming will prove crucial to determining whether we are moving quickly toward real tipping points.” Any acceleration means less time for risk mitigation, due to the urgency to respond “leading to increased transition risk – potentially impacting insurers and stakeholders, including governments,” he said.
Muir-Wood also noted that the “great moderation” phase of economic stability is coming to an end and is being replaced by frequent and unpredictable shocks. Insurers are now facing inflationary pressures, rising construction costs and higher interest rates, all of which are impacting their business planning.
“As with any other product, the cost of insurance must compete with other demands on the consumer’s income. In an economic environment where the cost of housing, food and fuel is rising, insurers risk being seen as expensive and not offering immediate value for a risk they believe they are not exposed to. Insurers must be viewed as partners in ensuring the economic viability of homeowners, businesses and the community,” he said.
Threats to supply chains and long-tail claims
Global supply chains have proven vulnerable to disruption, as demonstrated by the COVID-19 pandemic and the Russian invasion of Ukraine. Insurers must help companies strengthen their resilience to future supply chain shocks.
“Companies are quickly relearning how to manage global supply chains, assuming nothing is certain, and building resilience and contingency into their systems. “Identifying the new vulnerabilities in each supply chain and recognizing that the leanest approach may not be the best solution and that supply continuity is the best outcome now will help minimize future supply shocks,” Muir-Wood said.
Both aging infrastructure in developed countries and new infrastructure in developing countries present challenges. Muir-Wood points out that failure of inadequate infrastructure puts insurers at increased risk in extreme conditions.
“There is a growing need for (re)insurers to be prepared for the increase in ‘long-tail’ losses from many potential sources and even to provide reserves,” he said. “Social inflation factors, where awarded losses, higher litigation rates, or simply the backlog of litigation following the COVID crisis, lead lawmakers to extend lawsuit deadlines or adjust eligibility deadlines to allow more plaintiffs to recover Uncertainty.”
Advances in health care have increased life expectancy, but problems such as obesity and inadequate access to health care counteract these advances. Muir-Wood said insurers must balance the positive impact of medical breakthroughs with emerging health risks.
“These risks are intended to challenge, stimulate debate, require analysis and help initiate conversations about addressing a risk landscape that appears more complex and opaque than in previous times,” he said.
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2024-06-03 18:13:37
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