Global insurance industry executives ranked a global pandemic, a large-scale natural catastrophe and a food/water/energy crisis as the three most important extreme risks for the insurance industry to worry about in the long term, according to a survey conducted by global professional services company Towers Watson.
According to the company, other top 10 extreme risks named include cyber-warfare, an economic depression, a banking crisis and a default by a major sovereign borrower. The consideration of these extreme risks can be useful in helping insurers design new risk management processes.
"Much as we would have expected pandemics and natural catastrophes to figure prominently in insurers' extreme risk thinking, the high rankings of concerns such as cyber-warfare and a major data compromise in the cloud (user-submitted idea) illustrate how the industry is keeping up to date with risk assessment," said Stephen Lowe, senior consultant, Risk Consulting and Software, Towers Watson.
Among the top 10 extreme risks identified by survey participants, Towers Watson sees a range of implications for insurers. For example, the impact of a food/water/energy crisis includes a potential impact on morbidity and mortality, and the creation of investment winners and losers.
In the case of a sovereign default, Towers Watson believes that as well as the impact on those insurers holding debt in the defaulting country, it would in all likelihood result in a regional insurance crisis and an increase in M&A activity due to forced disposals from banking groups.
The impact of a prolonged economic depression can also be complex: Although it can adversely impact the top line, based on the experience of many European motor insurers, the pressure on household finances would lead to a reduction in vehicle miles and, in turn, to reductions in claim frequency and an increase in profitability.
"We were delighted to get such a geographically diverse and high response rate to the survey. The kinds of risks that could wipe out an insurance business do inevitably evolve over time, so we were very encouraged to see this degree of engagement from a broad sample of the industry," said Lowe.
The survey was carried out as an extension of the company's regular biennial analysis of the extreme risks likely to affect the broader investment community. That research and ranking, titled Extreme Risks 2013, categorizes very rare events that would have a high impact on global economic growth and asset returns if they occurred. Votes were compiled in a wiki survey, which enabled participants to add their own ideas. Over 30,000 votes were cast.
Top 10 extreme risks facing the insurance industry (as rated by wiki survey respondents) Rank Risk description
Seeded or user-
submitted risk 1 Pandemic: A new, highly infectious and fatal disease spreads through human, animal or plant populations worldwide Seeded 2 Natural catastrophe: A confluence of major earthquakes, tsunamis, hurricanes, flooding and/or volcanic eruptions with major global effects Seeded 3 Food/water/energy crisis: A major shortfall in the supply of, or access to, food/water/energy, causing severe societal issues Seeded 4 Cyber-warfare: Computer sabotage/espionage on a major scale, with severe damage to infrastructure, financial, medical or defense systems Seeded 5 Technology: A large quantity of personal, government or business data stored in clouds are found to be hacked, compromised or misused User-submitted 6 Depression: A deep and protracted trough in economic output, massive increase in unemployment, restriction of credit and shrinking investment Seeded 7 Banking crisis: Central banks unable/unwilling to supply liquidity in the next crisis, causing banking and real economic activity to stop Seeded 8 An extreme event that causes property damage, supply- chain failures, business interruption and death on a significant scale User-submitted 9 Rise in extreme weather: Events exceed the capacity of insurance industry and governments to respond, with physical and social implications User-submitted 10 Sovereign default: Nonpayment by a major sovereign borrower causes market panic and disrupts the global economy Seeded
A feature of wiki surveys is that they allow respondents to add their own ideas to those seeded by the survey originator. Each survey participant was presented with two of the extreme risks selected by an algorithm, and either clicked on the one they thought was the biggest threat or had the opportunity to submit their own idea. The final rankings are calculated as the estimated chance that the idea would win against another randomly chosen idea. So those at the top of the rankings are predicted to win the most frequently.
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