10 years of SONAR – lessons from emerging risks

For a decade now, Swiss Re’s annual SONAR publication has promoted dialogue about emerging risks in the insurance industry and beyond. In doing so, it has supported avoidance of unnecessary losses, enabled timely risk mitigation, and highlighted paths for new insurance opportunities.

Emerging risks – new or changing risks – matter. If not mitigated, they can impair lives, cause damage and necessitate unexpected expenditure for households and businesses. They can be expensive for insurers too, via claims, financial losses and operational challenges.

SONAR’s purpose is to foster early risk dialogue and awareness when there is still time to adapt to emerging risk scenarios, and to mitigate potential impacts for the insurance industry and society at large.

HOW IT ALL BEGAN

LOOKING BACK AT 10 YEARS OF SHARING EMERGING RISK INSIGHTS

What lessons can we draw from the emerging risks featured in past SONAR reports?
One learning is the central role of scenarios to depict new, changing or slow-burning risks.

For example, supply chain vulnerability flagged in the inaugural 2013 SONAR report was inspired by actual events: the Japan earthquake and tsunami, and the Thailand flood.

The events expanded scenario thinking by contemplating what further triggers could be considered: Supply chain disruption can result from a number of different events outside the control of an organisation, such as natural catastrophes, pandemics, cyber risks or terrorism¹.

The article further highlighted globalisation, outsourcing, interconnectedness of risks, challenges to identify non-physical loss triggers and accumulation potentials. In hindsight, today this all seems prophetic.

INFECTIOUS DISEASE THREATS

What did we flag?

SONAR has prominently featured infectious disease and pandemic risks over the years, and also highlighted different aspects of the microbial threat cluster. Apart from the pandemic scenario impacting supply chains, the 2013 article Emerging infectious diseases underlined risk factors and disease triggers such as increased human mobility, food trade and strategic use of pathogens. The same edition covered drug resistance and the implications for Life & Health and casualty lines.

Subsequent reports expanded on the emerging risk landscape for viruses and bacteria, hospital hygiene, prescription habits: The antibiotic boomerang, 2015 and farming: Too much of a good thing – antimicrobial overuse in animal farming, 2017.

SONAR has also addressed disease origination several times: Bugs on the march – underestimated infectious diseases, 2017, inter-species transmission Rising pandemic risk, 2015 and vaccination refusal and scarcity Vaccination – a shot worth more than politics and profitability, 2019.

Where are we now?

Unfortunately, one of our scenarios materialised with the COVID-19 pandemic. The modern world – with population growth, increased interactions and interconnectivity, cross-border and increased economic activity, and diminishing natural resources and habitats – will likely face more such challenges in the years to come, with potentially rising frequency and severity.

What lies ahead?

Going forward, rapid cooperation will be key, be it on scientific disease research or preventive disease management measures. With respect to associated financial protection and risk transfer solutions, public private partnerships and other stakeholder cooperation should be part of the mix.

What do our clients think of SONAR?

REGULATIONS CAN SHAPE RISK EMERGENCE

SONAR is about identifying new risks and shifts in the risk landscape. However, new or changed risks to society and the insurance industry do not emanate exclusively from new risk phenomena alone.
Changes in regulation and market conditions can also shape potential insurance impacts and opportunities.

A case in point is the underestimation of the frequency and severity of wildfires, which SONAR featured in 2015, with a regional focus on the US and Australia².

The article argued that climate change and human negligence aggravate wildfire risk. Indeed, wildfire losses increased in the following years³. Insurers in California reacted with premium increases and decreased appetite to provide cover.

This in turn triggered the state to introduce a one year ban on non-renewing policies in 2021. Unfortunately, such market distortions introduced by regulatory intervention prolong incentives for homeowners to dwell in high-risk areas.

But legislation can also have beneficial effects on risk mitigation, if it incentivises prevention and punishes risky behaviour. This was and will remain the case for many forms of environmental pollution.

In SONAR, we flagged different aspects of pollution, such as:
• Air pollution as a mortality driver in 2014,
• Ocean pollution from microplastics in 2016, and
• You pollute it, you own it – environmental liability and insurance in 2018.

Apart from regional-specific regulatory dynamics, which can make the legal side of pollution complex, potential liability claims also depend on the technical possibility to single out polluting parties, attribute respective damage and provide causal linkage. While liability regimes to prosecute different sorts of pollution have risen in many markets over past years, this is not yet the case for microplastics.

CLIMATE CHANGE AND THE LOW-CARBON ECONOMY

What did we flag?

While treating climate change as a macro trend, SONAR has focused on new – and potentially near-term – uncertainties in relation to warming temperatures. These include interaction with other risk factors and trends, thus highlighting areas in need of better understanding and with potential for under-rated risk (accumulation).

Apart from spotlights on extreme events and the 2013 article Underestimated nat cat exposures, SONAR also picked up on slow developing risk trends, such as Climate change in Life & Health in 2019 and Methane hydrate – an upcoming energy source?, a potential accelerator of greenhouse gas emissions, in 2014.

Where are we now?

As we transition to a low-carbon economy, the insurance industry will need to assess and address new emerging risks: Moving to a low-carbon future, 2020. Key risk trends include rising losses from so-called secondary perils such as heavy precipitation events, droughts and wildfire.

Other emerging risks include climate change litigation and associated risks and opportunities from the reduction of the re/insurance value chain’s carbon footprint to reach net-zero greenhouse gas emissions.

What lies ahead?

Insurers will need to be proactive in tackling emerging risks to best support the move to a low-carbon economy. This includes dealing with prototype risks in relation to low-carbon technologies.
It also means addressing non-intended transition risks so potential threats can be mitigated and turned into opportunities for the insurance industry and society.

What do our clients think of SONAR?

DIGITALISATION RISK

What did we flag?

SONAR has regularly featured digitalisation, interconnectivity, advances in computing and emerging cyber risk. The pace of digital innovation and emergence of associated cyber security risks has been high over the past years.

Related SONAR articles include Cyber attacks, 2013, Cloud computing security, 2014, Computing at the edge – cybersecurity overstretched?, 2020 and this year’s Quantum computing – a threat before an opportunity. Digitalisation harbours cyber threats from the changing relationship between humans and digital technology.

SONAR pointed out potential deficiencies for machines Wiggle room – Artificial Intelligence and healthcare, 2019 and humans Dumbed down – is digitisation undermining human skills?, 2018.

Where are we now?

Cyber attacks, particularly ransomware attacks, targeting private companies and public infrastructure are on the rise. Additionally, social media disinformation, which SONAR already addressed in 2014, and manipulation, such as deepfakes, flagged in SONAR in 2020, have become prevalent. Of striking relevance is the growing interdependency and integration of different technologies that make today’s digital world so effective and at the same time so vulnerable.

The merging of systems, platforms and hardware is keeping cyber security experts busy.

What lies ahead?

Cyber is an ever-evolving threat, requiring ongoing vigilance and refinement of cyber defences. As cyber security demands increase on all fronts, more and more investment is needed. Cyber fatigue is a growing risk itself.

What do our clients think of SONAR?

EMERGING RISK LATENCY

Many of the risks flagged in SONAR have materialised through key events and associated claims at a later point in time. Such an achievement is bittersweet given SONAR’s aim to foster early mitigation action.

Success would be avoidance of losses thanks to early action triggered by SONAR. This starts with monitoring and investigating new emerging risks and taking bold decisions amid high uncertainty.

Solar storms, for instance, are a latent risk which have not yet led to large insurance claims. However, given increasing infrastructure values, future space weather events could result in larger losses.

EMERGING OPPORTUNITIES

From risk detection to assessment and mitigation, emerging risk management is a means to turn a threat into an opportunity. Cyber risk is a good example of how emerging risks can develop into a market segment. Understanding emerging cyber risk is a prerequisite for probabilistic modelling and to maintain the insurability of cyber risks.

By encouraging due attention to new cyber risk downsides, SONAR has helped build improved understanding of the challenges emanating from the cyber risk landscape, and in turn has contributed to making cyber insurance a risk transfer solution and market segment.