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.
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 more robust 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.