From net zero to zombies emerging risks threaten global recovery

Swiss Re’s Chief Risk Officer has warned the global re/insurance industry has to be vigilant to a range of emerging risks that will develop as the world recovers from the COVID pandemic.

He was speaking as the underwriter issued its latest SONAR report which sought to identify the emerging risks that will shape the future post-COVID-19 risk landscape.

These emerging risks range from the unintended consequences of government interventions through to the dangers of restarting under-maintained industrial facilities. The report also highlighted the urgent need to decarbonise the global economy, especially in the area of urban transport.

Patrick Raaflaub (above) said: “When COVID-19 emerged in late 2019, few could have predicted the magnitude of its impact. Many of the actions taken to mitigate the pandemic have themselves created new risks, from the widening inequality gap to the dangers of restarting under-maintained industrial operations. As re/insurers, it is essential that we have the best possible understanding of these emerging risks. It is also important to remain vigilant on the emerging risks that are already known – especially regarding climate change – as these will impact us for years to come.”

The report said the income inequality gap has widened and with it will come new threats to the economy.

“COVID-19 lockdowns widened the gap between rich and poor,” it said. “While many white-collar workers were able to move to home offices and continue their work, lower-wage face-to-face service sectors such as retail, gastronomy and tourism experienced high unemployment. In the US, for example, leisure and hospitality unemployment rose from 5% at the start of 2020 to 40% in April 2020. In the UK, unemployment in these sectors peaked at 10.9% in the three months to January 2021. This was significantly lower than the US owing to the UK government’s job retention scheme.”

However the income inequality gap is not only an issue for developed economies. According to Pew research, the growth of the global middle classes was 54 million people fewer than projected in 2020, with 60% of that reduction in India alone. In countries where government finances allowed for aid packages, lower-income households fared better. In the US, stimulus measures increased the incomes of low-wage workers during the first few months of the pandemic.

For the industry itself the reduction in income for many sections of the global community threatens the recent growth in insurance demand seen in many markets. It also places the emphasis on the development of affordable private insurance solutions to fill the protection gap for middle and lower-income segments.

The report said the pandemic had given rise to the threat of an invasion of Zombie companies that have sought to survive the pandemic but will not survive the recovery as state aid is withdrawn.

“As COVID-19 swept across the globe, many governments enacted financial relief programmes to prevent corporate bankruptcies,” it warned. “In the US company bankruptcies were down by 5% year on year in 2020, a reversal of the trend of increasing rates from 2017 to 2019. Government stimulus programmes helped many viable companies stay afloat, however stimulus measures have also propped up non-viable firms: so-called ‘zombie companies’.

“Zombie companies are a potential burden for the financial sector, especially when it comes to increased credit default rates. Low interest rates are incentivising companies to take up bank credit, creating a risk of large-scale defaults on these loans once government support dries up and zombie companies become insolvent. The Institute of International Finance reported that bank loans to small-and-medium enterprises in the US rose by 6% in 20203.”

Swiss Re added to avoid a potential surge of defaults and bankruptcies, governments will need to carefully decide how and when to withdraw stimulus packages. A recent Swiss Re Institute paper concluded that for sustainable economic recovery, policy should support businesses that are viable in the long run and facilitate the orderly restructuring of non-viable firms.

Looking to the climate the report said rapid decarbonisation of the global value chain is essential to avoid the most extreme effects of global warming and climate change. One important target area for decarbonisation is transportation, which currently contributes about 24% of global CO2 emissions from fuel combustion.

“The move to electromobility, hydrogen fuel cells and non-fossil-based fuel alternatives is well underway and promises a sustainable response to traffic-loaded urban centres,” it explained. “For example, there are already sophisticated micro-mobility systems such as rentable e-scooters in many cities. In the future, the options are open to develop self-driving delivery vehicles, or even urban air mobility options such as clean-powered flying taxis.”

However, the report cautioned: “The benefits of the revolution in clean transport are clear. However, there are emerging risks. City planners face the challenge of creating ways for new e-vehicles to safely coexist with traditional transport and infrastructure. Injuries from e-scooters and e-bikes are a potential source of new liability claims. Further, the rental model of many of these new forms of urban transport requires sharing of personal information, giving rise to risks around possible data theft. Legislation and regulation will therefore also need to be updated in order to mitigate these risks.”

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The report said the pandemic had given rise to the threat of an invasion of Zombie companies that have sought to survive the pandemic but will not survive the recovery as state aid is withdrawn.