The Big Question: How does the industry identify and mitigate tomorrow’s emerging risks?

With Catherine Dixon, Chief Underwriting Officer, Allianz Insurance.

The world is becoming a far riskier place. Munich Re has put the insured costs of natural disasters at $120 billion per year for the past two years and the overall losses for 2021 and 2022 were $590 billion.

The year has begun with clear signals that reinsurers and, with them, the primary market will need to reassess their approach to risks at a time when claims inflation and the increase in both frequency of major natural perils are impacting claims costs.

Data and technology are seen as key tools in the ability for the industry to identify and understand new and emerging risks, but they need to go hand in hand with human capital which makes the industry’s battle to attract talent all the more pressing.

The way in which clients want to access the products to mitigate their risks, and how they want them to be delivered, require new skills with the traditional roles of broker and underwriters changing.

Be it cyber, or the increasing demand for coverage for intangible risks, the market is facing a changing risk environment. However, while the industry looks to respond to the current threats, it has to look to the future. It needs to identify those risks which are on the horizon in order to be in a position to support clients when those risks impact their businesses.

Ian Summers, Global Business Leader, AdvantageGo

Catherine Dixon, CUO at Allianz Commercial, says the future emerging risks which threaten the world highlight the need for the insurance industry to combine to understand and mitigate these threats.

In terms of future emerging risks, Dixon has identified three which require a swift industry response.

The first is changing road use.

“There has been a lot of coverage around the changing use of technology and the emergence of autonomous vehicles on our roads,” she explains. “However, there are still large amounts to be resolved from the insurance industry’s point of view around subrogation and liability.

“We still have to resolve questions around who is responsible for what, when and where. And we need to understand what does the future frequency of claims look like in a driverless world?”

Dixon adds that the biggest issue will be the transition between a future when every vehicle on the road is autonomous and the period were there will be autonomous and non-autonomous vehicles sharing the road.

“It is where existing and future risks will be alongside each other.”

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She adds it is likely that for a period we will have vehicles that can deliver some autonomous driving capabilities everywhere, while there will be other vehicles that will be able to deliver completely autonomous driving capabilities but only in certain conditions and on certain roads.

There is also the cyber threat to autonomous vehicles to be understood Dixon adds: “What do we do if suddenly all BMWs are told to only turn left at 3pm on a Friday afternoon.”

She says that once all vehicles are autonomous, risks will be both stable and predictable. However, the issue for the industry is trying to predict what the future claims averages and claims costs will look like.

The second threat is climate change.

“In many ways, some will say this is not an emerging risk, but one that is already with us,” Dixon explains. “However, we can expect its impact to increase in the future and, with it, the costs of severity of claims.

“The UK saw its average temperature exceed 10C for the first time ever and 15 of the 20 hottest years on record have been in this millennium, with the ten hottest in the past two decades.”

Dixon warns that if the world warms to the Paris Agreement target of 1.5C it will mean that the UK will see 19 additional days of extreme heat each year.

“We will not only see extreme heat increase but also rainfall,” she explains. “It will bring new risks. While we are already aware of flood risks, we are likely to see subsidence risks increase. There are also concerns around increased landslip risks and the risks of hail and wildfire in the UK.”

Dixon says the likelihood is that some risks will become uninsurable, or at best, simply a case of money swapping, which is not a position the industry wants to find itself.

The third emerging threat is that of space weather risk.

“By space weather we mean magnetic fields, radiation or particle matter emitted from the sun,” she explains. “The sun undergoes an 11 year cycle, and it entered an active phase in 2021, which means it will reach its peak in 2025.

“While it has happened in the past, any major events have been at a time when the world was not so reliant on technology for communication and so much of our daily lives, so the impact is likely to be very much greater.”

Dixon points to a recent study co-authoured by Lloyd’s on the issue, which predicted that should a major space weather event occur, the costs to the world would be between $0.6 trillion -£2.6 trillion.

“We would not be worrying about the insurance costs at that point,” she adds.

The three risks identified create real challenges around risk accumulation, are truly global and are also likely to require the market to rewrite its wordings.

“I believe that insurers need to come together to tackle these risks,” adds Dixon. “We need to bring together the industry’s expertise to tackle what truly are global risks.”

She adds Allianz’s global reach has seen the insurers create teams from across the world to examine threats and look for solutions.

“We have an opportunity, but we need to attract talented individuals that can bring new skills to the industry, which will work alongside the expertise we already which understands how insurance works, examine the lessons of past events, to look to the risks of the future.

“However, a lot of the primary market response to these risks will be driven by the approach from the reinsurance market, which again points to the need for the market to collaborate.”

The Big Question is supported by AdvantageGo, which provides revolutionary commercial insurance and reinsurance software solutions. Harness the power of proven, functionally-rich core solutions.