The 5 Pivotal Emerging Risks Shaping the Insurance and Risk Transfer Landscape in 2024
Introduction
The insurance industry stands at the crossroads of transformation, with emerging risks casting a dynamic shadow on the risk landscape.
As we step into 2024, a host of challenges and opportunities are prompting insurers to reassess their strategies and embrace the innovative approaches needed to tackle a world that is rapidly changing. This exploration delves deeper into five pivotal emerging risks that promise to define the insurance landscape in the coming year; for insurers and the organisations that use insurance to mitigate their risks.
There is, of course, a broader context for all organisations across all sectors, including insurers and this is best sourced through the WEF Global Risks Report 2024 and as discussed and visualised by this Visual Capital article:
Understanding Emerging Risks:
Hélène Chauveau, former head of the Emerging Risks department at AXA, provides her insight by describing emerging risks as
"newly developing or changing risks that are generally characterized by major uncertainty."
The lack of historical data, coupled with factors such as scientific-technological, socio-political, or regulatory changes, contributes to this uncertainty.
With this perspective, let's delve into five risks, either emerging or emerged, that will demand insurance and risk transfer responses, in 2024.
Emerging Risks in 2024:
1. Climate Change: The Unyielding Force of Nature
Climate change remains an omnipresent threat, asserting its impact through rising temperatures, extreme weather events, and ecological shifts. The accelerating urbanisation of coastal areas intensifies vulnerability, demanding collaborative efforts between insurers, city authorities, and the private sector. As global temperatures surge, the insurance industry must proactively address the escalating risks associated with heatwaves, storm surges, and rising sea levels. Strategic planning and innovative risk mitigation measures are essential to navigate the intricate challenges posed by climate change.
But to do so, organisations seeking to rely on insurance must better understand their operational and financial risk exposures and their risk appetite and tolerances to be better able to work in partnership with insurance partners and to achieve the optimal tipping point between retained risk and the purchase of insurance.
In parallel, having a deep understanding of current coverage and wordings is key. Ahead of new product innovation, “legacy” policies may have clauses and exclusions that are unhelpful to the policyholder in the event of claims. The onus is on the policyholder and, often, independent expert advice can support this process.
2. Cyber Risk: Navigating the Digital Frontier
In an era dominated by interconnected technologies, the spectre of cyber risks looms large. The continually evolving nature of cyber threats, from sophisticated ransomware attacks to intricate information warfare, challenges insurers to understand and price these multifaceted risks. Fostering increased risk awareness among the public and private sectors becomes pivotal in preventing and mitigating cyber threats. As the insurance industry becomes more deeply entwined with technology, a holistic and adaptable approach to cybersecurity is imperative.
Whilst there has been an increase in the purchase of cyber insurance this remains below insurance for more traditional risks, such as physical property. The primary issue for many organisations is to utterly understand their cyber risks, be that exposure to infrastructure or vulnerability in data security. Equally, in an increasingly digital and interconnected age, considering the supply chain; whether that be with clients or suppliers is key.
If ever the time was right to adopt a one-team approach it is now. For some companies it is unmanaged cyber risk that could bring them to their knees, so having an aligned approach bringing the IT, Risk, Finance and Operations leaders together is the key to a cohesive risk management strategy. Insurance comes thereafter and will become an easier proposition for the insurance market to provide support.
3. Technological Convergence: From Generative AI to IoT
The convergence of Generative AI, Internet of Things (IoT), and Artificial Intelligence heralds a new era fraught with complex risk landscapes for insurers. While automating processes through Generative AI offers efficiency gains, it introduces uncertainties that demand careful consideration. The proliferation of IoT devices, coupled with advancements in AI and robotics, opens new fronts in cybersecurity. Insurers face the challenge of addressing this amalgamation of risks through a multifaceted approach, combining regulatory measures, technological safeguards, and comprehensive risk mitigation strategies.
For companies that introduce AI into their businesses; either for internal efficiency or to augment their client or consumer propositions should be well versed into the risk that the AI opportunity presents. Hardly and emerging risk, since machine learning has been around for some time, the technology has advanced significantly over the last few years.
AI was a top topic at Davos 2024 and many CEO’s are bullish on AI, at the same time worrying about implications for employment, the existential human threat of superior machines and a widening gap between rich and poor nations.
The “risk manager of the future” will undoubtedly be expert in AI risk and opportunity and will immediately see the link between AI and intellectual property and professional indemnity risks. Again, the risk savvy organisation will get the best that the insurance market has to offer and is likely to ignite innovation rather than pessimism and exclusions.
4. Financial Dynamics: Navigating Market Volatility
A decade after the Great Recession, the insurance industry grapples with ongoing challenges tied to financial dynamics. Global economic uncertainties, low productivity, and the interplay of fiscal and monetary policies create a landscape ripe for market volatility. Insurers must navigate potential risks stemming from these economic complexities, emphasising the importance of effective financial regulation and macro-prudential policies. As markets undergo shifts, insurers must remain agile, adapting their strategies to ensure stability and resilience.
Such economic voliatity is closely linked to geo-political uncertainty. It appears as though levels of economic uncertainty are less this year, as interest rates are likely to fall, whereas last year they were likely to rise. However, US/China, Russia/Ukraine and Hamas/Israel generate significant geo-political uncertainty. So, it’s a collision between economic optimism and the risks of metastasizing conflicts.
Organisations will be proactively considering the financial risk and opportunity of economic changes, but this cannot be done in isolation. Assessing the vulnerability in its supply chain alongside changes in consumer behaviour and attitudes, alongside the stability of trading partners and distribution channels is key to understanding the risks to the business and how they might crystallise. Once again, finding appropriate insurance as an important piece in the risk management jigsaw will become easier and, undoubtedly, the insurance market will respond best to organisations who take this approach. Particularly, success in obtaining effective directors & officers liability insurance may turn on risk maturity in managing volatile trading conditions.
5. Natural Resources Management: Balancing Economic Growth and Sustainability
As the global population continues to expand, the strain on natural resources intensifies. The insurance industry must grapple with the increasing demand for food, water, and energy, driving stress on essential resources. Water scarcity emerges as a critical concern, posing risks that could paralyse regions and imperil lives. National and international efforts to promote sustainability, remove perverse incentives, and align regulations with sustainable development become imperative for insurers to address this emerging risk effectively. Insurers are called upon to play a pivotal role in fostering a balance between economic growth and environmental sustainability.
Organisations that have a deep understanding of its supply chain and its direct and indirect impact on natural resources will be key to business resilience. The legal and regulatory framework in many territories will toughen and mandate change and those firms that take a proactive approach and look, wherever necessary to pivot and transition are likely to perform best over the medium term. Having an invested and embedded ESG strategy is just the start. Insurers will be able to best support companies who show maturity and bravery in companies that are able to make meaningful change in what and how they do business. Undoubtedly, parametric insurance will have a growing part to play in the insurance, but as with any other insurance cover, companies who show risk management maturity and demonstrate a real stake holding in arresting the depletion of natural resources and slowing climate change will be the best served by the insurance markets.
AXA's Emerging Risks Report:
For further insights into emerging risks, AXA's Emerging Risks Report 2019 serves as a valuable resource. This comprehensive report provides additional context and analysis, offering a deeper understanding of the evolving risk landscape. Access the report here.
AIRMIC emerging risk report:
“The challenges ahead beckon insurers, brokers and the companies that they serve to work together, rise to the occasion, seize opportunities for innovation, and pave the way for a resilient and sustainable risk-managed landscape in 2024 and beyond. Although the word has rapidly changed and we were yet to experience a global pandemic, I would advocate the Airmic Guide to Emerging Risk as a useful resource for companies looking to develop effective and robust risk strategies”
Conclusion:
In the face of these emerging risks, the insurance industry stands at a critical juncture, poised for transformation. Adaptability, collaboration, and innovative solutions are paramount. As insurers navigate the complexities of climate change, cyber threats, technological convergence, financial dynamics, and natural resources management, proactive risk management strategies and a forward-thinking approach will be key to ensuring a resilient and thriving future for the industry. But, they cannot do it alone. Simply, insurers will be able to tackle these substantial threats by working with organisations in partnership; those organisations who, regardless of insurance, seek to pioneer and lead the approach to mitigate the risks and, in effect, become more sustainable and resiliet in the short, medium and long term.