SwissRe’s SONAR Report Explores Emerging Societal Risks

A sobering focus on a rogue internet, financial repression and the future of work

Image courtesy David Robert Bliwas

25 MAY 2016, ZURICH — Swiss Re’s new SONAR report explores top emerging risks for the re/insurance industry and society:

• Swiss Re’s SONAR report highlights 21 emerging risks that the re/insurance industry should keep on its radar

• The three emerging risks with the highest potential impact are “emerging markets crisis 2.0”, “the great monetary experiment” and “Internet fragmentation”

• Others topics of concern include “human-induced earthquakes” and “mass migration”

Turmoil in emerging markets, increased localization of internet networks within country borders and financial repression are some of the key risks identified in this year’s SONAR report, published today.

The publication is based on the SONAR process, an innovative crowdsourcing tool drawing on Swiss Re’s unique internal risk management expertise to pick up early signals of what lies beyond the horizon.

Risk not yet measured

The report offers insights into emerging risks, those newly developing or evolving risks whose potential impact and scope are not yet sufficiently taken into account.

Among these, the report also highlights a “crisis of trust” in institutions, the “legal and pricing risks of the sharing economy” and technology-related topics, such as the rise of “precision medicine” and “distributed energy generation”.

“Risk management is not just about managing risks in the present. It is about anticipating future ones to make sure we will be in a position to deal with them,” says Patrick Raaflaub, Swiss Re’s Group Chief Risk Officer. “These risks may only fully reveal themselves to future generations. That doesn’t mean that we shouldn’t act today to reduce uncertainty and alleviate their burden.”

The identified risks are relevant to life and non-life insurance areas and are presented with the goal of helping industry players prepare for new scenarios by adapting their behaviors, market conduct and product portfolios.

Detecting early signals of looming threats allows for a proactive approach to risk mitigation and is an important step to help society as a whole to become more resilient.

The three top risks with the highest potential impact:

• Emerging markets crisis 2.0: Turmoil in emerging countries could hinder the market entry and the penetration strategies of global insurance companies and even result in higher underwriting losses, especially in property, personal and commercial lines, for example in the case of riots.
• The great monetary experiment: The long-term costs of negative interest rates and unconventional monetary policies are still unknown, yet they might lead to a broader loss of confidence in the monetary system. Short-term benefits are limited as the policies are unlikely to boost economic growth.
• Internet fragmentation: Firewalls, special software to filter out unwanted information and isolated IT infrastructure detached from global networks: disconnected nets could soon become a reality. Their potential impact includes increased costs and disrupted business models for insurance companies and other businesses operating across borders.

Excerpts from SONAR Report

• Crisis of trust
  Description:
  Citizens increasingly distrust public institutions, particularly governments, large corporations, especially banks and multi-nationals and the traditional media.The phenomenon is not entirely new, but has gained traction since the 2008/09 financial crisis.2 The trend is clearly visible in Western democracies, as shown by the growing popularity of populist parties and candidates in countries such as Portugal, Spain, Ireland, or the US. It has caused a resurgence of populism, conspiracy theories, denigration of elites and minorities and a longing for charismatic leaders.While there are many reasons for the decline in trust, at least part of it is due to rising inequality, a sense of disenfranchisement and rising job insecurity, resulting in a growing alienation between the elites and middle classes. In the Middle East, Africa and Latin America, there is a deep-seated frustration with the alleged inability of governments to overcome an unequal distribution of income and wealth and make people benefit from economic growth. In Western democracies, the middle class feels threatened by globalisation.People feel multi-national corporations no longer offer job security in exchange for their loyalty; manual and other clerical jobs are threatened by technology and outsourcing/offshoring. Finally, on a social level, immigration is seen as a threat to job security and local cultures and values, while at the same time people feel it became taboo to complain about immigrants [see also emerging risk theme on “Mass migration”, p. 9].As trust in the traditional media declines, information disseminated on social media and the internet is gaining attention, despite it being fragmented and often of low journalistic standards. Bloggers, commentators and “trolls” race to outbid each other with ever more provocative statements and allegations. The messages are often undifferentiated and filled with stereotypes and prejudices. Narratives combine anti-establishment and anti-elite sentiments, anti-capitalism, and a generalised deep distrust of institutions, including insurance companies.
  Cybercrime and cyberespionage have grown strongly over the last few years and have made the internet less safe

  Potential impact:
  – A decline of trust in insurance in general may hurt business.
  – A more predatory attitude may lead to an increased number of unwarranted claims

• The future of work
  Description:
  With the rise of artificial intelligence and robotics, industrialised countries are on the verge of a fourth industrial revolution, also known as the industrial internet of things or industry 4.0.10This gives rise to ‘smart manufacturing’ where automation, machine-to-machine communication and other high-tech applications dominate industrial production. This will increase productivity and allow delegating strenuous and repetitive work to machines. However, it will also radically change the industrial workplace and redefine human tasks and skill requirements. As artificial intelligence is entering a stage where even complex tasks such as recognition of emotional states or business negotiations could successfully be managed by machines, white collar jobs are also coming under pressure.While the fourth industrial revolution will create new jobs and transform work qualitatively, a high portion of paid labour jobs is also expected to vanish. This will affect the middle classes, and ultimately the insurance customer base: if people have no jobs they cannot buy insurance – at least not unless they have an income independent of employment or entrepreneurism.A pessimistic vision for the future of industrial societies depicts a grim scenario, with mass unemployment and a frustrated workforce sharing a shrinking amount of paid labour. Such societies risk plunging into social unrest. However, if managed carefully this transition could also entail opportunities if a new informal economy of voluntary work becomes more prominent. This could, for instance, help to bridge the generation gap by enabling more people to spend part of their time engaging with and caring for elderly family members, friends or neighbours.Potential impact:
  – The digital industrial revolution will increase demand for information and communication technology and corresponding insurance products.
  – Mass unemployment could result in a shrinking customer base for personal insurance and a reduced portfolio for employers’ liability if newly created jobs are not outweighing the loss.
  – Insurance might find new opportunities in supporting the growth of a new informal economy.
•   Internet fragmentation
  Description:
  Cybercrime and cyberespionage have grown strongly over the last few years and have made the internet less safe. Studies show that at the current rate, benefits from annual information and communication technology (ICT) investments and upgrades only barely outweigh the costs of protecting systems from hacktivism, cybercrime, cyber espionage, cyber sabotage and local network instabilities. And the way forward seems to indicate more of the same.31Governments are concerned about this development and have been building up their capabilities to prosecute criminals and hackers in the cyberspace. Governments are instituting more regulation, urging corporations to
  protect their online assets more effectively and requiring technology andICT companies to store data on servers physically located within their geographical borders. Some countries are even using special software to filter out unwanted information, firewalls and isolated IT infrastructure detached from global networks. A step further in this direction is the design and development of internet protocols which make certain communications impossible. In China, for instance, the government already controls all Internet content as well as the physical infrastructure.A fragmentation of the internet is currently being viewed as unlikely to happen suddenly. International negotiations are currently under way to agree on how the internet should be governed, but no consensus or international treaty has emerged yet. While the debate is still under way, there is a chance that disconnected national and regional nets will become more common.32 Such developments would increase IT costs and regulation and would hurt insurance companies operating across borders.

  Potential impact:

  Sunk costs in cross-border IT infrastructures that would become ineffective amid increasing fragmentation could become a legacy issue on the balance sheets of large corporates.

  Evolving regulation would increase operational risk and could trigger more liability claims (D&O, fidelity); it may also massively increase costs for setting up and maintaining separate legal structures.

  Technology companies, such as providers of cross-border cloud services, could see a disruption of their business model and might face liability suits from customers if they could no longer access data stored on cross-border servers.

  
  Read the entire SwissRe SONAR- New Emerging Risk Insight here.