Insurance is about preventing adverse outcomes and protecting customers against risks. In order to carry out this mission to the best of their abilities, insurers need to understand and prepare for the risks we will face in the years ahead. Hélène Chauveau, former head of the Emerging Risks department at AXA, defines these risks as “newly developing or changing risks that are generally characterized by major uncertainty”. This uncertainty is “partly derived from the lack of historical data that characterizes them, but also from scientific-technological, socio-political or regulatory changes that can create discontinuities in their evolution”, she continues.
In this context, how can insurers study and categorize these potential threats, as “there are hundreds of potential emerging risks, often characterized by a lack of consensus on their potential impact”? Since 2014, Hélène and her team have set up and managed the Emerging Risk Survey. By polling over a thousand group employees across the globe, as well as a network of scientists, the survey targets experts with diverse backgrounds, cultures and skills in order to compile a comprehensive picture of emerging risks. This year’s results have shown a predominance of environmental risks (climate change, natural resources) and technology changes (e.g. the Internet of Things (IoT), Artificial Intelligence (AI) and cyber risk), in addition to financial uncertainty… Analysis below.
Emerging risk #1: Climate change
For the third year in a row, the environmental risk has claimed the top spot in the ranking of emerging risks. That result comes as no surprise to Joaquim Pinto, Holder of the AXA Chair on Regional Climate and Weather Hazards at Karlsruhe Institute of Technology. He even sees it in a positive light, signaling a welcome change in public awareness:
The 5 warmest years have occurred since 2010. Given that the climate change trend is unbroken, we can expect the probability of occurrence of intense heat waves to increase within the next ten years. The same is true for storm surges and high-water levels on the coasts.
Coastal areas face the biggest risks, particularly as urbanization keeps increasing drastically in these regions: “Strong population concentration in coastal areas, such as southeast Asia, West Africa or the US Southeast, as well as the increase in insured values, is very problematic, as these areas are often affected by heavy rainfall (monsoon), typhoons and/or storm surges”, explains Joaquim Pinto.
In his view, it is essential for city authorities to grapple with this problem. Private sector companies can also do their part to limit the impact of these risks. According to the researcher, regulating construction in flood zones is one of the best examples of how companies and public authorities can work together for change: “While this is obviously not a good idea in terms of physical science, [construction in flood zones] regularly happens due to the necessity to increase housing near large cities. An increased awareness of the regional and local authorities of these issues could thus be very helpful to limit the impact of climate change-related risks.”
Emerging risk #2: Cyber Risk
Is cyber risk really an emerging risk? For Victoria Melvin, Head of Research - AXA Group Security, this question depends on your point of view: “In layman’s terms, cyber risks have been here since the creation of the Internet, so we can hardly qualify it as emerging. But by insurance industry definitions, the cyber risk is an emerging risk: it is still little understood and we simply don’t have enough historical information to be able to price it with traditional pricing methods.”
And there is good reason for that paucity of information, given the ever-changing nature of cyber risk, as mentioned by Victoria Melvin:
Adding to this complexity is the extent of cyber risks – from cybercrime to information war – and the broad range of affected stakeholders – individuals, States and companies.
For Victoria Melvin, “Increasing risk awareness among the public and private actors is a great first step as basic security measures are sufficient to prevent the many of the most harmful attacks.” But this is not enough. We also need to take action to fight these risks.
Ultimately, this first step should help change the way we perceive this risk: “There is still a misunderstanding that it is a technology risk, when it’s really a business risk”, she specifies.
Emerging risk #3: Internet of Things, artificial intelligence and robotization
For Joanna J. Bryson, professor in the Department of Computer Science at the University of Bath, supported by the AXA Research Fund, some technological breakthroughs in recent years have opened up security gaps that are hard to bridge. This is why technology risk claimed the third spot in the 2017 ranking of emerging risks.
This multifaceted risk category touches on several different issues, from advances in artificial intelligence (with the development of deep learning) to the development of robotics and the rising number of connected objects (Internet of Things, IoT).
IoT, in fact, presents two principal risks for Joanna J. Bryson: “Cybersecurity of data and cybersecurity of devices.” In addition, she thinks this mass of connected objects “could be used either for independent data aggregation or for direct action”.
We should be concerned not only by state actors trying to disrupt information infrastructures but also terrorists, stalkers, or just teenage vandals that may want to use automated systems to cause physical destruction as well as data destruction and network disruption.
In terms of artificial intelligence development, the risks are changing shape. As research advances and new services capable of making autonomous decisions become more widespread, many have raised questions regarding the reliability of these systems.
For Joanna J. Bryson, it is high time legislators regulated these technologies, while leaving room for further development and application: “We are at a significant juncture, and we need to determine the appropriate policies for the future.”
In the same time, she notes that “AI will be easier to legislate around than institutions composed of humans because we can mandate accountability and transparency, for example the logging of decisions, the auditability of code as well as of training procedures.”.
Emerging risk #4: Financial Risk
A decade after the Great Recession, growth is still in recovery mode. Should growth slow before subsisting financial imbalances recede completely, imbalances may create risks that need to be carefully monitored over the next five to ten years
For Laurence Boone, Global Head of Multi Asset Client Solutions at AXA IM, “it is highly likely that as the global economy experiences some cyclical slowdown over the medium term, some of the risks linked to market volatility will materialize. Vulnerabilities in the system will come to the test when markets get stressed.”
The economist attributes this fragility to the combination of low productivity and the exceptional fiscal and monetary policies which were enacted in order lift economies out of the most serious economic crisis for decades:
Ultra-low interest rates have supported valuation for most financial and real assets, while policies have not succeeded in lifting trend growth. A withdrawal of central bank easing policies, without appropriate fiscal and structural policies could lead to financial markets unravelling.
As for public entities, notably states and municipalities, as well as private companies, the situation is no brighter: “Historically low interest rates combined with generous fiscal policies that have not been reversed in recent better economic time led to a large increase in leverage, especially for governments and non-financial corporations”.
Financial risks in China, given the country’s importance in the global economy, has only further stoked the fear of instability, according to Laurence Boone: “China is subject to large financial imbalances that will have to be sorted in the medium term”. And this must happen at a time when the global economy is resting on the shoulders of a single emerging economy in an unprecedented way. “A financial accident in China would have major implications, should China open to global financial markets before imbalances are corrected” , she signals.
“Financial regulation and macro-prudential policies are key policies to limit risks in the financial system”, concludes Laurence Boone, underlining the importance of taking action in this area so as to fend off these potential risks.
Emerging risk #5: Natural resources management
“Natural resources management being the 5th Emerging Risk reflects a growing realization that the world economy is reaching a sustainability limit”. For Mark New, who has studied water crises in Africa and is the Holder of the AXA Research Chair on African Climate Risk at Cape Town University, the situation is clear:
The underlying drivers of stress on natural resources will continue over the next 5-10 years. The global population will continue to grow, resulting in an increasing demand for food and fiber, water and energy; economic activity will have to expand in order to support the livelihoods of this growing population.
Water is a particularly urgent example in his eyes. Not only is it a crucial resource for life on Earth, but it is also a central component of all economic development (food production, energy, industry): “We struggle to decouple economic growth from exploitation of our natural resource endowment”, says Mark New.
For this reason, a water supply crisis due to lack of resources or overwhelming demand would paralyze entire regions and place the lives of many in peril.
For Mark New, public authorities need to address this issue on both a national and international level: “[They] can push on multiple fronts; remove perverse incentives that encourage exploitation of natural resources, such as fossil fuel subsidies, not paying the full price of water, develop regulations that are aligned with sustainable development, national and regional development plans that embed sustainability.”
Emerging risks: “Avoiding blind spots”
The role of this emerging risk survey extends beyond ranking risks by order of importance. For Hélène Chauveau, “the Emerging Risk survey also aims at avoiding blindspots and detecting risks by asking respondents whether they think some risks are not taken into account in our radar”.
This year, the survey also emphasizes the importance of health risks, even though these risks did not make it into the top of the ranking. Survey respondents expressed concern about pandemics, resistance to antibiotics, new medical practices and recent fears concerning endocrine disruptors: “It rather belongs to the middle and low levels of the ranking, pointing to the fact that they could be underestimated relative to others”, she underlines.
In addition to highlighting these underreported risks, the survey provides a foundation to build on and identifies topics to explore in order to implement concrete actions:
"Tools like this survey allow for the identification and monitoring of the emerging risks dynamics and trends, proving a worthwhile asset for establishing adaptable risk anticipation strategies for insurance companies", states Hélène Chauveau. “In order to better protect its customer, this is crucial that an insurance company like AXA develops risk management techniques to ensure it will meet its commitments at all times, even when crises or bad developments occur”.