Insurance executives from around the world have cast more than 30,000 votes to rate a global pandemic, natural catastrophes and a food/water/energy crisis as the three categories of extreme risk that are of most significance to the insurance industry.
Other extreme risks featuring in the top 10 included cyber warfare, an economic depression, a banking crisis, and a default by a major sovereign borrower. Votes were compiled in a wiki survey organised by global professional services company, Towers Watson, which enabled participants to add their own ideas into the voting.
Graham Fulcher, a managing director in the Risk Consulting and Software business at Towers Watson, commented: “Much as we would have expected pandemics and natural catastrophes to figure prominently in insurers’ extreme risk thinking, the high rankings of things like cyber warfare and of a user-submitted idea on the risk of data compromise in the cloud illustrate how the industry is keeping up-to-date with risk assessment.”
Among the top 10 extreme risks identified by survey participants, Towers Watson sees a range of implications for insurers. For example the impact of a food/water/energy crisis includes a potential impact on morbidity and mortality, and the creation of investment winners and losers.
In the case of a sovereign default, Towers Watson believes that as well as the impact on those insurers holding debt in the defaulting country, it would in all likelihood result in a regional insurance crisis and an increase in merger and acquisition activity due to forced disposals from banking groups.
The impact of a prolonged depression can also be complex; although it can adversely impact top-line, based on the experience of many European motor insurers, the pressure on household finances leads to a reduction in vehicle miles and in turn to reductions in claims frequency and an increase in profitability.
The survey was carried out as an extension of the firm’s regular biennial analysis of the extreme risks likely to affect the broader investment community. That research and ranking, entitled Extreme Risks 2013, categorises very rare events that would have a high impact on global economic growth and asset returns if they occurred.
Graham Fulcher added: “We were delighted to get such a high and geographically diverse response to the survey. The kinds of risks that could wipe out an insurance business do inevitably evolve over time, so we were very encouraged to see this degree of engagement from a broad sample of the industry.”
1 Pandemic: A new highly infectious and fatal disease spreads through human, animal or plant populations worldwide.
2 Natural catastrophe: A confluence of major earthquakes, tsunamis, hurricanes, flooding and/or volcanic eruptions with major global effects.
3 Food/water/energy crisis: A major shortfall in the supply of, or access to, food/water/energy, causing severe societal issues.
4 Cyber warfare: Computer sabotage/espionage at a major scale, with severe damage to infrastructure, financial, medical or defence systems.
5 Technology: Large quantity of personal, government or business data stored in clouds are found to be hacked, compromised or misused.
6 Depression: A deep and protracted trough in economic output, massive increase in unemployment, restriction of credit, shrinking investment.
7 Banking crisis: Central banks unable/unwilling to supply liquidity in the next crisis, causing banking and real economic activity to stop.
8 Extreme event causing property damage, supply chain failures, business interruption and death on a significant scale.
9 Rise in extreme weather: Events exceed the capacity of insurance industry and governments to respond, with physical and social implications.
10 Sovereign default: Non-payment by a major sovereign borrower causes market panic and adversely disrupts the global economy.
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