This piece is by Robert Paxton, Global Head of Strategy and Business Development at Charles Taylor.
Risks exist whether we’re aware of them or not and in many cases it’s those that we’ve become used to, without realising how much they’ve evolved, that are the most dangerous. Comfort breeds complacency and that’s a vulnerable frame of mind for any organisation.
We often compartmentalise risk to make it easier to ringfence and mitigate, but the reality is that insurers can no longer afford to think rigidly in terms of specific geographies or lines of business. Now, the interconnected nature of risk is going to become more costly for carriers and force them to be innovative in how they work with insureds to mitigate losses and increase their resilience.
In the coming year, the following three areas of risk are going to challenge the insurance market. They’re not new areas of exposure, but the pace at which they’re evolving and the way they bleed into every corner of personal and commercial activity will ensure they impact every carrier in the market.
Climate change
Existing actuarial models haven’t kept up with the volatility and extreme nature of weather events. Whether it’s a fire, flood, drought, hurricane or volcanic eruption, the result is a spike in claims across product lines ranging from motor, property and general liability to business interruption, personal injury and life.
To combat climate change, the world is transitioning away from fossil fuels to clean and renewable alternatives. This green transition brings its own set of challenges. The accelerated switch to new technologies is putting pressure on carriers to underwrite risks without detailed claims data that stretches back over many years.
Wind turbines, solar farms, electric vehicles, battery storage and cobalt and lithium mining all come with complex, interconnected risk profiles. As their prevalence increases, so too will the impact of associated losses.
One of the core concerns for insurers in dealing with climate change is sustainability. When handling a claim, how do they fund the need to build back better within existing financial models? If they pay for risk mitigation measures, how do they benefit from the improved risk performance? Could they push through a switch to longer policy terms – three to five years – to create genuine risk partnerships?
Geopolitical instability
Events in Ukraine, the Middle East and South Korea are unwanted examples of how geopolitical instability has increased massively in recent years and become a major concern for insurers and insureds alike.
A more unstable world hits supply chains hard and impacts on the cost and availability of goods internationally. Trade tariffs, embargoes, sanctions, disrupted transport routes and damaged manufacturing facilities are all inflationary factors on claims costs and affect multiple lines of business in every international territory.
The political pendulum is swinging away from globalisation and a more nationalistic outlook has gained prominence in many countries. This will further disrupt the dynamics of global trade and push claims costs higher.
Cyber security
The proliferation of technology and, in particular, the low-cost and ready access to AI is supercharging the scope, scale and sophistication of fraud targeted at organisations and individuals of all shapes and sizes.
And as insurers continue to pour capacity into the expanding cyber market, they shoulder increasing liabilities.
AI has become so sophisticated that even founding father and Nobel Prize winner Geoffrey Hinton raised concerns that it may become more intelligent than its creators in a matter of years. And in that scenario, how do we prevent it from taking the whip hand? Similarly, companies are rushing to implement AI processes into their operations to improve efficiency and enhance their products and services. But if the AI models they rely on falter, then the resulting commercial impact could be catastrophic.
State-sponsored cyberattacks already have a material impact on democratic elections, societal thinking and civil cohesion. How soon before they lead to a major riot or military coup? Technology offers many of the solutions to our current social, commercial and cultural problems. But it also has the potential to exacerbate the risks we face to such an extent that neither the insurance market, nor the wider society it supports, would remain intact. As we continue in 2025, appreciating the pace at which existing risks are evolving and becoming more interconnected will be central to our ability to prevent them from turning into unmanageable systemic threats.
One point remains clear, no single organisation will resolve all of these risks, which points to the ever-growing need for increased dialogue and collaboration across the insurance market and beyond.
Be the first to comment