The systemic nature of very large losses has increased as a result of globalisation and digitalisation. From 1990 to 2008, world trade grew twice as strongly as the overall economy. And since then, trade has still increased more rapidly than economic output. This greater interconnectedness has also heightened interdependencies. Yet a variety of solutions are conceivable for the three major risks of our time – pandemics, cyber and climate change.
Pandemics: Accumulation risk for insurers – State-backed pools required
The expenditure that insurers have incurred for COVID-19 losses is significant. The burden is already nearing that of the most costly natural catastrophes. Life and health insurance covers pandemic risks, and the cancellation of numerous major events has also caused significant losses. Liability and travel insurance as well as credit business have sustained claims.
Yet the greatest economic losses by far have been caused by business interruptions owing to imposed lockdowns. Given that these losses occurred almost simultaneously across many sectors of the economy, they are not insurable by the private sector alone. The American Property Casualty Insurance Association (APCIA) estimates that US insurers’ risk capital would have been fully consumed within a matter of weeks if business interruption losses owing to the coronavirus had been covered.
"We need new reliable mechanisms to insure such risks. The only way to achieve this is by creating state-backed risk pools in which insurers can participate with limited capacity. Furthermore, insurers can help to assess risks accurately and organise distribution and claims settlement", said Stefan Golling, Chief Underwriter at Munich Re.
Increase in cyber attacks during the pandemic – Market outlook remains positive
As a result of the lockdown measures to curb the rate of coronavirus infections, companies moved many of their business processes almost entirely and directly online, which under normal circumstances might have taken years. The cyber attack risk has consequently increased, since it is more difficult to safeguard the security of data and processes outside a corporate network. At the same time, awareness of digital dependency has increased, so that more investment in IT security is necessary and likely.
Coverage for cyber risks remains one of Munich Re’s most important strategic growth areas and fields of activity. The cyber insurance market will triple to around US$ 20bn between 2020 and 2025. With a market share of around 10%, Munich Re is one of the leading insurers.
“Munich Re has a team of over 130 experts who develop cyber solutions for the entire value chain, from risk analysis and prevention to risk transfer. In addition, it has a steadily growing network of external experts and partners offering services before and after a cyber attack. The cyber market may grow even more strongly than anticipated in the face of the additional momentum from digitalisation”, Golling said.
Climate change: Inaction will make climate risks systemic
Climate change remains humanity’s greatest challenge as it has a long-term impact and cannot be reversed for generations. Since 1980, weather-related natural catastrophes have been responsible for around US$ 4,200bn in losses and have cost the lives of almost a million people. Only about a third of these losses were insured. And the figure does not even include indirect losses following the breakdown of supply chains, banks experiencing a surge in loan defaults, or power plants having to scale back production during a heatwave.
“So far, climate change has not been a systemic risk, but it will be if global warming continues unabated. Certain regions will no longer be arable in a few generations’ time. The loss probabilities of certain natural hazards are on the rise, and we are already seeing this with severe thunderstorms and forest fires”, said Board member Torsten Jeworrek.
It is crucial to acknowledge risks of change as a result of climate change, and find out where risk assessments based on past data are no longer accurate owing to a change in probabilities. This applies not only to insurers and financial service providers but also to the real economy which needs to identify climate risks on its balance sheet – for instance, in the case of long-term credits or investments. Digitalisation and more precise data analysis help to improve the tools for assessing such risks and developing better risk transfer solutions.
In the battle against climate change, the consistent use of new technologies in the energy sector, in transportation, and in industrial and food production plays a key role. In addition to renewable energies, these technologies mainly comprise energy storage and carbon-free energy sources such as “green” hydrogen and synthetically manufactured fuels. There is also a need for technologies that can remove carbon dioxide from the atmosphere and store it. As a risk carrier, Munich Re facilitates the market entry and affordability of such new key technologies by developing innovative insurance solutions for them or investing in them. To create incentives for this technology transfer, it is also indispensable to internationally implement consistent carbon pricing with well-functioning market mechanisms.
The COVID-19 pandemic largely caught the world unawares, even though experts have long been issuing such warnings. “We must draw the right conclusions from this and make better preparations in order to minimise losses. As a company, we are doing our share by analysing and helping to understand risks with the expertise we have at our disposal, and we are absorbing part of these with suitable insurance solutions”, said Jeworrek.