Interconnected systemic risks highlight need to expand ILS capacity: Swiss Re & LSE

A new joint analysis published by Swiss Re Institute and LSE has highlighted how artificial intelligence (AI) and supply chains are opening new pathways to systemic stress as risks become increasingly interconnected, which is driving a need for expanded capacity and leading them to highlight ILS as a crucial capital source.

Data from the research, which analysed filings from 91 Fortune-100 companies between 2019 and 2026, revealed a 24% increase in the links between risks, with AI and supply chains emerging as key points of connection.

Ultimately, the findings from the analysis point to a broader shift in systemic risk as threats increasingly interact across financial, digital, natural-hazard and socio-economic systems.

Swiss Re and LSE also warned that the severity of the next systemic crisis may depend less on the size of the initial shock than on where it hits and how widely its effects spread.

“Growing dependence on common suppliers, technology platforms and critical infrastructure means disruption in one area can increasingly cascade into seemingly unrelated parts of the economy,” Swiss Re and LSE explained.

Jérôme Haegeli, Group Chief Economist and Head of Swiss Re Institute, commented: “Interconnected risks leave less room for error, while governments in many advanced economies have less room to respond. High debt and constrained policy buffers mean resilience cannot start when a crisis hits – it has to be built beforehand, by reducing critical dependencies, strengthening buffers and preserving the capacity to transfer risk.”

Swiss Re and LSE’s report explained that the most consequential new development has been the growing interaction between risks across the financial system, the digital ecosystem, natural hazard risks, and the wider socio-economic environment.

Researchers also noted that climate risk mentions by companies increased by around 31% since 2019. Extreme weather poses substantial threats to key infrastructure, with over 25% of US data centres exposed to frequent large hail, and more than 40% are in tornado zones, while 88% of Taiwanese semiconductor plants are in extreme seismic zones.

These figures underscore the growing challenge of concentration risk.

Concentrating multi-billion-dollar assets within high-hazard geographic regions amplifies extreme loss scenarios and constrains the capacity of primary insurers to distribute risk effectively without accessing additional capital market resources.

Regarding natural hazard risks, the report states that rising exposure alongside growing concentration of critical infrastructure and challenges to risk transfer are creating new pathways from local physical shocks to wider systemic disruption.

“Large economic losses from natural hazards are not necessarily systemic. Systemic risk emerges when natural hazards disrupt critical infrastructure and the effects spread across the wider economy and society,” the report reads.

In addition, natural hazards can become systemic when they hit concentrated infrastructure that large parts of the economy highly depend on, and that cannot easily be replaced, which includes AI data centres, power systems and strategic supply chain hubs.

Swiss Re and LSE highlight that re/insurance and the capital markets can provide important financial buffers against natural catastrophe events but cautioned that growing concentrations of high-value infrastructure and complex multi-sectoral dependencies can create larger accumulated and tail exposures.

“Individual AI data centre campuses can exceed USD 10bn in replacement value and reach as much as USD 50bn in exceptional cases (eg Meta Hyperion). Replacement values for a large semiconductor plant can reach USD 20‒30bn37. While insuring these assets creates new challenges, advances in engineering expertise, underwriting, risk modelling and programme design can be used to unlock capacity,” the firms explained.

Adding: “Concentration in catastrophe-prone locations therefore increases demand for protection and can make risks more difficult to diversify. It also weakens the assumption that losses across individual assets are largely independent. Insurance-linked securities (ILS) provide an additional source of risk-bearing capital. However, rising frequency of secondary perils and greater loss accumulation risks may make capital more selective precisely where exposure is growing fastest.”

Furthermore, Swiss Re and LSE’s report also outlined that traditional public policy tools against systemic stress are becoming more constrained and less effective against a backdrop of increasingly interconnected risks and geo-economic fragmentation.

Amongst the key priorities that both firms lay out for businesses, policymakers and regulators, the most effective one for Artemis’ readers is where Swiss Re and LSE highlight the importance of expanding risk transfer capacity and the boundary of insurability of emerging systemic risks through public-private partnerships.

“Systemic risks – such as pandemics, extreme cyber accumulation and wider critical infrastructure failures – by definition exceed the private-sector risk-bearing capacity. Fiscal constraints are also reducing public shock-absorbing capacity,” the report reads.

Swiss Re and LSE also indicated that public and private stakeholders may explore mechanisms to expand risk-transfer capacity through layered solutions, combining public resources, re/insurance and ILS instruments such as catastrophe bonds and sidecars.

“For this, it is important that policymakers foster open capital markets and cross-border reinsurance to avoid capital market fragmentation that would otherwise undermine international risk pooling. Preserving the capacity to transfer risk will remain as important as reducing risk itself,” the report added.

Ivan Gonzalez, Chief Executive Officer of Corporate Solutions at Swiss Re, said: “A company may look diversified until you discover that its suppliers, technology providers and customers depend on the same infrastructure. One disruption can therefore affect more parts of a business than expected. Understanding those dependencies may help companies reduce concentrations, strengthen resilience and decide which risks they can absorb and which they need to transfer.”