The risk that insurers and reinsurers fear the most is the outbreak of a global pandemic, according to the results of a survey undertaken by professional services firm Towers Watson recently.
Towers Watson polled global insurance industry executives as part of its research into extreme risks, asking respondents what were the most important risks for the insurance industry to worry about over the long-term.
In first place, as the most important extreme risk worrying insurers and reinsurers, is global pandemic, followed by a large-scale natural catastrophe event and a food, water or energy crisis.
Other top ten extreme risks included cyber-warfare, an economic depression, a banking crisis and a default by a major sovereign borrower.
“Much as we would have expected pandemics and natural catastrophes to figure prominently in insurers’ extreme risk thinking, the high rankings of concerns such as cyber-warfare and a major data compromise in the cloud (user-submitted idea) illustrate how the industry is keeping up to date with risk assessment,” commented Stephen Lowe, senior consultant, Risk Consulting and Software, Towers Watson.
Pandemic risk is a feature of the insurance-linked securities market, through its inclusion in a number of mortality catastrophe bond issues. Global, or even regional, pandemic outbreaks are one of the key reasons for issuing a mortality catastrophe bond and these ILS typically protect the sponsor based on an increase in mortality rates.
A large-scale natural catastrophe could also be an event which could trigger a mortality catastrophe bond, as could be a major terrorism event. But interestingly, Towers Watson highlights that the risk voted in at third most worrying, a food, water or energy crisis, could also result in a steep uplift in mortality and morbidity.
A global crisis in food, water or energy security or availability could result in a steep increase in mortality rates and may be covered by some of the mortality cat bonds currently in the ILS market. Artemis is not aware of any mortality bonds which explicitly exclude this type of risk, typically the bonds purely state that they can be triggered by any increase in mortality rates.
With risks such as food crises becoming of much greater concern globally in recent years, particularly with a view to climate change induced food security issues, this is perhaps an issue that in future could encourage a sponsor to issue a mortality bond. It is certainly a risk that those issuing or investing in mortality-linked ILS should be aware of.
Fourth on the surveyed list of extreme risks is cyber-warfare. This is another risk which could result in mortality increases, given that one area of concern with respect to cyber risks is the security of water and energy supplies. Extreme weather comes in at number nine, which is clearly another extreme risk that can impact the ILS, catastrophe bond and property catastrophe reinsurance market.
The survey results serve as a reminder that property catastrophe is not the biggest risk out there, the reason it receives the most coverage is that it is the best modelled and understood of the major risks, and therefore the most frequently found in ILS, cat bonds and alternative reinsurance capital transactions. There are many other major risks that the ILS and reinsurance markets will find ways to structure in years to come and hence the support of the global capital markets to absorb these extreme risks is vital.
The full list of the top-ten extreme risks as voted for by the 30,000 respondents to the Towers Watson survey are below:
- Pandemic: A new, highly infectious and fatal disease spreads through human, animal or plant populations worldwide
- Natural catastrophe: A confluence of major earthquakes, tsunamis, hurricanes, flooding and/or volcanic eruptions with major global effects
- Food/water/energy crisis: A major shortfall in the supply of, or access to, food/water/energy, causing severe societal issues
- Cyber-warfare: Computer sabotage/espionage on a major scale, with severe damage to infrastructure, financial, medical or defense systems
- Technology: A large quantity of personal, government or business data stored in clouds are found to be hacked, compromised or misused
- Depression: A deep and protracted trough in economic output, massive increase in unemployment, restriction of credit and shrinking investment
- Banking crisis: Central banks unable/unwilling to supply liquidity in the next crisis, causing banking and real economic activity to stop
- An extreme event that causes property damage, supply-chain failures, business interruption and death on a significant scale
- Rise in extreme weather: Events exceed the capacity of insurance industry and governments to respond, with physical and social implications
- Sovereign default: Nonpayment by a major sovereign borrower causes market panic and disrupts the global economy
You can download Towers Watson’s piece of research into extreme risks here.