In the 12th edition of the World Economic Forum’s Global Risks Report, a new report on the top perceived risks that the world is facing, extreme weather, natural disasters, environmental and climate risks are all cited as key concerns, highlighting the need for risk transfer solutions.
The report features an assessment by experts on the top global risks in terms of likelihood and potential impact over the coming 10 years. The Global Risks Report 2017 has been compiled with the assistance of insurance and reinsurance brokerage and advisor Marsh & McLennan Companies and Zurich Insurance Group.
Each year the report highlights the top physical, environmental, societal and other risks that the world will face in the coming years, with a ranking of how likely they are to cause an impact, as well as how impactful they are perceived to be.
For 2017 and beyond the threat posed by extreme weather events is now seen as the top risk in terms of likelihood, highlighting the important role that insurance, reinsurance and the insurance-linked securities (ILS) markets can play in helping to increase the world’s ability to withstand and recover from weather impacts.
Similarly, the third most likely risk is said to be natural disaster risks, which again is an area where insurance, reinsurance and ILS market participants have the expertise, ability and capacity to help the world become more resilient.
Climate change related risks feature highly in 2017’s report, with issues such as large-scale involuntary migration, water crises, environmental crises and failure of climate change mitigation and adaptation, all climate linked and risks for which the impacts can be softened with the help of risk transfer and the provision of post-event risk capital.
Of course that’s not to say that risk transfer is a solution to any of these major risks that the world is facing, but it is a key component in helping people, corporations, cities, countries and the globe to increase its resilience to these threats, while also being better able to recover from their impacts be tapping into post-event sources of risk capital.
Risk capital can also assist on projects to increase resilience from the threats of weather, disasters and climate risks, with initiatives already looking at how to bring elements of the catastrophe bond into resilient infrastructure financing.
Access to risk capital is key for projects that seek to mitigate weather, disaster and climate risks, often making the projects more attractive to institutional investor capital that is required to back them.
Other risks highlighted in the top ten include terrorism risks, cyber risks, man-made environmental disasters and food crises, all of which again are areas where the insurance, reinsurance and ILS risk capital markets can play a role.
The role of risk capital and risk transfer in enabling the world to more effectively mitigate these risks is in providing insurance products that pay out when these risks impact, and in providing risk capital linked to the occurrence of these risks to help finance and encourage investment in adaptation projects and resilience building.
The fact that so many of these key risks are so closely linked to each other also raises cause for concern and highlights the need for risk transfer preparations to be made.
The report explains; “The confluence of risks around water scarcity, climate change, extreme weather events and involuntary migration remains a potent cocktail and a “risk multiplier”, especially in the world economy’s more fragile environmental and political contexts.”
With close to 1 billion people thought affected by disasters around the world in 2015, by the UN Office for Disaster Risk Reduction (UNISDR), the amount of capital required to help increase resilience, offset risks and transfer risks to those better able to bear the financial consequences is enormous.
The capital markets role in addressing these risks is clear, as the traditional insurance and reinsurance industry alone may lack the capital depth and liquidity to make transfer of such volumes of global risks efficient alone.