Aftershocks

Aftershocks

Swiss Re’s annual Sonar report on emerging global risks looks beyond the darkest days of the pandemic

About this time last year, the foreword to Swiss Re’s Sonar report included a suitably sombre told-you-so: the reinsurance giant’s annual run-down of emerging global risks had flagged pandemic threats on at least three occasions since its inception in 2013.

A year on – and with the vaccines slowly rolling out – Sonar 2021 looks beyond the coronavirus crisis, focusing on some of the flow-on risks, plus a handful of other threats worth tracking as all eyes, hopefully, begin to turn away from COVID-19.

As Swiss Re’s Chief Risk Officer Patrick Raaflaub notes, it is important not to lose sight of the dangers that were already looming – particularly the existential ones.

“When COVID-19 emerged in late 2019, few could have predicted the magnitude of its impact,” he says. “Many of the actions taken to mitigate the pandemic have themselves created new risks.

“As (re)insurers, it is essential that we have the best possible understanding of these emerging risks.

“It is also important to remain vigilant on the emerging risks that are already known – especially regarding climate change – as these will impact us for years to come.”

Stop-start

One of the most high-impact threats flagged in Sonar 2021 flows from the pandemic and, more specifically, the global recession it triggered.

As Swiss Re acknowledges: “Typical industry [pandemic] models had focused on potential mortality … yet, many impacts of the COVID-19 pandemic specifically relate to the sudden lockdown measures-induced halt to global economic activity to an extent that had not been foreseen.”

The report notes that in the global oilfield services industry, maintenance budgets were cut by $US20 billion last year as belts tightened, while facilities such as chemical plants, mines and power plants have been similarly affected.

“A consequence of a global economy in trouble has been a squeeze on maintenance budgets in many industries, and a delay to planned works.

“Across many industries, as a savings measure, the choice has been to mothball facilities rather than use the downtime for maintenance.

“In addition, qualified and experienced staff have either been laid off and/or, due to restrictions on mobility in lockdown, not able to travel to sites of work.”

Restarting a mothballed facility comes with acute risk. In the refining, petrochemical and chemical industries, research shows up to half of process safety incidents or major losses occur during start-ups following shutdowns. The rush to restart while budgets are still depressed may heighten the risk, Swiss Re says.

And the same danger applies to industries not involving hazardous materials, such as aviation.

“Planes that have been mothballed will be reactivated as demand for air travel picks up…pilots will resume work after a long period of no or less flying time,” Swiss Re says.

“Human error accounts for two-thirds of root causes in aviation and other man-made accidents, and rusty flying skills as carriers ramp up their operations could be an additional risk.”

General insurers are urged to focus on “three pillars” – adequate funding, time and the availability of experienced and qualified staff – as client companies return to normal post-pandemic conditions.

Raised risk: stopping and starting facilities such as oilfields increases the chances of a major loss

As the Sonar report notes in a separate entry on the storage of hazardous materials in urban areas, we need not look back far to see the potential consequences of industrial accidents. In one of 2020’s “other” tragedies – an astonishing incident, quickly nudged off news lists by the next wave of COVID stories – an ammonium nitrate stockpile explosion wiped out a vast section of Beirut’s port area, killing hundreds, injuring thousands and causing about $US15 billion of property damage.

Insurers are reminded that in assessing risk, even if insured sites adhere to robust regulatory standards, “additional analysis of the location with respect to surrounding population and land use, and exposure to natural perils that could trigger an accident, is required”.

The living dead

When the pandemic struck and economies went into meltdown, governments around the world reached for the button marked “stimulus”, writing cheques to keep companies and workers alike from bankruptcy, cutting already low interest rates and issuing credit subsidies.

But, as Swiss Re notes, some of the companies taking advantage of such subsidies were far from viable to begin with. These are the “zombie firms”, unable to service their debts. And, while they are nothing new, their numbers may be on the rise.

“Two pieces of evidence are worth considering,” the Sonar report says. “First, according to data from [ratings agency] S&P, the global default rates in 2020 were lower than in past recent crises and are expected to remain below peak levels, highlighting the effects of the [support] measures taken.

“And second, according to the Institute of International Finance, non-financial corporate debt in the US has risen from less than 75% in [northern] autumn 2019 to more than 90% in spring last year, while bank loans to SMEs rose by 6%.”

The report says zombie companies could threaten banks that are exposed to non-performing loans when interest rates start to rise again, and they may also dent a country’s productivity.

For insurers, particularly in credit and surety lines, the danger lies in knowing which companies are insurable risks.

Failing the test

This year’s top-rated threat for casualty insurers comes in the shape (literally) of a crash test dummy.

“Making products safe for human use is not an easy task, not least because product testing needs to keep up with demographic trends,” the report says.

“This includes adjusting test conditions and results for gender, and changes in weight, height, age and others. Failure to do so can have fatal real-world consequences.”

Crash test dummies, it says, are mostly modelled on the average male, which may help explain why women are 47% more likely than men to incur severe injury in a car accident, and why in Europe between 2010 and 2017 the proportion of elderly people hurt or killed on roads had risen, even as the general trend has been for fewer injuries.

Swiss Re also notes that, historically, men have been more likely to participate in drug trials than women, but “at rest metabolism in females is typically slower than in males. This means dosage levels determined by study results on males can be too high for women.”

When safety-testing products, a lack of diversity in terms of size and shape of test subjects – plus gender, age, ethnicity and genetics – could prove disastrous for insurers.

“For insurers, particularly in fields where product use could lead to bodily injury or health impairment, risk assessors should fully investigate the data set used by regulators as the basis for product approval.

“If test populations are not representative of end-user groups, a more cautious underwriting approach makes sense. This is especially so where potential for serial losses exists due to fast rollout of new products to many consumers.”

Breaking the chains

Modern slavery – and global attempts to stop it – could increasingly affect the operations of insurers and their corporate clients, and prompt an “avalanche” of liability claims.

Swiss Re says more than 40 million people are victims of worker exploitation, forced and child labour, trafficking and forced marriage – plus other crimes covered by the modern definition of slavery. It is estimated 16 million of these work in the private sector.

And this is not some distant, “third world” problem. Advocacy group AntiSlavery Australia says more than 1900 people in this country are slavery victims. For example, in April a Melbourne couple was found guilty of keeping an elderly woman prisoner in their home for eight years, paying her a few dollars a day to cook and clean.

The Sonar report says modern supply chains are global and complex, “with many agents involved at different stages. As such, it can be difficult to trace the origins of a final product and to identify occurrence of human rights violations along the production path.”

It notes that along with growing shareholder pressure more stringent anti-slavery regulations have recently been introduced in markets including Britain, California, France and the Netherlands.

“More rigorous laws and growing expectations of due diligence give rise to new liability risks. A first successful claim based on the new regulations could lead to an avalanche of subsequent claims.

“For insurers, this means more detailed appraisal of the issue of modern slavery in underwriting, notably with respect to directors’ and officers’ liability covers.” 0

Sonar signals

This year’s Sonar report features nine emerging risk themes based on early signals collected over a year by the reinsurer’s internal crowdsourcing platform, which collects input and feedback from underwriters, client managers, risk experts and others across the company.

The themes “do not reflect entire industry-wide thinking with respect to emerging risks, nor necessarily the full list of associated topics currently on Swiss Re’s radar screen”, the report says. They are categorised according to their estimated impact and time frame, and the insurance lines where the biggest exposures lie.