
AM Best has examined more than 60 potential risks on U.S. insurance companies claims frequency and severity, and ranked them by level of impact, with a look at how well-prepared insurers are for each risk. The analysis, contained in a new Best’s Special Report, elevates the importance of emerging risk management as an essential part of the enterprise risk management (ERM) toolkit.
The report, “The Growing Importance of Emerging Risk Management,” also provides an expanded look at the top 10 emerging risks insurers likely will face over the next decade. In AM Best’s view, climate change represents the largest of these risks. With frequency and severity of weather-related events on the rise, insurers have been impacted severely by related losses, and pricing based on past experience remains challenging as catastrophe models have not yet fully considered the new normal. Because of this and other considerations such as reserving and reinsurance, AM Best also views the industry as having low readiness to the complex challenges climate change presents.
An increasingly interconnected and uncertain global economy is facing the impacts of a number of factors, among them:
• Climate change, evidenced by increased weather volatility and creating catastrophic
losses due to flooding, hurricanes, wildfires, and droughts
• A connected world in which cyber risks proliferate and businesses and consumers may
be at high risk from systemic failure of connectedness
• Low interest rates across the globe and expansionary monetary policy that has limited
the ability of central banks to counter any future crisis
• Government protectionism and reconfiguration of global trade contracts
These factors, along with changing demographics and technology, have elevated the
importance of emerging risk management as an essential part of the ERM (Enterprise Risk
Management) toolkit. Insurers need to continually scan the ecosystem for risks, quantify the
impact of emerging risks, and be proactive in designing mitigation plans in the event that
these risks manifest themselves.
An emerging risk may be a new risk; it may also be a current risk whose impact is not
fully understood—for example, cyber risk. AM Best examined the impact of more than 60
potential risks on US insurers’ claims frequency and severity. Exhibit 1 lists the top ten risks
to the insurance industry. Some of these risks—such as terrorism or climate change-related
catastrophes—may hit insurers quickly and abruptly, while others—such as negative interest
rates, legacy systems, and social inflation—may lead insurers to a slow and painful death.
The number of natural catastrophes has risen steadily since 1970 (Exhibit 2). For example,
the growing frequency and severity of wildfires, coupled with poorly planned urbanization,
has resulted in economic and insured losses (noticeably in California and Australia) that
have had a tremendous impact on the insurance, reinsurance, and retrocession markets. Insurers
see wildfires as an increasingly frequent and severe emerging risk.
Cyber is another rapidly evolving risk whose impacts may span multiple
lines; a systemic cyber attack has the ability to paralyze entire corporations and even governments, as evidenced by the NotPetya attacks globally and the ransomware attacks on Atlanta and Baltimore in the United States of America.