Cybergeddon, Fiscal Crises and Natural Catastrophes - Global Risks 2014

Published by Cherry Chan on

As actuaries, we are concerned with assessing different risks and quantifying the possible effects.  We often hear about the risks involved in carrying out a certain action, or the risks associated with a new business strategy.  But what about the wider-scale risks that have the potential to affect everyone? The World Economic Forum (WEF) published a report at the start of the year detailing the major global risks of 2014.

These risks spanned from environmental and climate change issues to global economic collapses.  We have picked out a few that are relevant to the insurance industry and brought in some external research that we have carried out on the matters.

Technological – Cybergeddon

The growing dependence on the internet has stemmed a new global threat with the potential of mass systemic failure, the so-called 'cybergeddon'.  The threat of a cyber breach appears to be spiralling upward on a daily basis.  Technology that provided the perpetual increase in productivity could also be the very poison to destroy it.  News reports are showing that anyone from online shoppers to global corporations are being targeted.

Research from Zurich’s Beyond Data Breaches report state that the year 2013 was the worst thus far in terms of cyber attacks, with 740 million data files potentially stolen or viewed globally.  One of the most serious cyber attacks of this year was the Heartbleed bug that was discovered in April 2014.  Heartbleed is found in software called Open SSl, and allows hackers to steal data from computers. Another major cyber incident was the CryptoLocker virus, that was first seen in 2013.  This virus is a sophisticated piece of ransomware that targets computers running Microsoft Windows via infected email attachments or websites.  The virus encrypts the files on the computer, destroying all data.  Newly launched antivirus programmes now detect the virus, but users should nonetheless maintain wariness.

A cyber threat must not be narrowly viewed as the theft of customer data.  The threat stretches far wider to a global domino effect caused by the interconnectedness of the internet.  Almost everything from infrastructure to supply chains are dependent on the internet and therefore a global shock on the scale of the 2008 collapse of the financial system is a possibility.  If a major cloud data storage provider were to fail analogous to that of Northern Rock, the knock-on effects could be immense.

The insurance industry is very much aware of this issue and is developing new products to meet the cyber protection needs of the market.  The cyber insurance market is still an immature market however, and with limited historical data it is difficult to assess how protected society truly is from a cybergeddon.

Economic - Fiscal Crises

The risk that is most likely to have a global scale impact in the next ten years, according to the WEF report, is the growing income gap between the richest and poorest citizens.  Fiscal crises and unemployment are also among the highest rated risks in the report, all of which tend to signal an economic recession.  This can cause a whole range of issues for the insurance industry.

Recession sparks an increase in fraudulent insurance claims.  The ABI detected a record total of £1.3 billion of insurance fraud in 2013, which is a rise of 18% from 2012.  These fraudulent claims range from entirely spurious incidents to exaggerated sustained injuries and are seen within any sector, from pet insurance to property or motor insurance.  Organised gangs are often behind these events, which cost each UK household an extra £50 in premiums per year.

An increase in demand for catastrophe bonds is also seen during times of poor market conditions, as investors look to improve returns.  Near zero interest rates, volatile markets and the global economic slowdown all force investors to seek alternative forms of investment.  Catastrophe bonds are a form of insurance-linked security that transfer the risk related to certain natural disasters from an issuer to the investors.  This form of investment is relatively 'recession proof' in the sense that the occurrence of a natural catastrophe is uncorrelated to the performance of the economy. 2013 saw a 22% increase in the global issuance of catastrophe bonds, to $7.1 billion, according to Fitch.  The return obtained on catastrophe bonds has, however, fallen recently as a result of the increase in demand.

Environmental - Natural catastrophes

Natural catastrophes are a phenomenon that have been occurring throughout history.  From cyclones to droughts these events have been affecting mankind on a major scale.  The daunting prospect with regards to natural disasters is that they have the potential to wipe out intelligent life eternally, and there is little that humanity can do to prevent them.  The WEF report cites the 2011 tsunami at the Fukushima nuclear power plant in Japan as an example.  An earthquake triggered the tsunami that resulted in a meltdown of three of the plant’s nuclear reactors, resulting in a large release of radioactive materials.  The clean-up process is expected to take decades.  The disaster was a combination of natural and man-made forces, and the argument within the report is that a combination on this scale could conceivably trigger existential risks for life on Earth.

The magnitude of the losses incurred from natural disasters is difficult to predict and therefore the insurance industry has a vital role to play in aiding the recovery of communities.  The insurance industry can help to advise regions on how to prepare for and even prevent an anticipated event.  Global insured losses from catastrophes in 2013 were $45 billion, according to research by Swiss Re.  Large contributions of this were the severe storms in Europe and super-typhoon Haiyan in the Philippines.

Conclusion

The risks faced by society today may require greater attention due to the interconnectedness of the world that we live in. Unlikely incidents, such as 1-in-200 year events are no longer that remote or unimaginable. Individuals may need to be more creative when envisioning the effects of combinations of events occurring simultaneously.  Insurance companies will certainly play a role in managing or preventing risks for their clients and their products will have to evolve to meet the market needs for the ever more complex risks.


Blog links

WEF Report (para 1)
Zurich report (para 3)
Fitch (para 8)