Munich Re: Major risks of our time - Better preparation needed

10 September 2020 — Daniela GHETU
Munich Re: Major risks of our time - Better preparation needed
The systemic nature of very large losses has increased as a result of globalisation and digitalisation. The greater interconnectedness has also heightened interdependencies. Yet a variety of solutions are conceivable for the three major risks of our time - pandemics, cyber and climate change, Munich Re's analysts said recently.

The coronavirus pandemic has shown the world how vulnerable it is to very large risks. Trillions in financial losses ought to be a wake-up call for economies to better equip themselves for extreme risks of this nature. Yet, despite the pandemics holding the headlines this year because if the current Coronavirus crisis, we must not lose sight of major threat scenarios such as cyber and climate change because their consequences could be even more far-reaching in the long run than those of a pandemic, Munich Re considers. Prevention measures and suitable risk transfer instruments can make societies more resilient.

Torsten JEWORREK, Member of the Board of Management, Munich Re said:

"The coronavirus pandemic needs to be a lesson to us all: We must take action more rapidly and vigorously to ensure that we are not as unprepared as we were with COVID-19 for risks such as cyber-attacks or climate change. It is possible to better safeguard against the financial consequences of such risks for the benefit of humanity. It needs to be clear that systemic risks like pandemics also require systemic countermeasures - for instance, the creation of state-backed risk pools to make uninsurable risks bearable."

The global reinsurer is drawing the attention towards three major risks:

I. Pandemics: Accumulation risk for insurers - State-backed pools required

The expenditure that insurers have incurred for COVID-19 losses is significant. The burden is already nearing that of the costliest natural catastrophes. Life and health insurance covers pandemic risks, and the cancellation of numerous major events has also caused significant losses. Liability and travel insurance as well as credit business have sustained claims.

Yet the greatest economic losses by far have been caused by business interruptions owing to imposed lockdowns. Given that these losses occurred almost simultaneously across many sectors of the economy, they are not insurable by the private sector alone. The American Property Casualty Insurance Association (APCIA) estimates that US insurers' risk capital would have been fully consumed within a matter of weeks if business interruption losses owing to the coronavirus had been covered.

Stefan GOLLING, Chief Underwriter at Munich Re, said:

"We need new reliable mechanisms to insure such risks. The only way to achieve this is by creating state-backed risk pools in which insurers can participate with limited capacity. Furthermore, insurers can help to assess risks accurately and organize distribution and claims settlement."

II. Increase in cyber-attacks during the pandemic - Market outlook remains positive

As a result of the lockdown measures to curb the rate of coronavirus infections, companies moved many of their business processes almost entirely and directly online, which under normal circumstances might have taken years. The cyber-attack risk has consequently increased, since it is more difficult to safeguard the security of data and processes outside a corporate network. At the same time, awareness of digital dependency has increased, so that more investment in IT security is necessary and likely.

Coverage for cyber risks remains one of Munich Re's most important strategic growth areas and fields of activity. The cyber insurance market will triple to around USD 20 billion between 2020 and 2025. With a market share of around 10%, Munich Re is one of the leading insurers.

GOLLING commented:

"Munich Re has a team of over 130 experts who develop cyber solutions for the entire value chain, from risk analysis and prevention to risk transfer. In addition, it has a steadily growing network of external experts and partners offering services before and after a cyber-attack. The cyber market may grow even more strongly than anticipated in the face of the additional momentum from digitalization."

III. Climate change: Inaction will make climate risks systemic

Climate change remains humanity's greatest challenge as it has a long-term impact and cannot be reversed for generations. Since 1980, weather-related natural catastrophes have been responsible for around USD 4,200 billion in losses and have cost the lives of almost a million people. Only about a third of these losses were insured. And the figure does not even include indirect losses following the breakdown of supply chains, banks experiencing a surge in loan defaults, or power plants having to scale back production during a heatwave.

Torsten JEWORREK, Board member of Munich Re, said:

"So far, climate change has not been a systemic risk, but it will be if global warming continues unabated. Certain regions will no longer be arable in a few generations' time. The loss probabilities of certain natural hazards are on the rise, and we are already seeing this with severe thunderstorms and forest fires."

It is crucial to acknowledge risks of change as a result of climate change, and find out where risk assessments based on past data are no longer accurate owing to a change in probabilities. This applies not only to insurers and financial service providers but also to the real economy which needs to identify climate risks on its balance sheet - for instance, in the case of long-term credits or investments. Digitalization and more precise data analysis help to improve the tools for assessing such risks and developing better risk transfer solutions.

In the battle against climate change, the consistent use of new technologies in the energy sector, in transportation, and in industrial and food production plays a key role. In addition to renewable energies, these technologies mainly comprise energy storage and carbon-free energy sources such as "green" hydrogen and synthetically manufactured fuels. There is also a need for technologies that can remove carbon dioxide from the atmosphere and store it. As a risk carrier, Munich Re facilitates the market entry and affordability of such new key technologies by developing innovative insurance solutions for them or investing in them. To create incentives for this technology transfer, it is also indispensable to internationally implement consistent carbon pricing with well-functioning market mechanisms.

The COVID-19 pandemic largely caught the world unawares, even though experts have long been issuing such warnings. "We must draw the right conclusions from this and make better preparations in order to minimise losses. As a company, we are doing our share by analyzing and helping to understand risks with the expertise we have at our disposal, and we are absorbing part of these with suitable insurance solutions", said JEWORREK.

Munich Re's opinions and solutions were presented in a video conference organized on 7 September. The presentation given on this occasion is available online in the reinsurer's website.

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