A technologically connected world means more opportunity for global financial disruption, otherwise known as systemic risk. The Financial Stability Board defines systemic risk as “the risk of disruption to the flow of financial services that is caused by an impairment of all or parts of the financial system and has the potential to have serious negative consequences for the real economy.” Examples of such events include natural disasters, weather events, inflation, changes in interest rates, war, even terrorism.
The most recent illustration of systemic risk is the Covid-19 pandemic which had a cataclysmic impact on the global economy. In the insurance industry, the effects reverberated throughout every enterprise—from underwriting to distribution to claims—and influenced how insurers operated and interacted with customers. The good news is that during the two years of the pandemic, those who work in insurance markets were able to learn from the issues caused by the disruption and were able to devise methods to mitigate future systemic risks.
Another worldwide crisis that’s been in the news lately is cyberattack risk. Cyberattacks can cost a company up to a million dollars in damages. Personally identifiable information—data such as an ID number, location data, or online identifiers—are the most reported data breaches, with credit and payment card information being one of the most frequently stolen pieces of data. In the medical industry, Protected Health Information (PHI) such as medical records are also at risk. Maintaining cyber liability insurance will help keep companies operational after an attack.
Climate change, in the form of extreme and more frequent weather events, is a major systemic risk that impacts both the insurance industry as well as the world at large. Nowadays, the insurance industry is at the forefront of dealing with the impact climate change has on society and our infrastructure, so having a clear and appropriate approach to this risk is imperative.
Though the industry is slowly learning how to better cope with these diverse risks, there is no one-size-fits-all solution.
It is critical that insurers pay close attention to risk analytics companies that model future insurance accumulations by tracking scientific developments and discoveries. By staying on top of the predictions, possible disruptions can be diverted.
Another way insurers can identify certain risks early on is to open dialogue and be proactive with their clients. By discussing the early science, companies can revise their business models in order to avoid anticipated problems. The insurance industry can be the vehicle for that action in a way others cannot, and agents and brokers are in a position to create change.