Quantum Computing, Substandard Build Quality, Legal Tech, etc.

The global community continues to face known challenges such as the pandemic, the war in Ukraine, economic turmoil and loss of faith in established social institutions. But a report from Swiss Re reminds re/insurers that new risks emerging on the horizon could materialize.

“The emerging risks this year stem from climate change and the transition to a low-carbon economy, real and publicized technological disruptions, and heightened global uncertainty and risk awareness,” said one. commentary accompanying Swiss Re’s SONAR report “New Insights on Emerging Risks”. (See related article: Edge Computing, Supply Chains, Deepfakes Among Top Emerging Risks of 2020: Swiss Re).

Swiss Re has identified by business sectors the main emerging risk themes likely to affect re/insurers:

  • Thawing permafrost – accelerating climate, infrastructure and health risks. This risk poses environmental, property and health risks, and may result in property and liability claims. (See below for more detailed explanations of these risks).
  • Legal tech – Does AI deliver justice? Lawyers can use “legal technology” or advances in artificial intelligence (AI) and machine learning (ML) to select cases with the best chance of success. This risk has implications for the exposure of victims.
  • Quantum computing – a threat before an opportunity. With the rapid development of quantum computing (QC) capability, re/insurers face new data security threats, which could affect P&C, specialty and P&C insurance and operations, assets and liabilities. financial markets.
  • Challenges in construction – raw material shortages and price hikes. There are fears that inflationary pressures and the scarcity of raw materials will affect the quality and durability of buildings, posing risks for property, specialty and casualty insurance.
  • Erosion of trust – new concerns for public health. Swiss Re said life and health reinsurers could be affected by growing distrust of public health officials and medical professionals, which “promotes harmful behaviors and increases the risk of morbidity and mortality more high, especially during future health crises”.

Permafrost thaw

Diving into each of these topics in turn, Swiss Re said permafrost has thawed at an increased rate in recent decades in high latitudes and mountainous regions. “This poses environmental, property and health risks, and can result in property and liability claims, as well as higher costs in L&H activities,” the report states.

“Damage to property or infrastructure due to permafrost thaw can increase property and engineering claims. public sector supporting or building infrastructure in permafrost areas or in areas exposed to risks associated with permafrost thaw (e.g. rockfall),” the report adds.

Swiss Re said there could also be an increase in liability claims against projects that accelerate permafrost thaw.

Health claims could also affect L&H insurers due to illnesses caused by pathogens and pollutants released by melting permafrost. “Permafrost thaw also poses a health risk, both human and animal. It can release pathogens previously trapped in frozen ground, such as anthrax. The thaw also causes the limestone deposits to release toxic substances, such as mercury and radon. Mercury poisoning of water sources has been reported in permafrost regions.

Legal technology

Legal technology, which uses AI and ML, could have a significant direct impact on insurers if lawyers use legal technology systems “to focus on the lawsuits/cases with the greatest chance of success,” says the report, noting that this could also lead to a significant increase in claims burden.

Other potential impacts of legal tech include:

  • A potential increase in liability cases in situations where the AI ​​software produces incorrect results. This includes large law firms that can be held liable for the services they provide while using these types of technologies (eg, in accounting, tax, licensing, etc.).
  • Lawyers may decide to focus on class action cases with a greater chance of winning larger awards, which could lead to prioritizing economic success over justice, as well as an overall increase in number of claims for insurers.
  • The increase in claims could come from low-value claims, as efficiencies in legal technology can reduce legal costs for individual cases. “Potential lines of business could be, for example, motor vehicle liability (car accidents), employer’s liability/workers’ compensation (worker’s compensation),” Swiss Re said.

On a more positive note, Swiss Re said, legal technology can benefit insurance operations by helping to mitigate error and fraud, while identifying high liability risks or high exposure cases.

quantum computing

Swiss Re describes quantum computing as a technology capable of solving problems too complex for classical computers. “Insurers and other financial service providers will benefit from the accelerated processing power, high-speed data pattern recognition and advanced machine learning that QC promises,” Swiss Re said. “For insurers, QC opens up unprecedented opportunities for simulation and modelling.”

Along with the benefits, however, there will be new data security threats “which, from the insurer’s perspective, are likely to outweigh any benefits for the foreseeable future,” the report said.

While the first models hit the market, the report notes that a full-fledged quantum leap is still a few years away.

“And worryingly, before companies can enjoy broad commercial application, CQ is likely to become a threat to existing computer security protocols – particularly as an as-yet-unknown force capable of cracking industry-standard encryption keys. used in online communications and data transfer,” the report said. continued.

Here are some of the potential impacts of QC identified by Swiss Re:

  • Availability of business-relevant applications may take longer than expected, and some may even fail, resulting in strategic, investment, and operational risks.
  • CQ increases the potential for large-scale attacks against data security in general, as well as targeted attacks against quantum research and development organizations. Additionally, cyber and property insurance losses could be triggered by attacks on policyholders.
  • If standard encryption keys for Internet communications, digital banking, and e-commerce were hacked, there could be cyber insurance and business interruption claims.
  • Insurance operations could also be affected if an insurer or one of its third-party providers suffers a data privacy breach, which could result in reputational damage and financial loss. In addition, the transition to more secure (post-quantum) data encryption will take time and be expensive.

Lower build quality

Scarcity of raw materials due to supply chain disruptions and rising wages is leading to high inflation in the construction sector, which could see builders ‘cut corners’, driving down quality of construction and, ultimately, an increase in property and professional damage claims.

Using cheaper and often inferior materials in terms of fire and integrity, the report says, citing the example of combustible cladding for buildings, which can be visually the same, but much cheaper than cladding not combustible. “In the event of a fire in a building with combustible cladding, however, the losses can be much higher.”

Swiss Re noted that the risk of unexpectedly high claims is a challenge for long-term businesses in particular, such as engineering
where there is a long delay between the payment of premiums and the filing of claims.

Erosion of trust

“Trust between large segments of the population and government officials as well as academic experts has been tested by the pandemic, and it is possible that conspiracy theories and alternative views on health and d ‘other behaviors negatively impact societal resilience more broadly,’ according to the report.

Here are some of the potential impacts of the erosion of trust identified by Swiss Re:

  • If people refuse treatment, avoid preventive measures or turn to questionable alternatives for their condition, this could have negative consequences for morbidity and mortality.
  • Individuals, professionals and organizations providing harmful treatments may face liability lawsuits.
  • Longer and more costly public health crises can arise if growing societal divisions impede the effective resolution of public health emergencies.
  • In the case of future pandemics, increased excess morbidity and mortality may occur if a large part of the population does not trust the advice of public health authorities, further compromising the resilience of society.

About SONAR

The SONAR report, which celebrates its 10th anniversarye anniversary, identifies 24 macro trends at the heart of the insurance industry in the areas of “demographic and social environment”, “political and economic environment”, “technological and natural environment” and “the competitive and business environment.

The report conveys early signals of risk from a wide range of insurance-related areas, Swiss Re said, explaining that the signals do not reflect the whole of industry-wide thinking in this regard. relating to emerging risks, nor does it necessarily cover the full list of topics currently under consideration. Swiss Re’s radar screen.

“Some emerging risks featured in this year’s SONAR report may never materialize, while others may form the basis of future risk pools. Likewise, some of the trends described may lose importance, while others may play an increasing role in shaping the future business environment.

SONAR stands for Systematic Observation of Notions Associated with Risk, which is Swiss Re’s process for identifying, assessing and managing emerging risks.

Source: Swiss Re SONAR

Topics
InsurTech Construction Tech Trends

Sherry J. Basler