# Emerging risks: is our Insurance system able to cope? Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2022-05-10 Category: INSURANCE Category URL: https://financedigest.com/category/insurance Meta Title: Emerging Risks in Insurance: Are New Products the Solution? Meta Description: Discover the four main categories of emerging risks in the insurance industry, from climate change to cyber threats. Learn how insurers are adapting to cover URL: https://financedigest.com/emerging-risks-is-our-insurance-system-able-to-copehtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/istock-1153620019-1736815746140-compressed.jpg) _By_ **_Emmanuèle Lutfalla_** _partner at Signature Litigation &_ **_Deborah Azerraf_** _Associate at Signature Litigation_ Managing risk and anticipating future events are at the heart of the [insurance](https://www.financedigest.com/protecting-investments-a-comprehensive-guide-to-private-equity-insurance.html) business. But risks inevitably change over time as human activity evolves to create new categories of emerging risk. The key issue is whether [insurers](https://www.financedigest.com/different-countries-different-insurance-cultures-how-insurers-can-adapt-their-products.html "insurers") and other entities are able to provide suitable products to cover them. According to AXA, France’s largest insurance company, there are four main categories of emerging risk: climate change; cyber; AI ( [artificial intelligence), IOT (the Internet of Things), robotisation; and financial instability](https://www.financedigest.com/how-artificial-intelligence-is-simplifying-sanctions-screening-for-insurers.html "How Artificial Intelligence is Simplifying Sanctions Screening for Insurers"). Following recent events, pandemics and regional conflicts could arguably be added to the list. Given such a wide range of potential emerging risks, what effect might these have on [insurance companies and those who are seeking cover](https://www.financedigest.com/japan-insurers-to-maintain-cover-for-lng-vessels-in-russian-waters.html "Japan insurers to maintain cover for LNG vessels in Russian waters") against them? In determining predicted [future levels of emerging risk and the ability of current insurance](https://www.financedigest.com/insuring-themselves-for-the-future.html "Insuring themselves for the future") products to adapt to them, there is some cause for concern. For example, cyber [risk remains largely under insured](https://www.financedigest.com/improving-risk-management-in-the-insurance-industry.html "Improving risk management in the insurance industry"), thanks in part to the high premiums that apply. Meanwhile, a successful cyberattack on a major [company could potentially](https://www.financedigest.com/factbox-companies-potentially-affected-by-italys-election.html "Factbox: Companies potentially affected by Italy’s election") lead to losses running into many tens of billions of euros. No [insurer would be able to cope with this level of loss](https://www.financedigest.com/uk-motor-and-home-insurers-headed-for-heavy-losses-ey-warns.html "UK motor and home insurers headed for heavy losses, EY warns"). As an alternative, emerging [risks with potentially catastrophic consequences of that magnitude could be resolved by using new financial](https://www.financedigest.com/financial-risks-of-climate-change-overplayed-senior-hsbc-banker-says.html "Financial risks of climate change overplayed, senior HSBC banker says") products that circumvent the traditional insurance model, including catastrophic (cat) bonds and parametric insurance. According to Swiss Re, the total [economic losses](https://www.financedigest.com/flood-most-damaging-peril-of-2016-causing-nearly-one-third-of-210bn-global-economic-losses-according-to-aon-catastrophe-report.html "Flood most damaging peril of 2016, causing nearly one-third of 0bn global economic losses – according to Aon catastrophe report") from natural (e.g., earthquakes, floods, etc.) and man-made (e.g., a terrorist attack) disasters are c. €150 billion a year. Catastrophe [insurance protects businesses](https://www.financedigest.com/are-there-tax-breaks-for-business-health-insurance.html "Are there tax breaks for business health insurance?") against these low-probability, high-cost events. Created in the aftermath of natural disasters in the mid-1990s, cat [bonds are an alternative to traditional catastrophe](https://www.financedigest.com/investors-seek-higher-returns-as-catastrophe-bond-issuance-slows-during-q2-according-to-aon-study.html "INVESTORS SEEK HIGHER RETURNS AS CATASTROPHE BOND ISSUANCE SLOWS DURING Q2, ACCORDING TO AON STUDY") reinsurance. As risk-linked securities, insurance companies issue bonds through investment banks, transferring specific risks from a sponsor to investors, typically comprised of [hedge funds](https://www.financedigest.com/what-is-a-hedge-fund.html "What Is A Hedge Fund"), catastrophe-oriented funds, and asset managers. Most cat bonds are issued by special purpose reinsurance companies which are mostly domiciled in Caribbean [offshore jurisdictions](https://www.financedigest.com/will-hong-kong-remain-the-jurisdiction-of-choice-for-offshore-banking.html "Will Hong Kong Remain The Jurisdiction Of Choice For Offshore Banking?"), or in Ireland. French [insurers may innovate by using them more often in the near future](https://www.financedigest.com/classic-car-insurance-broker-launches-future-classic-investment-guide.html "Classic car insurance broker launches Future Classic investment guide"). Parametric [insurance is another alternative: an insurance contract](https://www.financedigest.com/incentive-fm-wins-contract-with-global-insurance-services-company.html "Incentive FM wins contract with global insurance services company") that provides for the occurrence of a specific event. A set amount is paid based on the magnitude of the event, rather than the magnitude of the losses – as applies in a traditional indemnity policy. A third [alternative is self-insurance when a captive insurance company](https://www.financedigest.com/closing-a-limited-company-three-alternatives-to-liquidation.html "Closing a limited company: three alternatives to liquidation") is set up by the insured – a wholly-owned subsidiary insurer that provides risk-mitigation for its parent company. Typically, captives are formed when the parent company cannot find an insurer to [insure it against certain risks](https://www.financedigest.com/how-financial-services-insurance-leaders-can-get-more-scientific-on-risk.html "How Financial Services & Insurance leaders can get more scientific on risk"). Even when they do have cyber insurance, most cyber policies are inadequate to deal with the [financial consequences of a major cyber-attack for large multinational companies](https://www.financedigest.com/how-can-financial-services-companies-compete-more-effectively-in-times-of-uncertainty.html "How can Financial Services Companies compete more effectively in times of uncertainty?"). Accordingly, the critical step is to try and enhance prevention rather than trying to get [insurance protection to cover](https://www.financedigest.com/app-based-insurance-cover-for-millennials-possessions-and-experiences-back-me-up-powered-by-ageas.html "APP-BASED INSURANCE COVER FOR MILLENNIALS’ POSSESSIONS AND EXPERIENCES: ‘BACK ME UP’, POWERED BY AGEAS") the worst-case scenario. Beyond very high premiums, another problem is that [insurers’ requirements concerning the level of protection](https://www.financedigest.com/how-to-choose-the-best-income-protection-insurance.html "How to Choose the Best Income Protection Insurance") are constantly evolving, making it very difficult for the insured to get insurance. Self-insurance, or making sufficiently [large provision in their accounts](https://www.financedigest.com/euro-zone-current-account-deficit-widens-again-on-large-energy-bill.html "Euro zone current account deficit widens again on large energy bill") may be the best option. In reality, many large French businesses are doing exactly that, although it is much harder for SMEs to do this. Equally, in terms of systemic risk, there is an increasing onus on companies to [mitigate potential risks](https://www.financedigest.com/mitigating-operational-risk-through-centralising-reconciliation.html "MITIGATING OPERATIONAL RISK THROUGH CENTRALISING RECONCILIATION"), wherever possible – for example, by not making significant investments in financial instruments which are deemed to have higher levels of risk, such as derivatives or crypto currencies. Following the global financial crisis of 2008, these [risks have been extensively highlighted by central banks and regulatory authorities in multiple](https://www.financedigest.com/wto-sees-subpar-2023-trade-growth-with-multiple-risks.html "WTO sees “subpar” 2023 trade growth with multiple risks") countries. In terms of [insurance relating](https://www.financedigest.com/2020-the-paradoxical-year-that-has-reshaped-the-future-of-motor-insurance-and-related-sectors.html "2020: The paradoxical year that has reshaped the future of motor insurance and related sectors") to climate change, cyber, or another pandemic, the scale of potential risk has started to fundamentally change the status quo between insurers and the insured. At worst, it could ruin the entire system if a combination of [risks were in play at the same time – climate](https://www.financedigest.com/institutional-investors-back-shell-board-lawsuit-over-climate-risk.html "Institutional investors back Shell board lawsuit over climate risk") change, cyber, and another pandemic – together with the usual level of natural disasters. The [market would cease to function](https://www.financedigest.com/functional-printing-market.html "Functional Printing Market") as result. Looking ahead, it is difficult to make firm predictions. The alternative insurance solutions outlined above will arrive sooner than later, French insurers will [need](https://www.financedigest.com/breaking-down-the-types-of-insurance-you-need.html "Breaking Down the Types of Insurance You Need") to be careful since the alternative financial products that underpin them might be more attractive to the market than traditional insurance products. They will therefore [need to adapt](https://www.financedigest.com/big-banks-want-survive-past-next-10-years-need-adapt.html "If the big banks want to survive past the next 10 years, they need to adapt"). To [deal with emerging risks and competitive products](https://www.financedigest.com/two-thirds-of-consumers-would-prefer-to-deal-with-a-single-provider-for-insurance-products.html "Two-thirds of consumers would prefer to deal with a single provider for insurance products") that mitigate them, further mergers between insurance companies are also likely. One thing does remain certain: as new risks continue to emerge, so the [insurance market](https://www.financedigest.com/a-look-ahead-to-2023-in-the-insurance-market.html "A Look Ahead to 2023 in the Insurance Market") will continue to evolve. --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---