Generali’s approach to emerging risks
In Generali, the strategy to be a lifetime partner requires us to look around and focus our attention on trends related to relevant topics, such as political, economic, social, environmental and legal, as well as to disruptive scientific and technological evolutions. Through our approach we aim at identifying and properly managing the “unknowns”, both in terms of risks and - business opportunities.
We are managing our emerging risks within our broader Main Risk Self-Assessment process, coordinated by the Group Risk Management Function. The overall process involves a network of business specialists, which represents all main Group Business Functions, as well as all Group Business Units, that provide expertise on the most relevant risks for their markets. In 2021, the Group exercise has been conducted involving also a broader set of Top Managers across the Group to pursue a wider perspective and strategic views. Among main contributors, Business Strategy and Group Sustainability & Social Responsibility play a key role, granting both a strong integration with the business strategy and the embedding of ESG factors within the risk management process.
A Booklet with an insight on specific risks is shared with all Generali Group employees, so to raise awareness and share know-how with the purpose of preparing to take actions should the risks materialise. In this way, regardless of their geographical and organisational position, employees are strongly encouraged to deep dive in order to have a proactive discussion around such topics.
The overall Group Emerging Risk Register is updated on a yearly basis, taking into account the results of the exercise performed at top management, Group Head Office and Business Unit level, as well as relying on the most relevant market studies on the major trends, among which, for example, the World Economic Forum.
Generali Group participates to the European CRO Forum – Emerging Risk Initiative (ERI), that deals with the most significant trends and risks for the European insurance industry and coordinating a publication on selected emerging topics on a yearly basis.
In 2020, Generali chaired the ERI working group by coordinating:
- the update of the ERI Risk Radar;
- the publication of the CRO Forum paper ‘Imagine all the people – Demographics and social change from an insurance perspective’ an in-depth study on demographic and social risks and their impacts on the insurance industry
both available on the CRO Forum website1.
The 2020 Generali Group Emerging Risk Register maintains a predominant focus on climate change and natural disasters, geopolitical instability with related financial distresses, demographics and social changes and digitalisation aspects. Compared to the previous year, a major focus is given to the consequences of biodiversity loss, which is increasingly relevant for the Group and its sustainable goals, being a threat for future ecosystems and posing new risks to people and economic sectors.
The emerging risks landscape has been reshaped by the Covid-19 pandemic. Despite vaccines appearing to lighten the end of the tunnel, the Covid-19 pandemic and its related social and economic implications have challenged governments, companies and people and still do so. The pandemic has represented a boost for certain trends, such as digitalisation, pushed by the growing trend of remote work, potentially leading to an increase of cybersecurity risks. Moreover, the prolonged feelings of uncertainty and vulnerability among people have generated different reactions, ranging from mental illnesses and breakdowns to the exacerbation of the income and health inequalities, worsening already existing social tensions and divides.
A snapshot2 of most relevant risks for the industry is provided below.
ERI 2020 Paper ‘Imagine all the people – Demographics and social change from an insurance perspective’: https://www.thecroforum.org/2020/12/17/imagine-all-the-people-demographics-and-social-change-from-an-insurance-perspective/
2 This brief summary provides some of the elements discussed within the 2020 Generali Group Emerging Risk Register and it is not to be considered exhaustive in terms of overall emerging risk assessment, nor it is intended to rank all Group risks.
Geopolitical landscape is characterized by protectionism, military conflicts, large-scale migration, increasing social inequality and populism and is perceived as globally fragile leading to extreme movements and potentially putting international cooperation at risk.
Covid-19 has further increased the level of perception of such risks together with a growing attention to sustainability topics, in particular those related to climate and human rights with relevant disparities across regions.
Geopolitical tensions have as a first direct impact the financial instability, along with the potential to lead to business interruptions, supply chain failures, trade wars and other tensions on the economic environment. Pressure on food, water, energy and other commodity prices and supplies as well as increasing unemployment rates have the potential to accelerate market and social unrest and reduce the trust in financial markets, with a decreasing appetite for financial products and leading to higher lapses.
The last decade showed an acceleration of such phenomena with an outlook of continuous increase in frequency with a growing questioning of the overall globalization trend.
Climate change risks derive from the increase of CO2 and other greenhouse gas (GHG) emissions influencing Earth’s climate, causing a progressive global warming that in turn exacerbates extreme weather events and the consequent change in specific economic factors. Climate change risks can be classified in 3 main categories:
- physical risk, arising from the worsening of climate-related catastrophic events, such as storms, floods, drought caused by rising temperatures;
- transition risk, arising from the more or less sudden changes in market factors (such as consumer preferences, climate regulations and policies and new technologies), caused from the process of adjustment towards a greener economy characterised by lower or almost null GHG emission levels;
- liability risk, arising from environmental legal cases and / or due to the inadequate environmental related disclosure.
In particular, during 2020 Generali performed activities related to the identification and measurement of physical and transition risks, with the objective to focus on management and reporting in 2021.
The main activities carried out include:
- selection of 3 climate scenarios, with different temperature levels and time horizons, in order to capture transition and physical risks impacts:
- < 2°C scenario, characterised by an increase in temperature in the period between 1900 and 2100, aligned with the Paris Agreement, with a significant reduction of emissions and only transition risk impacts (in short and medium time horizons, 2030-2050);
- 3°C - 4°C scenario, characterised by an increase in temperature in the period between 1900 and 2100 moderated by only limited de-carbonization activities and both transition and physical risks impacts (in 2030-2050-2100);
- 5.4°C scenario, characterised by an increase in temperature in the period between 1900 and 2100 with a significant rise in GHG emissions and only physical risk impacts (in long time horizons, 2030-2050-2100).
- initial qualitative and quantitative impact analysis on:
- investments in equities and bonds, to identify sectors and the most vulnerable geographic areas;
- P&C underwriting to identify business lines and the most vulnerable geographic areas.
In addition to the incurred climate change risks each financial institution has to manage also its own emissions generated directly through operations and indirectly through its investment and underwriting portfolios. Managing decarbonization and emissions following declared commitments is a key strategic lever and at the same time contributes to mitigating reputational risk, as the climate commitments are under tight scrutiny by market stakeholders.
Digitalization trends have been boosted by the big data massive use in all economic sectors and the strong push to digital driven by Covid-19.
The main risk related to these trends remains cyber threat, with operational, legal and reputational implications and is yet evolving, leading to the need for more effective cyber security and the increasing demand for insurance coverages. This digital acceleration exacerbates the already observed digital gap affecting the more fragile part of the population, those in vulnerable socio-economic status, disconnected geographical locations, and workers that need to be upskilled and reskilled.
Risk of manipulation and digital misinformation is also becoming critical fostered by increasing social media coverage, influencing social, political and economic behaviours, but also causing potential losses due to fake news, deep fakes and similar.
Artificial Intelligence (AI) with all ethical implications and Internet of Things (IoT) are the two most visible phenomena posing a number of questions around future of work, data ownership, liability and broader health and social implications. The increasing trend of a more digitalised workforce leads to a reduction in physical injuries counteracted by an increase in mental stress and mental-related illnesses.
Demography is a well-known and traditionally predictable actuarial science even though, nowadays, the significant social evolutions bring new challenges.
Population in most developed countries is ageing and pressure is placed on public budgets leading to the need to rethink long term care programs, healthcare and pension propositions. On the other hand, younger generations require different products and services. They more and more rely only on digital products and pay attention to ESG topic dimensions.
The current workforce stands in the middle of the old and young generations and is squeezed between the assistance to the elderly while still managing child care (sandwich generation), with an inevitable economic and social burden.
Together with ageing, social changes and divides represent key elements to account for when observing the impacts on the population, including intergenerational conflicts: young are more and more perceived as a lost generation with jobs insecurity and in a world of economic crises, leading to an overall disillusion whose consequences are still to be noted.
Migration trends pose new challenges to an evolving society, underwriting practices and finally risks. When considering movements of people, Covid-19 has inhibited the urbanization trend seen in the last decades, but the trend is expected to recover once the fear for the Covid-19 pandemics will be over, even though at a slower pace.
Autonomous machines most visible examples are driverless cars, already used in some parts of the world, where specific laws were introduced to regulate the new transport and define responsibilities in case of accident. Also in Europe some preliminary laws were issued to take into account this innovation. Public transport has already adopted some autonomous vehicles, for example, underground lines in Paris or Milan. The impact on the current motor insurance market is expected to be disruptive in terms of products and clients, as retail lines of business will no longer respond to the new needs and B2B business, between insurers and producers, will increase. Covid-19 has temporarily limited the sharing economy trend, but this is expected to recover once the pandemic crisis is over.
Other industries are more and more impacted by the use of autonomous machines such as in logistics or heavy jobs such as mining or farming where human labour is being substituted by robots and workers supervise the overall process. The new mansions require specialised personnel able to manage, for example, coding errors.
Our houses and cities are increasingly connected through domotics and computers. The reliance on IT systems leads to the issues already named in the Digitalisation risk, such as big data management and possible cyber attacks.
Autonomous machines can be more and more used in other sectors, from health care and robot surgery to military equipment, in which their use can pose severe threats to the population.
Internet of Things (IoT) is an evolving aspect of Digitalisation that modified the way people and machines interact. Connected devices are present in homes (domotics), vehicles (autonomous machines) and wearables (medical devices).
Also within the industrial sector smart factories are connected to suppliers along the production chain and to customers.
The abovementioned hyper connectivity whilst reducing costs and accelerating processes, leads to a number of risks related to the amount of available data, such as big data management and cyber attacks already described in the Digitalisation risk.
Artificial intelligence (AI) and in general cognitive computing techniques are entering into almost every facet of society and are part of the Digitalisation risk. They are machines able to learn and accumulate information and to solve problems that up to now only people were able to solve. Applications are only at an initial stage, considering also the investments required both on IT systems and on personnel, but the expected impact can be disruptive on the insurance companies’ ability to make profit.
Automation and the use of robots can significantly reduce labour and production costs with platforms that help companies introduce smart automation. Robots can replicate current employee tasks, and smart robots add artificial intelligence to this. Notwithstanding the cost efficiency, further risks may arise such as errors on the processes together with the potential risk of cyber attacks or business interruption.
Lifestyle has changed in the latest years, with the exacerbation of a number of phenomena such as lack of sleep, smart and other drugs’ abuse, electronic cigarettes, obesity, malnutrition, sedentary habits, mental health and, on the other side, increased interest in wellbeing. Covid-19 has exacerbated this trend forcing people to stay at home and adding further stress increasing significantly mental health illness.
Insurers play an important role in supporting wellbeing products and quality of life through partnerships (e.g. with gyms, diet and fitness advisors) or promoting health campaigns.
Medicine is also rapidly evolving, leveraging both on research and technologies such as automated diagnoses, robots, nanotechnology, telemedicine and the development of artificial intelligence.
Insurers need to keep life products updated, both in terms of services offered and coverages. Particular attention is needed for the storage and management of big data and the ethical consequences of their use, when reliance is made to AI, telemedicine and similar.
Pandemics and Antimicrobial resistance are critical for society and insurers and their severity can increase if the two materialize simultaneously. Factors such as changes in lifestyle (drug abuse), global warming and biodiversity reduction, together with globalization and migration trends, are threats for the global health system thus creating the ideal conditions for infection and disease transmission.
As seen with the Covid-19 pandemics, in a connected world, viruses may spread very rapidly and they may have a devastating impact on economies and societies. The rapid response to pandemic events proved to be crucial. This has to be supported by medical innovations, changes in the health care system as well as overall people and authorities’ response. At the same time, no-vax movements and general misinformation may lead to late or inadequate responses with severe consequences. The growth of antimicrobial resistance to drugs further increases the vulnerability of the population and the potential spread of viruses. Another risk is related to the increasing protection gap for the most vulnerable areas and social groups.
Insurers are called to provide coverage and assistance in case of malicious events, but may not manage to keep up with the rapid increase in customer demand, greater operational difficulties and the presence of contractual clauses which often exclude pandemics or catastrophic events from coverages.
New market players from other markets started selling insurance products to their own customers. These companies can leverage on the big data already available to them, together with their experience in technology and communication, for example through apps, thus improving efficiency and optimizing the offer.
The impact on the insurance market of the new market players has so far revealed to be not so disruptive as expected in the past, but still traditional insurers should consider new technologies, data analyses and access to clients for maintaining their share of business in the future. Covid-19 has forced insurers to rapidly embrace new technologies and products and new ways of attracting customers.
Also, some reinsurers are entering the primary market leveraging on their experience and skills, with more developed data, analytical and predictive capabilities, competing especially on the B2B2C market which is expected to expand in the future. Reinsurers will be the real competitors for the existing primary insurance market.
Changes in health care systems are ongoing with new models, medical advances and integration of big data and hyper-connected systems. Many evolutions are imposed by the legislation, but the main drivers are the demographic and social changes already presented in such risk i.e. ageing society, the global mobility, the urbanization and migration trends.
The increase in litigations for negligence in the medical sector results in an increase of diagnostic/ preventive medical treatments with consequent additional costs for the health care systems and the insurance coverage. Public health care systems are struggling to face the increasing request for services and assistance requiring the need for people to buy private coverages, thus increasing significantly costs and resulting in a shift in demand.
Covid-19 pandemic situation has highlighted the vulnerabilities and limits of existing health care systems and, on the other hand, has demonstrated the need to further invest in health assistance and resource distribution. Collaborative public-private agreements may help in covering expenses and limiting losses in critical periods.
Terrorism is perceived as major threat in Europe and globally. Measures against terrorist attacks in sensitive locations or areas with a high density of people (such as sporting events, concerts, subways), are not considered sufficient to mitigate such risks. The unpredictive and adaptive nature of this risk makes it very difficult to identify, assess and mitigate. Covid-19 has moved the attention from this topic, but the increased political and economic tensions due to the pandemics are expected to lead to further terroristic attacks in the future.
NBCR terrorist attacks (Nuclear, Biological, Chemical, Radiological), together with attacks on computer systems and industrial installations (Cyber terrorism, Electro-Magnetic Pulse (EMP)), are some of the main terroristic threats. Future attacks might for example even come from the sky or above, as space-based terrorism could emerge.
Biodiversity loss is accelerating due to human interventions, both direct (e.g. from deforestation, pollution, climate change) and indirect (e.g. from population growth with an increasing need of urbanisation). Every year, species are extinguishing at a faster pace than in the last million years. Loss of biodiversity is not only an environmental issue, but also a developmental, economic, social, security and moral issue.
Food or drinkable water shortages increase people’s unhealthiness leading to increasing morbidity and mortality. To the extreme, they can also lead to conflicts which can jeopardize the economic and political stability of a country.
Customers are more and more aware of the risks related to the planet’s weaknesses and require insurers to make sustainable choices, in terms of strategies and investments.
Business structures are developing together with new technologies and widespread use of social media, drawn by increasing digitalisation and hyper-connectivity trends. New ways of working such as remote working, use of platforms and social media, which were already rising trends, have been accelerated by the Covid-19 pandemics outbreak.
Increasing digitalisation and the rise of digital companies require insurers to rethink the underwriting offer. Innovative product design requires new skills and digital competences together with the need to collect statistical data, which is still very limited.
Market attention to sustainability topics is seen as a priority both for customers and for governments. Young generations show strong preferences towards green and sustainable products, while regulations accelerate mandatory disclosure and the effective management of environmental and social impact of businesses.