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 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 represent all main Group Business Functions, ranging from Underwriting, Investment and Operations, to Marketing and other expertise. Two major roles are played by Business Strategy and Group Sustainability & Social Responsibility with the purpose of granting both a strong integration with the defined business strategy and the increasing embedding of ESG factors within the risk management process.
All our Group Business Units, spread around the globe, are participating to this Group exercise. Coordinated by local Chief Risk Officers, they provide their own inputs to the risk identification process by focusing on the most relevant risks for their markets. These are assessed in terms of vulnerability, timeframe as well as risk management preparedness, ensuring coverage of all major ESG factors’ interrelations in parallel. This grants a consistent risk-based approach for the Group Materiality Matrix definition.
All Generali Group employees have been provided with a Booklet accessible from Generali internal website which allows them to have an insight on specific risks. They can both learn and comment on selected topics, regardless of their geographical and organisational position. Moreover, they are strongly encouraged to deep dive and provide their comments in order to have a proactive discussion around such topics.
The overall Group Emerging Risk Register is updated on yearly basis, taking into account the results of the exercise performed both at 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), dealing with the most significant trends and risks for the European insurance industry and coordinating a publication on selected emerging topics on yearly basis. At the end of 2019 the document ‘Medical Advances – Risks and opportunities for the (re) insurance industry’ has been published. During 2020, Generali is chairing the ERI working group, coordinating the update of the ERI Radar (already available on the CRO Forum website) as well as an in-depth study on a selected emerging risk.
The 2019 Generali Group Emerging Risk Register maintains a predominant focus on climate change and natural disasters, geopolitical instability with related financial distresses and digitalisation aspects. Compared to the previous year, a major focus is also given to demographic and social changes aspects as well as to pandemic and antimicrobial resistance.
A snapshot1 of some of the main risks which are considered particularly relevant for the industry is provided below.
1 This brief summary provides some of the elements discussed within the 2019 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.
Overall international agreements are perceived to be less powerful. Return of protectionism and regionalisation, phenomena like large-scale migration, changes in global power balance, social inequality perception, increase of populism and extreme movements might lead to military conflicts, social revolts and protests.
Geopolitical instability could also lead to business interruptions, trade wars and accordingly tensions on the economic environment such as on food and energy prices, unemployment rates triggering social unrest and to a reduced trust in financial markets, with a decreasing appetite for financial products and an increasing number of lapses observed.
The increased frequency and velocity of geopolitical instability events have been reshaping geopolitical framework and might probably lead to new implications for financial markets and real economy, confirming the need of the risk management process to be focused on the geographical footprint as a cornerstone.
Due to Covid-19 outbreak, barriers between countries have been reintroduced creating disparities in terms of supply and people movements, nationalistic and populistic movements have emerged in countries and the deterioration of US-China relations have exacerbated the different approaches and political views around the world, leading to tensions similar to those of the 70’s.
Climate change is unanimously perceived, by financial and insurance institutions, as the top emerging risk. The emerging aspect of this risk is related to its systemic nature and to the difficulty of accurately predicting where, when and how intense the changes will be over time.
Main risks deriving from climate change can be classified in 2 main categories:
- physical risks arising from several factors, that relate to specific weather events (such as heatwaves, floods, wildfires and storms) and longer-term shifts in the climate (such as changes in precipitation, extreme weather variability, sea level rise, and rising mean temperatures) and
- transition risks arising from the process of adjustment towards a low-carbon economy (typically the loss of value of high carbon intensity assets). A range of factors influence this adjustment, including climate-related developments in policy and regulation, the emergence of disruptive technologies or business models, shifting sentiment and societal preferences, or evolving, frameworks and legal interpretations.
Due to Covid-19 outbreak and the related lockdown, climate change, on the one hand, has slowed given the emissions reduction related to the interruption of many industries and the limitation to mobility and transportation in the very short term. But, on the other hand, the negative effects generated by the massive use of single-use protection tools non-recycled wastes, the consequent water pollution as well as the impacts in the long-term are still unknown, unless a green recovery is fully pursued.
Higher volume, velocity and variety of data captured, acquired and integrated in today’s enterprises require new thinking in data governance, including data processing, storage and data consumption. Cyber risks, with relevant regulatory and reputational implications, are expected to increase as a result of hyper-connectivity, accessible and cheaper computational power and artificial intelligence leveraging access to big data repositories. The quantum computing is in particular expected to strongly innovate the way of data processing.
Within digitalisation trend, big data can be associated with both higher volumes and increased speed of the data to be analysed and used in the future, by leveraging new data sources (such as software applications on mobile devices as well as billions of interconnected devices in the Internet of Things – IoT), artificial intelligence and higher computing capacities (e.g. super cloud services provide the option of storing significant amounts of data with high level of availability, scalability and limited fault tolerance).
Due to Covid-19 outbreak, companies and the education area had to adapt during the lockdown period, advancing digitalisation, smart working and e-learning. Even companies where smart working and digitalisation were not the normal day-to-day working mode, have quickly transformed into digitalised and connected companies. However, this trend has also generated challenges, making those companies struggling with the availability and widespread of connections and devices.
Demography has always been considered a well-known and traditionally predictable actuarial science even though nowadays several trends are representing new challenges, coming from a notable social evolution. This category includes several topics to be considered, stemming from:
- an increased life expectancy with an increasing focus on healthy ageing;
- the reduction of birth rates and the progressively ageing population having a significant impact on the economic and financial sustainability of social protection systems, putting health and pensions systems at risk;
- the impact of a squeezed sandwich generation that is posing new challenges to the economy and productivity;
- demand for specific products for elderly population (e.g. LTC) and the need to penetrate in younger population market segments;
- population distribution changing because of migration and urbanisation flows: both of them severely impact the financial landscape and to some extent risk exposures (risk concentration in megacities);
- social changes and tensions due to increasingly perceived inequality.
It is still too early to say how Covid-19 will impact demographics. However, during the first months of the pandemic, it has been observed that it mainly affected the elderly. Moreover, the lockdown has created significant economic and psychological issues, limiting the freedom of movement, work, education and culture creating, as many people have lost their jobs and schools have been closed.
Shocks attributable to Covid-19 will also be seen in the urbanisation trends since the containment measures will persist for a while longer.
Autonomous machines include driverless cars which can already be seen on some roads, driverless public transportations, robots providing advice in shops and in online experiences, machines used in medical and surgery equipment, manufacturing robots, mining or farming machines, home and care assistants, drones, microsatellites as well as weapons. Their introduction is expected to affect almost all sectors of the economy and lead to important new legal, regulatory, societal and ethical considerations.
In the motor business sector, self-driving cars or semi-autonomous cars are expected to disrupt the existing insurance model: as at the moment, human error is the main cause of accidents, a broader use of autonomous machines might lead to a reduction in the frequency of claims and an increase in the severity of new risks such as cyber. Losses may be accumulated in new ways (e.g. same programming error replicated on numerous machines or a single machine performs the same erroneous activity several times). With this new mobility, car insurance will be increasingly a B2B business, between insurers and producers, while the cars directly owned by individuals could rapidly decrease with the parallel spread of sharing economy.
Besides self-driving cars, malfunctions of autonomous machines are expected to be impacting a number of insurance lines of business, particularly relevant in case of infrastructural systems or highly sensitive sectors like the medical one. A particular attention will be also addressed to software owners and programmers: the ability to evaluate the impact of error in coding as well as the related impact on liabilities will be key in the future of insurers.
Due to Covid-19 outbreak, a push towards individual travelling has been generated and, consequently, has negatively impacted public transportation. Moreover, with respect to the trend described above, new doubts on the sharing economy have emerged.
Hyper-connectivity within the new communication models refer to person-to-person, person-to-machine and machine-to-machine connections. The multiplication of data sources leads to an increased cyber risk exposure such as cyber-attacks, ranging from loss of data and information to increasingly relevant business interruptions. This is even exacerbated in case of sensitive data. Reputational damage within a hyper-connected world are related, for example, to the increasing spread of fake news and deep fake.
Internet of Things is also about smart factories, strongly relying to hyper-connectivity for internal processes (ability to capitalize on the increased volume of data, protect against cyber-attacks) and customers relationships (in terms of amounts and type of policy coverage), as well as domotics or so-called smart homes, providing increased assistance and support to people within their homes. On the contrary, these smart homes represent an additional IT and cyber risk exposure.
Communication with quantum computing systems will be even faster and thus more vulnerable to attacks.
Artificial intelligence (AI) and in general cognitive computing techniques are entering into almost every facet of society. They tend to the realization of machines able to solve the problems typically solved by human intelligence and rely on cognizing software, able to learn and accumulate information. The applications in AI insurance can be various. The interaction with the IoT sensors will likely provide personalised data to the tariff platforms, allowing users to pay a premium that best adapts to the risks related to a personalised lifestyle, for example, to pay less for motor insurance on the basis of the driver’s risk tolerance or at the time of use of the vehicle or pay less health insurance in case of a healthier lifestyle. The complex nature and the high investment required could impact on long-term strategy in terms of companies’ capability to generate future benefits.
Automation and use of production robots lead to considerable savings related to labour and production cost with platforms that easily help companies to introduce smart robotic process automation (Smart RPA). Robots work by replicating the activities that people currently undertake, using existing core systems, legacy applications, website accesses, and manipulating spreadsheets, documents and e-mails to complete tasks. Smart Robots add Artificial intelligence to the core replication skills mentioned above.
This automatization applies also to front-end business processes, providing the client with advice and consultancy services (so called robot advice).
Labour market is not immune to social and ethical implications given the reduced workforce demand as well as the resource exhaustion, due to the need of high level digital skills.
Within finance, AI applications can lead to the so-called “flash investments” phenomena, which can generally impact the short-term volatility.
Changes in people lifestyle can be found in several aspects, such as lack of sleep, smart and other drugs’ abuse, electronic cigarettes, obesity, malnutrition, sedentary habits and also, on the other side, increased interest in wellbeing. This implies for insurers the need to foster promotion of wellbeing and quality of life, also with the support of digital data and partnerships with gyms, diet and fitness advisors and health care providers.
In this evolving context, the medical developments represent a significant trend for the society, impacting individuals, health systems and, least but not last, insurance industry given its social role. Predictive genetic analysis, the way in which health services are provided (telemedicine, etc.) and the development of artificial intelligence in health are driven by the use of technology/automated processes in the diagnosis and treatment of patients who require care. Other examples are Robots used in hospitals and laboratories for repetitive tasks, in rehabilitation and in physical therapy; nanotechnology as a hot-topic in medicine, aiming to kill a broad range of harmful microbes but also producing new sensors that can detect whether a person has certain types of cancer from only a few drops of blood; etc.
Due to Covid-19 outbreak, people lifestyle has changed, being impacted by new ways of working and digitalisation, also related to medical diagnostics and assistance.
Factors as globalisation and rapid urbanisation, migration, drug abuse, global warming and biodiversity reduction represent only some of the threats for the global health system, being the ideal conditions in which viruses and infections are easily transmitted and have the potential to affect, not only life insurance markets, but all insurance business lines around the world, together with overall financial markets. However, the speed and the spread of the pandemics can be impacted by medical innovations, changes in the healthcare system as well as people and authorities’ responses, increasing the complexity for insurers in forecasting the overall consequences of the next pandemic.
The outbreak of such events can pose two main risks: the former relates to the failure of providing the expected assistance vis-à-vis, the rapid increases in customer demand, the greater operational difficulties and the presence of contractual conditions, often limiting guarantees in case of pandemics and similar catastrophic events; the latter relates to the increasing protection gap for areas and social groups most affected or vulnerable to the infection.
Both pandemic and antimicrobial resistance are critical aspects for society and insurers, and their severity can be even higher in case the two materialise simultaneously.
The growing of antimicrobial resistance to drugs increases the vulnerability of people. This may lead to the rapid spread of illnesses with high rates of morbidity and mortality risks.
Increase of human mobility and high population density in some countries can create the environment for new infection diseases.
The development of global trade, the increasing number of large multinational companies, the growing connectivity and the population expansion have created an increasingly competitive global market.
In a global economic world in which the use of technology, the management of Big Data and Artificial intelligence are entering into the insurance sector, big players may turn out as new market players in financial markets leveraging on capabilities and skills to manage high technology aspects, big data and artificial intelligence. Fintech (organisation, usually in the start-up space, where financial services are delivered through a better experience using digital technologies), techfin (technology firm that finds a better way to deliver financial products as part of a broader offering of services), apps to manage client requirements and similar are expected to improve the efficiency of internal processes and optimize the overall data usage.
The role of companies working in platform may create new ecosystems radically impacting social and economic landscape, as well as financial institutions.
The global health care system is constantly evolving, patient care is improving with new models, payment systems and with medical advances and integration of Big Data and hyper-connected systems; many changes are driven by social and demographic factors, but the main character of this evolution remains the legislation, which is enacted by local government to improve the efficiency and effectiveness of their own health care systems. Further privatization of health care as well as medical advances could result in a shift in demand and changed costs to provide for health care services and solutions.
Medical sector is also facing an increase in litigations for being held liable for negligence, this results in an increase of diagnostic/ preventive medical treatments with consequent additional costs for the health care systems and the insurance coverage.
Due to Covid-19 outbreak, the health care system has faced changes in terms of medical assistance and resource distribution. Moreover, the global mobility and the rapid urbanisation have been recognised as risk factors for the global public health, since they facilitate viruses and infections spread as well as antimicrobial resistance reinforcement.
Terrorism is perceived as major threat in Europe and globally. Measures against terrorist attacks in sensitive locations, 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.
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 are expected to come from the sky or above, as space-based terrorism could emerge.