Pandemics represent only one example of how low-probability, extreme events can cause economic (and insured) shocks, according to a recent Reactions article by Peter Hearn, President and CEO of Guy Carpenter.
There are others: catastrophic cyber attacks, a nuclear, biological, chemical or radiological (NBCR) terrorist attack and climate change are capable of bringing consequences that challenge (or call into question) the provision of (re)insurance.
The insurability of systemic risk is going to be one of the defining issues of the next decade for the sector. Rapid technological changes, digitalization in particular, have already transformed the characteristics of risks assumed by the (re)insurance market. COVID-19 will only accelerate these trends. We are living in the age of intangibles, with risks becoming more insidious and pervasive. Today, some 90 percent of the S&P 500’s market capitalization is intangible – whether data, intellectual property, brand and the like.
This massive shift presents challenges but also exciting opportunities for (re)insurance. Cyber is a working example of how the risk transfer sector is capable of responding to transformative developments, and it provides a glimpse into the growth potential on offer as new risk pools emerge. There are nevertheless concerns that a catastrophic cyber event carries systemic risk that could result in hundreds of thousands of simultaneous claims. Cyber catastrophes such as a cloud service provider failure or targeted attacks on power grids pose theoretical, but real, threats to the (re)insurance sector due to high risk aggregation.
Guy Carpenter and CyberCube last year estimated that a long-lasting outage at a leading cloud service provider could cost the standalone U.S. cyber market alone close to USD 15 billion. The loss potential from a power grid attack is equally stark. A London market study carried out in 2017 simulated a scenario where households and businesses in 15 U.S. states suffer blackouts lasting several days, resulting in power outages to 93 million people and causing estimated insured losses of at least USD 45 billion across multiple lines of business.