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The Times They Are a-Changin' - How insurers are changing their approach to systemic risks and what this means for general insurance markets

cyber security.jpgWhen Bob Dylan wrote The Times They Are a-Changin’ in 1963, the world was going through of a period of societal, economic and cultural upheaval. It could be argued that over the last couple of years, general insurance markets have undergone a similar upheaval. These markets have experienced a great deal of change in nearly all areas –including the introduction of the recent GI pricing rules, not to mention the impacts of the pandemic or the increasing risk of cyber-attacks. As a result, one area that has undergone a significant change and has increased in focus is how insurers approach systemic risks.

But what exactly do we mean when we refer to systemic risks? The Financial Stability Board defines systemic risk as ‘the risk of disruption to the flow of financial services that is caused by an impairment of all or parts of the financial system and has the potential to have serious negative consequences for the real economy’.[1]  In short, systemic risks are risks that are so large they threaten not just one or two areas, but threaten the whole financial system and economy. The Covid-19 pandemic is the most recent example of a systemic risk. The pandemic affected every corner of society, the economy and the whole insurance industry. Every insurer, every line of business and every employee were affected in some way. The effects were felt throughout the product lifecycle, from underwriting to distribution to claims, as well as how insurers operated and interacted with customers.

Climate change photo.PNGOver the last two years, those operating in general insurance markets have had time to reflect on the experience of the pandemic, and in particular on how one could improve the approach for dealing with future systemic risks. One particular reflection is whether the learnings taken from the pandemic can be applied to other systemic risks. Climate change is one of the major systemic risks facing both the insurance industry and the wider world. The insurance industry is at the forefront of dealing with the impact climate change has on communities and infrastructure all over the world, so having a clear and appropriate approach to this risk is imperative.

Another systemic risk facing the industry is cyber risk. Within developed countries, the use of digital technology in economic activity is ubiquitous. Firms overwhelmingly rely on digital infrastructure for their everyday operations within virtually all sectors of the economy. However, while the use of this technology has enormous commercial benefits, it also creates large and poorly understood risks to businesses. Recent cyber-attacks, such as the Colonial Pipeline attack and Microsoft Exchange hack, and the ongoing cyber operations linked to the conflict in Ukraine, highlight the disastrous consequences underestimating cyber risks can have and why businesses, including insurers, need to understand and be prepared for these risks.  

These examples showcase the diverse nature of systemic risk. There is no all-encompassing or one size fits all approach to dealing with these risks. The ABI’s upcoming webinar How insurers' approach to systemic risk is changing and what this means for the general insurance market will seek to explore these differing approaches. Delegates will have the opportunity to hear from UK Finance on how the banking sector has changed its approach to systemic risk and how the last two years have influenced its approach to both systemic risks and how the sector operates. Delegates will also hear from insurance industry experts on what the main systemic risks facing insurance industry are, how the industry will need to adapt its approach to these risks, whether any learnings from the last two years can be taken and applied and how changes to approaches are already having an impact on products, markets and insurer operations. 

[1] https://www.lloyds.com/conducting-business/regulatory-information/government-policy-and-affairs/international/systemic-risk




Last updated 26/05/2022