LONDON, 3 December 2013 - Insurance executives from around the world have cast more than 30,000 votes to rate a global pandemic, natural catastrophes and a food/water/energy crisis as the three categories of extreme risk that are of most significance to the insurance industry.

Other extreme risks featuring in the top 10 included cyber warfare, an economic depression, a banking crisis, and a default by a major sovereign borrower. Votes were compiled in a wiki survey organised by global professional services company, Towers Watson, which enabled participants to add their own ideas into the voting.

Graham Fulcher, a managing director in the Risk Consulting and Software business at Towers Watson, commented: “Much as we would have expected pandemics and natural catastrophes to figure prominently in insurers’ extreme risk thinking, the high rankings of things like cyber warfare and of a user-submitted idea on the risk of data compromise in the cloud illustrate how the industry is keeping up-to-date with risk assessment.”

Among the top 10 extreme risks identified by survey participants, Towers Watson sees a range of implications for insurers.  For example the impact of a food/water/energy crisis includes a potential impact on morbidity and mortality, and the creation of investment winners and losers.

In the case of a sovereign default, Towers Watson believes that as well as the impact on those insurers holding debt in the defaulting country, it would in all likelihood result in a regional insurance crisis and an increase in merger and acquisition activity due to forced disposals from banking groups. 

The impact of a prolonged depression can also be complex; although it can adversely impact top-line, based on the experience of many European motor insurers, the pressure on household finances leads to a reduction in vehicle miles and in turn to reductions in claims frequency and an increase in profitability.

The survey was carried out as an extension of the firm’s regular biennial analysis of the extreme risks likely to affect the broader investment community. That research and ranking1, entitled Extreme risks 2013, categorises very rare events that would have a high impact on global economic growth and asset returns if they occurred.2

Graham Fulcher added: “We were delighted to get such a high and geographically diverse response to the survey. The kinds of risks that could wipe out an insurance business do inevitably evolve over time, so we were very encouraged to see this degree of engagement from a broad sample of the industry.”

Top 10 extreme risks facing the insurance industry (as rated by Wiki survey respondents)

Rank Risk description Seeded or user-submitted risk
1 Pandemic: A new highly infectious and fatal disease spreads through human, animal or plant populations worldwide. Seeded
2 Natural catastrophe: A confluence of major earthquakes, tsunamis, hurricanes, flooding and/or volcanic eruptions with major global effects. Seeded
3 Food/water/energy crisis: A major shortfall in the supply of, or access to, food/water/energy, causing severe societal issues. Seeded
4 Cyber warfare: Computer sabotage/espionage at a major scale, with severe damage to infrastructure, financial, medical or defence systems. Seeded
5 Technology: Large quantity of personal, government or business data stored in clouds are found to be hacked, compromised or misused. User-submitted
6 Depression: A deep and protracted trough in economic output, massive increase in unemployment, restriction of credit, shrinking investment. Seeded
7 Banking crisis: Central banks unable/unwilling to supply liquidity in the next crisis, causing banking and real economic activity to stop. Seeded
8 Extreme event causing property damage, supply chain failures, business interruption and death on a significant scale. User-submitted
9 Rise in extreme weather: Events exceed the capacity of insurance industry and governments to respond, with physical and social implications. User-submitted
10 Sovereign default: Non-payment by a major sovereign borrower causes market panic and adversely disrupts the global economy. Seeded

Notes

A feature of wiki surveys is that they allow respondents to add their own ideas to those seeded by the survey originator. Each survey participant was presented with two of the extreme risks selected by an algorithm, and either clicked on the one they thought was the biggest threat or had the opportunity to submit their own idea. The final rankings are calculated as the estimated chance that the idea would win against another randomly chosen idea. So those at the top of the rankings are predicted to win the most frequently.

1 The Towers Watson ranking of these risks is derived from a scoring system that incorporates assessments of the likelihood, intensity of impact, scope of impact and uncertainty of each individual risk.
2 This year it has a new top three: Food/water/energy crisis, Stagnation and Global temperature change – while Sovereign default and Insurance crisis both fell five places and Depression lost the top spot for the first time since the research began in 2009.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organisations improve performance through effective people, risk and financial management. The company offers solutions in the areas of benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world.