Aamina Zafar examines a Swiss Re report highlighting emerging risks caused by the pandemic
Covid-19 has shaped the top two emerging risks for the insurance profession this year, according to a new report. The insurance sector faces an immediate danger from mothballed facilities, where missed inspections and delayed maintenance have amplified the risk of larger accidents as operations resume at
oil refineries, chemical plants, mines and power plants.
The second biggest threat comes from so-called ‘zombie’ companies – unviable firms that have only stayed afloat thanks to coronavirus relief efforts by governments across the globe.
These hazards are highlighted in Swiss Re’s report, entitled Sonar 2021: New Emerging Risk Insights, which was published in June to encourage conversations on emerging threats to the sector.
The 49-page report flags up how the pandemic has put maintenance and inspection work under pressure because of the lack of availability of contractors and equipment. A consequence of a global economy in trouble has been a squeeze on maintenance budgets in many industries and a delay to planned works. In the oilfield services sector alone, there was a £15bn cutback in maintenance budgets last year. However, there are still risks from using mothballed facilities as the world returns back to normal thanks to the gradual end to Covid-related restrictions.
Chris Andrews, director of risk management solutions at Aviva, believes firms must strike a balance between reinstating plant, equipment and premises and keeping employees and customers safe. He says: “As we move out of almost all the restrictions the pandemic put on British businesses, many will be rightly optimistic about returning to pre-pandemic operations. However, they will need to balance the latest market conditions with the short-term challenges of reinstating plant, equipment and premises, as well as keeping employees and customers safe. This may well be complicated if they have diversified during the lockdowns, which we know many businesses did, or if their supply chains have been impacted as a result of changes in availability, cost or delivery timings.
“To overcome these challenges, we would urge all businesses to ensure their risk assessments are continually reviewed in accordance with the latest government guidelines, making sure that any changes are communicated to staff and training is completed and documented properly. An important change to note is that the rules have now changed to guidance, which is more flexible, so it is imperative that records are kept up to date detailing why certain decisions were made and what controls are in place.”
Swiss Re’s Bernd Wilke believes the firms that do well to cope with the backlog of missed inspections will be the ones that have a culture of safety and reliability.
The senior emerging risk manager says: “Those that have a safety- and reliability-first culture will do well. Insurers should look at how big the maintenance backlog was before Covid-19 and how long it is now. If it has not diminished, insurers should be very careful and consider their offering in respect to the capacity they want to provide as well as in pricing of the risk.
“Safety-first should be the guideline. That will also pay off for the insured as a damaged facility will not produce in times of high demand.”
The rules have now changed to guidance so it is imperative that records are kept up-to-date detailing why certain decisions were made
The report also highlights how the level of financial support that many companies have received. The increase in the number of such firms – known as ‘zombie’ companies – is a problem because it distorts markets and makes it harder for the insurance profession to distinguish between those at risk of defaulting and those not.
The report suggests that zombie companies may simply not be able to pay back their borrowing, leading to a notable increase in non-performing loans. It also argues that zombie companies are less productive and lower a country’s aggregate productivity.
This is echoed by Jerome Haegeli, group chief economist at Swiss Re Institute, who says zombie firms must be avoided at all costs as they weigh on productivity. He adds: “Zombie companies are the ones that kill growth and prevent new jobs from emerging on the horizon. Zombification of our economies should be avoided at all costs, with government support needing to exit now and to bring market forces back. Resilience is creating growth buffers to absorb shocks – and growth needs to come ultimately from private investment and demand. Research clearly shows that zombie companies weigh on productivity.”
However, the repercussions of zombie firms may not be felt for some time as, for example, the UK government continues to offer financial support to firms that are struggling as a result of the pandemic.
In July, the UK government published statistics that showed businesses across the UK have benefitted from 1,670,939 government-guaranteed loans worth £79.3bn. These loans helped support their cashflow during the crisis, through schemes delivered by the British Business Bank. This included 1,560,309 bounce back loans worth £47.36bn; 109,877 loans worth £26.39bn through the coronavirus business interruption loan scheme; and 753 loans worth £5.56bn through the coronavirus large business interruption loan scheme.
New figures for the bounce back loan scheme top-ups now reveal that 106,660 loans have been approved worth £0.95bn.
Commenting on the continued financial support from the UK government, Zanele Sibanda, head of internal markets at Towergate Health & Protection, says: “Although the bulk of the government’s financial support was delivered early on in the pandemic and the numbers suggest that this was a well-timed and welcome injection into the economy, there are still a number of schemes available and yet to launch later this year. So, it’s clear that the government is committed to keeping the economy afloat beyond lockdown. Secondly, we saw many businesses innovating to keep trading when restrictions were imposed early in 2020, so I expect that business owners will be able to do the same, and find different ways to do business as the economy shifts and returns to a pre-pandemic trading environment.”
The report, which aims to inspire conversations about emerging risks so that the insurance profession and its clients can continue to build resilience, also highlights many other problem areas that have arisen as a result of Covid-19. This includes the risks attached to insurers turning towards artificial intelligence. The analysis found that while this promises a personalised, fast and intuitive end-to-end insurance experience, the profession needs to beware of the limitations of such technologies.
The report argues that the lack of cognitive skills is why humans are still needed to take care of cases that require special handling. It adds that integrating all automated systems, and also making them work with humans to offer a reliable and efficient end-to-end customer experience, can be challenging and costly if not executed carefully.
The report highlights a recent case in the UK, where an insurer was fined for overreliance on voice-analytics software, which led to some claims being unfairly declined or not adequately investigated.
Ian Mckenna, founder of Financial Technology Research Centre and AdviserSoftware.com, says technology can benefit the insurance sector but may also bring added risks.
He explains: “Artificial intelligence and related technologies are increasingly becoming a fact of life in modern society. These emerging technologies will bring huge benefits to society, but we do need to recognise they bring with them risks.
“In the past couple of years there has been a growing recognition that artificial intelligence can build in biases if strict protocols are not adopted to eliminate them. Now this issue can be understood, it is possible to take action to prevent artificial intelligence bias.
“It will be crucial for the industry to work with regulators and government to ensure artificial intelligence delivers on the enormous potential it can offer humanity by putting the right safeguards and checks in place.”
Aamina Zafar is a freelance journalist