Swiss Re SONAR examines post-COVID emerging risks, from zombie companies to urban mobility

Swiss Re’s Group Chief Risk Officer Patrick Raaflaub said: “When COVID-19 emerged in late 2019, few could have predicted the magnitude of its impact. Many of the actions taken to mitigate the pandemic have themselves created new risks, from the widening inequality gap to the dangers of restarting under-maintained industrial operations. As re/insurers, it is essential that we have the best possible understanding of these emerging risks. It is also important to remain vigilant on the emerging risks that are already known – especially regarding climate change – as these will impact us for years to come.”

Income inequality and the growing gap between rich and poor

COVID-19 lockdowns widened the gap between rich and poor. While many white-collar workers were able to move to home offices and continue their work, lower-wage face-to-face service sectors such as retail, gastronomy and tourism experienced high unemployment. In the US, for example, leisure and hospitality unemployment rose from 5% at the start of 2020 to 40% in April 2020. In the UK, unemployment in these sectors peaked at 10.9% in the three months to January 2021. This was significantly lower than the US owing to the UK government’s job retention scheme.

The income inequality gap is not only an issue for developed economies. According to Pew research, the growth of the global middle classes was 54 million people fewer than projected in 2020, with 60% of that reduction in India alone.^[1] In countries where government finances allowed for aid packages, lower-income households fared better. In the US, stimulus measures increased the incomes of low-wage workers during the first few months of the pandemic.

Of particular concern is the disproportionate impact on younger generations already struggling with pressured labour markets and lack of career opportunities. An unemployment rate of 10% for people under 25 remains elevated for the US, while in the UK this figure stands at 12%.^[2]

The reduction in income for many sections of the global community threatens the recent growth in insurance demand seen in many markets. It also places the emphasis on the development of affordable private insurance solutions to fill the protection gap for middle and lower-income segments.

Zombie companies: the dilemma of withdrawing government stimulus

As COVID-19 swept across the globe, many governments enacted financial relief programmes to prevent corporate bankruptcies. In the US company bankruptcies were down by 5% year on year in 2020, a reversal of the trend of increasing rates from 2017 to 2019. Government stimulus programmes helped many viable companies stay afloat, however stimulus measures have also propped up non-viable firms: so-called “zombie companies”.

Zombie companies are a potential burden for the financial sector, especially when it comes to increased credit default rates. Low interest rates are incentivising companies to take up bank credit, creating a risk of large-scale defaults on these loans once government support dries up and zombie companies become insolvent. The Institute of International Finance reported that bank loans to small-and-medium enterprises in the US rose by 6% in 2020.^[3]

To avoid a potential surge of defaults and bankruptcies, governments will need to carefully decide how and when to withdraw stimulus packages. A recent Swiss Re Institute paper concluded that for sustainable economic recovery, policy should support businesses that are viable in the long run and facilitate the orderly restructuring of non-viable firms.^[4]

New means of urban mobility to decarbonise transportation

Rapid decarbonisation of the global value chain is essential to avoid the most extreme effects of global warming and climate change. One important target area for decarbonisation is transportation, which currently contributes about 24% of global CO₂ emissions from fuel combustion.

The move to electromobility, hydrogen fuel cells and non-fossil-based fuel alternatives is well underway and promises a sustainable response to traffic-loaded urban centres. For example, there are already sophisticated micro-mobility systems such as rentable e-scooters in many cities. In the future, the options are open to develop self-driving delivery vehicles, or even urban air mobility options such as clean-powered flying taxis.

The benefits of the revolution in clean transport are clear. However, there are emerging risks. City planners face the challenge of creating ways for new e-vehicles to safely coexist with traditional transport and infrastructure. Injuries from e-scooters and e-bikes are a potential source of new liability claims. Further, the rental model of many of these new forms of urban transport requires sharing of personal information, giving rise to risks around possible data theft. Legislation and regulation will therefore also need to be updated in order to mitigate these risks.

Diversity gaps in product testing and other technology risks

Besides COVID-19-related emerging risks, Swiss Re’s SONAR also examined new technological risks in the global marketplace. For example, the report examined the importance of accounting for gender, age and other factors in product testing. Evidence suggests that crash test dummies and medical trials may need to more accurately reflect a changing demographic in order to increase car and medical safety.

Further topics in this year’s SONAR report include: the longer-term health burden of COVID-19, the risks of restarting industrial installations that have been under-supervised or not maintained during the pandemic, and the ethics of digital nudging.

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Methodology

Swiss Re’s SONAR programme stands for Systematic Observation of Notions Associated with Risk. It is Swiss Re’s process for identifying, assessing and managing emerging risks. Experts across the company collect early signals of emerging risks, which are assessed and prioritised by an emerging risk management team. SONAR findings have been published for external audiences SINCE 2013.

About Swiss Re

The Swiss Re Group is one of the world’s leading providers of reinsurance, insurance and other forms of insurance-based risk transfer, working to make the world more resilient. It anticipates and manages risk – from natural catastrophes to climate change, from ageing populations to cyber crime. The aim of the Swiss Re Group is to enable society to thrive and progress, creating new opportunities and solutions for its clients. Headquartered in Zurich, Switzerland, where it was founded in 1863, the Swiss Re Group operates through a network of around 80 offices globally. For more information, please visit www.swissre.com.

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Certain statements and illustrations contained herein are forward-looking. These statements (including as to plans, objectives, targets, and trends) and illustrations provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to a historical fact or current fact.

Forward-looking statements typically are identified by words or phrases such as “anticipate”, “assume”, “believe”, “continue”, “estimate”, “expect”, “foresee”, “intend”, “may increase”, “may fluctuate” and similar expressions, or by future or conditional verbs such as “will”, “should”, “would” and “could”. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the Group’s actual results of operations, financial condition, solvency ratios, capital or liquidity positions or prospects to be materially different from any future results of operations, financial condition, solvency ratios, capital or liquidity positions or prospects expressed or implied by such statements or cause Swiss Re to not achieve its published targets. Such factors include, among others:

• further instability affecting the global financial system and developments related thereto;
• further deterioration in global economic conditions;
• the Group’s ability to maintain sufficient liquidity and access to capital markets, including sufficient liquidity to cover potential recapture of reinsurance agreements, early calls of debt or debt-like arrangements and collateral calls due to actual or perceived deterioration of the Group’s financial strength or otherwise;
• the effect of market conditions, including the global equity and credit markets, and the level and volatility of equity prices, interest rates, credit spreads, currency values and other market indices, on the Group’s investment assets;
• changes in the Group’s investment result as a result of changes in its investment policy or the changed composition of its investment assets, and the impact of the timing of any such changes relative to changes in market conditions;
• uncertainties in valuing credit default swaps and other credit-related instruments;
• possible inability to realise amounts on sales of securities on the Group’s balance sheet equivalent to their mark-to-market values recorded for accounting purposes;
• the outcome of tax audits, the ability to realise tax loss carryforwards and the ability to realise deferred tax assets (including by reason of the mix of earnings in a jurisdiction or deemed change of control), which could negatively impact future earnings;
• the possibility that the Group’s hedging arrangements may not be effective;
• the lowering or loss of one of the financial strength or other ratings of one or more Swiss Re companies, and developments adversely affecting the Group’s ability to achieve improved ratings;
• the cyclicality of the reinsurance industry;
• uncertainties in estimating reserves;
• uncertainties in estimating future claims for purposes of financial reporting, particularly with respect to large natural catastrophes, as significant uncertainties may be involved in estimating losses from such events and preliminary estimates may be subject to change as new information becomes available;
• the frequency, severity and development of insured claim events;
• acts of terrorism and acts of war;
• mortality, morbidity and longevity experience;
• policy renewal and lapse rates;
• extraordinary events affecting the Group’s clients and other counterparties, such as bankruptcies, liquidations and other credit-related events;
• current, pending and future legislation and regulation affecting the Group or its ceding companies and the interpretation of legislation or regulations;
• legal actions or regulatory investigations or actions, including those in respect of industry requirements or business conduct rules of general applicability;
• changes in accounting standards;
• significant investments, acquisitions or dispositions, and any delays, unexpected costs or other issues experienced in connection with any such transactions;
• changing levels of competition; and
• operational factors, including the efficacy of risk management and other internal procedures in managing the foregoing risks.

These factors are not exhaustive. The Group operates in a continually changing environment and new risks emerge continually. Readers are cautioned not to place undue reliance on forward-looking statements. Swiss Re undertakes no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.

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SOURCE: Swiss Re