This year, the Unipol Group decided to integrate its Emerging Risk Management Framework into a Report on the identification of priority Emerging Risks, the analysis of the main impacts and main actions implemented by the Group, adopting an all-round vision to take into account the interconnections between the various Emerging Risks and driving forces.
Thanks to the work of the Reputation & Emerging Risk Observatory, which proactively analyses changes in the external context in its Report on Macro Trends, the Unipol Group has equipped itself with a tool that ensures the adoption of an all-round proactive approach to identify, evaluate and prioritize the main Emerging Risks.
The proactive analysis of Emerging Risks enables their integration within the Group Risk Management Framework, causing it to evolve towards proactive Risk Management and allowing the Group to prepare in time not only to be ready to manage emerging threats but also to seize opportunities.
1. Demographic Change
The main dimensions for the demographic analysis of population are volume, composition and geographical distribution. Changes in these dimensions may arise through various components, such as birth rate, longevity, morbidity, geographical mobility, etc. The effects produced by the combination of these changes, also in synergy with effects arising from other emerging risks, come about over multiple time horizons and substantiate in aging population, transformation of social relations and internal and external migrations.
In Italy, among the various effects of demographic changes, one may observe effects such as aging population and transformation of social relations, which will be relevant in the next 5-10 years, followed by other effects such as reduction in the population size, which will have a longer-term relevance. The study of demographic changes shows that these effects will be associated with other impacts, such as the increase in chronic morbidity and co-morbidity rates, increase in the rate of single-person households, increase in the generation gap, depopulation of rural areas, changes in working habits, in conjunction with an increase in the use of emerging technologies within a broader concept of demographic transition where the development of emerging countries will lead to other forms of potential impacts, such as competition for resources.
Anticipating the effects of demographic changes guarantees the possibility of preparing in time to mitigate potential risks and seize opportunities, considering that the direction of these trends is difficult to reverse, even in a context in which there is no lack of elements of uncertainty.
2. Climate change
The increase and accumulation of greenhouse gas emissions in the atmosphere have produced global warming, which alters climate models by increasing the frequency and intensity of extreme weather events, such as storms, floods, droughts and forest fires. This is one of the most urgent challenges and most complex issues of our time, also for the insurance sector, which, faced with an increase in compensation claims, is under growing pressure.
The increase and accumulation of greenhouse gas emissions in the atmosphere have produced global warming, which alters climate models by increasing the frequency and intensity of extreme weather events, such as storms, floods, droughts and forest fires. This is one of the most urgent challenges and most complex issues of our time, also for the insurance sector, which, faced with an increase in compensation claims, is under growing pressure.
The increase and accumulation of greenhouse gas emissions in the atmosphere have produced global warming, which alters climate models by increasing the frequency and intensity of extreme weather events, such as storms, floods, droughts and forest fires. This is one of the most urgent challenges and most complex issues of our time, also for the insurance sector, which, faced with an increase in compensation claims, is under growing pressure.
3. Cyber risk and cyber insecurity
The widespread use of data management technology at every stage of life exposes us to forms of risk linked to the tampering of information systems and adulteration of information. These phenomena produce malfunctioning information processes which may have an impact on a company’s operating continuity, social relations and human health, given the growing development of digital, robotic and lifestyle monitoring systems, as well as of Generative AI.
The voluntary or accidental tampering with digitized information (data) may undermine important aspects of information management, such as the confidentiality and integrity of information, but also its availability and access to it, thereby increasing a sense of insecurity towards these technologies, which are now so essential that we can no longer do without them.
Cyber risk is characterized by constantly changing and evolving threats. Cyber threats, to which we are all subject, change with the advancement of pervasive technology within companies and people’s daily lives. Digital technologies are essential for economic development and enable the massive production of information ranging from the processes they enable to any other imprint left by our online activities. Unauthorized or limited access to this information may produce adverse impacts on various organizational aspects, from malfunctions in operating processes to repercussions on reputation. Furthermore, cyber risk is closely connected to other emerging risks as it is a channel through which geopolitical instability, AI tampering and supply chain attacks may propagate in increasingly sophisticated ways that are difficult to predict.
4. Artificial Intelligence
Artificial Intelligence is capable of emulating some human abilities, such as learning and reasoning. In particular, Generative AI is able to create new content based on learned models and data, opening up innovative scenarios, but also causing ethical and operational issues to emerge with regard to intellectual property, use of data, discrimination and AI “hallucination”. AI analyses should universally consider the impacts of AI on all the various components of society: from a technology standpoint in terms of use of data and characteristics of the models developed; in relationships with people in terms of impact on the world of work, governance, data ethics and responsibility; in relationships with the planet in terms of energy consumption and use of materials for the construction of components and, finally, the specificities of the business sector within which it is used in terms of strategic advantage and advantage on the supply chain.
In the insurance sector, AI may have a significant impact: on the one hand, it can improve risk assessment, the efficiency of insurance processes and create highly personalized customer experiences, on the other, it requires a review of business models and skills, with all the complexities of a heavily regulated sector.
There is therefore the need to define AI governance, to develop corporate policies based on international regulations capable of guaranteeing the responsible and safe use of technology, with the right balance between IT processes and business demands. In a world closely connected through technology, how AI evolves will also depend on the development of geopolitical dynamics and on the ability of various international players to cooperate and coordinate for a common management of global AI-related challenges.
5. Geopolitical Instability
Geopolitical tensions represent a constant source of concern at a global level. Due to the interdependence that characterizes today’s economies, such tensions may, if concentrated in certain areas, trigger a series of chain effects that may have an impact on the world economy, on the supply chains and on the financial markets.
Geopolitical instabilities may take different forms, such as armed conflicts, economic conflicts, cyber wars or alliances, political polarization and dynamics that increase instability and geopolitical fragmentation.
Geopolitical tensions may disrupt global supply chains, blocking the shipment of goods and materials, leading to production delays, increased costs and poor product availability with repercussions on the global economy and on volatility in the financial markets, making it difficult to draw up long-term plans.
Risks associated with geopolitical conflicts are not limited to the economic aspect. They may also have serious social and environmental consequences, including mass displacement, human rights violations and damage to the environment, with long-term impacts on the stability and sustainability of the communities involved.
These scenarios of geopolitical uncertainty and instability also constitute a significant challenge for the insurance sector. Insurance companies must evaluate and manage emerging risks effectively, developing policies to protect their investments and operations in complex geopolitical contexts.
6. Impacts on Supply Chains
In the current global scenario marked by geopolitical, economic and climate crises, the probability of events that may cause disruptions and shocks for global supply chains increases, generating business interruptions and disrupting the supply of essential resources, such as fuels, minerals or rare metals and foodstuffs, which may result in soaring prices. In this inflationary scenario, businesses will have higher production costs and lower profitability and households a reduced purchasing power.
In addition to the direct impact on the accounts of businesses and insurance companies, inflationary pressure may have adverse repercussions on global economic growth due to changes in the yield of investments as a result of the central banks’ monetary policies and may cause a decrease in household consumption due to a lower propensity to purchase.
The scenarios that emerge from the combination of these factors emphasize the importance of risk mitigation strategies such as “reshoring” and “friendshoring”, diversification of supply sources, updates to insurance terms and conditions in order to adapt them according to an approach tailored to the client company based on its characteristics and the business sector in which it operates, in addition to the adoption of more advanced technologies to improve predictive models and anticipate possible threats.
Insurance companies will have to face various kinds of critical issues, such as increased costs of claims as a result of higher costs for repairing and/or reconstructing assets and greater complexity in risk management due to unpredictable changes in event dynamics.
7. Biodiversity loss
The depletion of natural resources as a result of human activities, such as deforestation, mining, intensive farming and agriculture, urbanization, industrialization, is the main cause of loss of biodiversity. This effect is accelerated by other forces of change, such as, for example, climate change and globalization, which, by modifying the physical conditions of the environment and allowing the movement of species between different areas, favour the establishment of invasive species that degrade the specific richness thus causing the collapse of natural ecosystems.
All of this translates into impacts on ecosystem services, i.e. services that Nature provides, including (i) Procurement Services, production of tangible goods such as water, food, commodities and medicines, (ii) Regulatory Services, climate and quality of air, pollination, moderation of extreme winds, etc., (iii) Support Services, species habitat and maintenance of genetic diversity, (iv) Cultural Services, physical and mental recreational, aesthetic, tourist and spiritual services. The collapse of Ecosystem Services may have direct repercussions on physical health and psychophysical well-being, but also on food security and on the profitability of economic activities over time (physical risks).
It is important to adopt actions aimed at reducing pressure on Nature, encouraging virtuous behaviour and fostering the transition towards a “Nature-positive” economy supported by regulatory changes, such as the adoption of EU rules for the protection and reclamation of natural and technological environments and the production of low environmental impact technologies, and supported by market preferences, such as encouraging the development of sustainable cities (transition risks).
8. Digital Disintermediation and New Players
Digital disintermediation is the provision of services that allow the consumer to be in contact with the producer in real time. This development of alternative distribution channels as a result of digitization witnesses the customer-supplier relationship no longer intermediated by dedicated figures but directly connected through Internet services. This phenomenon applies to many areas of life, from e-commerce, to home banking and insurance services, where new digital players are emerging. Furthermore, social media have given voice to new figures such as influencers, who can directly reach the public through digital channels, but who make it more difficult to verify the authoritativeness of the messages being communicated.
While offering undoubted advantages, digital disintermediation has ramifications with other emerging risks, such as the spread of disinformation and fake news, since the absence of filters and the speed of propagation of information online may cause false or distorted news to spread rapidly. This is particularly worrying for the most vulnerable segments of the population, who are often sensitive to misleading content, as it may shape their opinions and behaviour in harmful ways or expose them to scams and digital fraud.
These risks also have a direct impact on the insurance industry, where trust is key. Insurance companies are now forced to compete with new market players, with potential effects on their business models, as well as on profitability and reputation.
The risks associated with digital disintermediation may be mitigated by strengthening the reputation capital and customer experience, developing innovative products and services that meet emerging customer needs and adopting an omnichannel strategy.
9. Skills mismatch
Skills mismatch is a global phenomenon which refers to the mismatch between the skills required by the job market and those actually possessed by people. The growing degree of digitization, the development of new ways of working, the spread of multiculturalism within working environments have increased the complexity of methods for preparing people for market demand.
People who, in addition to being technically trained in new subjects and technologies, are able to develop “human skills”, such as empathy, high social skills, ability to relate to others and manage complexity, will be at an advantage. Managing human capital becomes increasingly complex in the presence of a growing aging population and greater diversity in terms of values, skills and aspirations. Enhancing generational and educational differences and diversity in cultural background and gender requires inclusive management strategies that promote equity and integration.
Skills mismatches may be addressed through continuous training, targeted up-skilling and re-skilling programs and more generally with lifelong learning in order to be able to change the work paradigm from a dynamic perspective. Strengthening cross-cultural and adaptability skills enables the development of multifaceted professional figures, improving the employability of workers and the competitiveness of companies capable of building an inclusive society and facing the challenges of the future.
10. Social Polarization increase and social tensions
Social polarization consists in group fragmentation within a society based on differences in values, opinions or interests caused by factors such as ideologies, income inequality and different access to opportunities, and cultural and generational gaps.
The exacerbation of polarization leads to increased social tensions, with significant risks for social and economic stability, such as anger among the most marginalized groups, with possible repercussions on political stability, increased poverty and lack of financial inclusion for certain segments of the population, thus creating a barrier that prevents the most vulnerable groups from improving their condition. The phenomenon of social polarization translates into intolerance and aversion to compromises and negotiations, posing an obstacle to the creation of a collective effort to address the global challenges of our time, such as reducing inequalities and fighting climate change.
The insurance sector is not immune to the effects of social polarization, as the lack of financial inclusion may restrict access to insurance products, especially for the most vulnerable segments of the population, thus generating a reduction in demand and the search for increasingly lower prices, with the related competitive pressure. Furthermore, social fragmentation may undermine trust in institutions, including the insurance system.
Addressing social polarization is a complex challenge that requires a joint commitment from all social players. Thanks to their role as financial intermediaries, insurance companies are able to promote financial inclusion by offering accessible insurance products and financial education and risk management programs for their customers, while promoting their own growth and success in the long-term period.