Emerging Risk Report

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 the aging of the general population, the shrinking of the number of young people amongst the population, and the transformation of social relations, which will be relevant in the next 5-10 years, followed by other effects such as the 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, even within the younger age groups, the increase in loneliness - recognised as one of the main public health challenges, the worsening of the generation gap, the 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.

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. 

Climate change generates new risks, which can be divided into acute physical risks arising from extreme and sudden weather events such as thunderstorms, floods or hailstorms; chronic physical risks resulting from long-term changes such as temperature change, desertification or rising sea levels; and finally, transition risks linked to the measures adopted to combat climate change, such as the decarbonization of the economy. The study of these changes should consider the regulatory implications linked to political decisions to encourage the ecological transition, the legal implications associated with disputes on the environmental impact of a company’s business activities, the technological implications arising from the use of new technologies, the effects of changes in market preferences, but also the implications on reputation linked to a company’s loss of reputation caused by the adverse impact of its activities on the environment. 

Addressing this type of change requires a set of joint and targeted actions in order to prevent the relevant trend from growing as much as possible and prepare increasingly reliable predictive models capable of detecting the development of an extreme climate event in advance and reduce the wide protection gap that characterises our country. For insurance companies the challenge is twofold: on the one hand, perfecting expertise in the analysis and management of climate risks, on the other providing products in line with emerging needs, even in the face of more stringent regulatory requirements.

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.

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 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 aspects of society: from a technological perspective, it is essential to consider the use and authenticity of data, which may be compromised or contaminated following cyber attacks, and the transparency of algorithms, so as to limit and recognise any biases and hallucinations; in terms of relationships with people, impacts 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, for the specificities of the business sector within which AI is used in terms of strategic advantage and along 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.

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.

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).

Environmental Pollution 

Environmental pollution represents one of the main threats to the health of people and the planet, with potential effects that extend well beyond the environmental sphere, also involving social, economic and insurance sectors. This risk manifests itself in multiple forms, depending on the environment – air, water, soil – or the source, for example pollution from plastic and other persistent materials or noise and light pollution. 

The introduction of harmful substances or actions alters the natural balance, directly compromising biodiversity and quality of life. Prolonged exposure to environmental pollutants is correlated with an increase in several chronic pathologies, both physical and mental, with direct impacts on health and, consequently, on Health insurance claims. It may also lead to an increase in claims related to environmental liability, particularly in the industrial and real estate sectors, where the management of buildings and production cycles with low environmental efficiency can give rise to disputes and claims for compensation. Companies that do not adopt sustainable practices or that invest in highly polluting activities may also suffer significant reputational damage, with repercussions on market value and stakeholder trust. 

It is important for the insurance sector to strengthen its capacity to assess and anticipate environmental pollution risks, also contributing to the transition towards a more sustainable and resilient economy and a future with greater balance between Nature, Society and Technology.

Critical Infrastructure Breakdown 

The collapse of critical infrastructures, such as power grids, transportation, communications or IT infrastructures, tends to have significant and consequential cascading effects, making it a high-impact risk capable of generating ripple effects on a local and global scale. Causes can range from cyber-attacks to geopolitical conflicts, earthquakes, floods, or even solar storms. In all cases, infrastructure vulnerability translates into operational disruptions, economic losses, health risks and environmental damage. 

In the insurance sector, these events lead to an increase in claims in life and non-life segments, with a particular impact on business interruption claims; they can also compromise the liquidation capacity of companies, slowing down response times, increasing costs and generating reputational damage. 

At a macroeconomic level, the prolonged collapse of strategic infrastructures can trigger shocks on financial markets, with medium-long term effects on the growth potential of businesses and the Country system. In extended crisis scenarios, an increase in social unrest can also be observed, with a consequent increase in accidents related to vandalism and material damage. 

The disruption of essential services such as electricity and water can have immediate effects on human health, which are exacerbated in the event of environmental disasters. Furthermore, investments in securities related to the affected infrastructure may suffer a significant loss of value, with consequences for the portfolios of institutional investors.

Insurance base transformation

Insurance base transformation represents a challenge for the insurance sector, linked to the management of structural changes in the assets to be insured and in consumption models. The transition from ownership to access (sharing economy), the rise of the circular economy and the growing importance of intangible assets – such as reputation, data and intellectual property – are profoundly changing the insurance landscape. 

These changes are leading to a progressive reduction in the demand for traditional insurance products and the emergence of new needs for the protection of intangible assets and digital services. Continuous technological evolution further contributes to redefining risk profiles, making it necessary to adapt certain evaluation and management models. There is a growing shift from a B2C to a B2B model, with significant implications in terms of management complexity and offer customisation. 

In order to address this transition, the insurance sector is called upon to innovate if it wants to maintain the ability to adequately respond to new insurance needs and not compromise stakeholder trust.

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.