Swiss Re has released a new report that examines the threats that will shape the post-COVID-19 risk landscape. These threats range from the unintended consequences of COVID-related government intervention to the dangers of restarting under-maintained industrial facilities.
The report, SONAR 2021: New Emerging Risks Insights, also highlights the need to decarbonize the global economy, especially in the area of urban transport.
“When COVID-19 emerged in late 2019, few could have predicted the magnitude of its impact,” said Patrick Raaflaub, group chief risk officer at Swiss Re. “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 reinsurers, 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.”
COVID-19 lockdowns widened the income inequality gap, according to the report. Although many white-collar workers were able to continue their jobs remotely, lower-wage service sectors like retail, gastronomy and tourism faced high unemployment. In the US, leisure and hospitality unemployment rose from 5% at the beginning of 2020 to 40% in April 2020. In the UK, unemployment in those sectors peaked at 10.9% in the three months to January. That was significantly lower than the US thanks to the UK’s job retention program.
The income gap isn’t only an issue for developed economies, according to Swiss Re. Pew research found that the growth of the global middle class was 54 million people fewer than predicted in 2020, with India alone accounting for 60% of the reduction.
Lower-income households fared better in countries where government finances allowed for stimulus packages. In the US, stimulus measures increased the incomes of low-wage workers during the first few months of the pandemic, the report found.
According to Swiss Re, a particular concern was the disproportionate impact of the pandemic on younger people already struggling with tight labor markets and a lack of career opportunities. In the US, the unemployment rate for people under 25 is elevated at 10%. In the UK, the rate is 12%.
“The reduction in income for many sections of the global community threatens the recent growth in insurance demand seen in many markets,” Swiss Re said. “It also places the emphasis on the development of affordable private insurance solutions to fill the protection gap for middle and lower-income segments.”
During the COVID-19 pandemic, many governments enacted financial relief measures to prevent corporate bankruptcies. In the US, company bankruptcies dropped 5% year over year in 2020 – a reversal of a trend of increasing bankruptcies from 2017 to 2019, according to the report. Government stimulus measures helped many viable companies stay solvent. However, stimulus programs have also propped up so-called “zombie companies” – firms that would not have otherwise been viable.
Zombie companies are a potential burden for the financial sector – especially as regards increased credit default rates, Swiss Re said. Lower interest rates are spurring companies to take up bank credit, creating a risk of large-scale defaults on those loans once government support expires and zombie companies become insolvent.
“To avoid a potential surge of defaults and bankruptcies, governments will need to carefully decide how and when to withdraw stimulus packages,” Swiss Re said. “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.”
Swiss Re said that rapid decarbonization of the global value chain was “essential to avoid the most extreme effects of global warming and climate change.” One area highlighted was transportation, which currently contributes about 24% of global carbon dioxide emissions from fuel combustion.
The move to electric vehicles, hydrogen fuel cells and non-fossil-based fuel alternatives is already well underway. For example, many cities already have sophisticated micro-mobility systems in place, such as rentable electric scooters.
“The benefits of the revolution in clean transport are clear,” Swiss Re said. “However, there are emerging risks.”
City planners must create ways for new e-vehicles to safely coexist with traditional transport and infrastructure. Injuries from e-scooters and electric bicycles are also a potential source of liability claims, and the rental model of many of these platforms requires sharing personal information – creating the risk of possible data theft.
“Legislation and regulation will therefore also need to be updated in order to mitigate these risks,” Swiss Re said.
In addition to COVID-19-related risks, the report examined new technological risks in the global marketplace. For example, it studied the importance of accounting for age, gender and other factors in product resting.
“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,” Swiss Re said.
Other topics covered in the report include the longer-term health burden of COVID-19, risks of restarting industrial facilities that were under-supervised or not maintained during the pandemic, and the ethics of digital nudging.