The pandemic has increased financial inequalities, the risk of climate change and the threat posed by “zombie” companies.
The income inequality gap has widened as a direct result of the COVID-19 pandemic. The problem was accelerated by rising poverty levels throughout 2020.
At the same time, the credit and financial markets have been exposed to even greater risks as a result of governments’ decisions to keep unsustainable “zombie” companies operating during the crisis. Climate change also continues to be a major problem, with an urgent need to decarbonize the global economy, especially in the area of urban transport.
These are just some of the main findings of Swiss Re SONAR 2021: new perspectives on emerging risks report released this month.
“When COVID-19 appeared at the end of 2019, few people could have predicted the magnitude of its impact,” said Patrick Raaflaub, risk director of the Swiss Re group.
“Many of the measures taken to mitigate the pandemic have themselves created new risks, ranging from widening the inequality gap to the dangers of restarting under-sustained industrial operations. As reinsurers, it is essential that we have the best possible underwriting for these emerging risks. It is also important to remain vigilant on emerging risks that are already known, especially with regard to climate change, as they will impact us in the years to come. “
1) Income inequality
The multiple blockages around the world have had the unintended consequence of exacerbating the gap between rich and poor.
While many white-collar workers were able to continue working from home, those in low-wage face-to-face service sectors such as retail and hospitality suffered high unemployment.
In the United States alone, leisure and hospitality unemployment climbed to 40% in April 2020 from a base of 5% at the start of last year. This eclipsed the UK, where the unemployment rate in these sectors peaked at 10.9% in the three months to January 2021.
In addition, the number of middle-class people in the world was 54 million fewer than expected in 2020, according to the Pew Research Center. Of particular concern was the disproportionate effect on young people struggling with pressured labor markets and lack of career opportunities, with a 10% unemployment rate for those under 25 in the United States.
This drop in income will have a knock-on effect on the demand for insurance. He also stressed the need for affordable private insurance for middle and lower income groups.
“The question is how important will insurance be compared to other household spending needs,” said Bernd Wilke, Managing Director of Swiss Re, Group Qualitative Risk Management. “When it comes to rent, for example, insurance probably won’t matter. “
He continued, “The only way to answer this is for insurance companies to rethink their products. They must be tailored to the needs of the poorer middle class households in terms of coverage and affordability. If insurance is successful in bringing such products to market, they might even increase and close the protection gap at the same time, as these products can have much greater adoption than current products.
2) The rise of the zombies
Another growing problem is that of so-called unsustainable zombie businesses backed by government stimulus measures. These companies represent a potential burden on the financial sector, especially in terms of rising credit default rates.
Low interest rates have prompted companies to take out bank loans, creating the risk of large-scale default on these loans once government support dries up and these zombie companies go insolvent.
This is reflected in the uptake of bank loans by small and medium-sized businesses in the United States, which increased 6% in 2020, said the Institute of International Finance.
To avoid an upsurge in defaults and bankruptcies, Swiss Re has advised governments to carefully decide how and when to withdraw their support programs. They must also focus on supporting companies that will be viable in the long run and restructuring those that are not, the reinsurer said.
“As we haven’t seen bankruptcies increase during the COVID downturn like in previous recessions, this creates a risk that defaults will increase,” Wilke said.
“Insurers should take this into account when selecting risks and pricing credit and surety lines as well as corporate bonds to prepare for a sudden risk of bankruptcy in different markets. Close monitoring of the political actions of governments, central banks and financial regulators is essential in this context. “
3) Carbon Targets
The report also concluded that rapid decarbonization was essential to offset the extreme effects of global warming and climate change.
Among the main target areas was transport, which contributes 24% of global CO2 emissions.
“In the United States, most cities were built for cars,” Wilke said. “This has the effect that outside the city centers in the suburbs, longer distances have to be traveled for shopping and shopping. In such cases, adapting the car to be emission-free and equipped with software to prevent accidents is a promising course to take.
He added: “To get more people to use public transport and to do it more efficiently, planners will need to integrate technology more into their thinking. Applications must allow smooth travel with all modes of movement so that existing space is used as efficiently as possible.
One of the answers is the shift to electromobility, hydrogen fuel cells and non-fossil alternative fuels, which is already well underway and will alleviate overcrowded urban centers.
To this end, rental electric scooters have been successfully deployed in many cities, while self-driving delivery vehicles and clean-powered flying taxis could also be possible future solutions.
Yet city planners face the ongoing challenge of finding ways for new electric vehicles to safely coexist with traditional transport and infrastructure. And injuries from electric scooters and e-bikes are a potential new source of liability claims, while sharing personal information within these rental models can also lead to data theft, increasing the need. update the legislation and regulations governing them.
“As cell phones are a key storage device for data today and are often connected to other hard drives and cloud storage, it is possible to hack their applications to access them,” said Wilke. “Systems that keep the user’s identity secret can also be compromised.”
As the world emerges after the pandemic, these risks will become more common. How they are approached will go a long way in defining this new world order. &