Evolving black swans are making the industry nervous

With up to five “evolving black swan events” currently hovering in the periphery of firms’ risk registers, the insurance industry is “incredibly nervous”, according to Kenneth Saldanha, senior managing director at professional services firm Accenture.

Talking to sister publication Insurance Times, Saldanha confirmed that there is sector-wide “black swan fear right now”.

A black swan event is defined as “an event that is rare [and] very important” while also being “difficult to have predicted” yet “obvious in hindsight”.

With this in mind, Saldanha described the five potential black swan events hitting the insurance market as being the Covid-19 pandemic and its aftermath, “broad-based political conflict”, supply chain issues, the current “energy vector” and climate change, including weather events such as flooding in Australia and hurricanes in the US.

“It’s a multiplicity of black swan possibilities, occurring in the face of what already feels like [an] operationally stressed environment [due to the] Covid recovery and inflation pressures,” he explained.

“It’s a difficult arena to play in [especially as the] reserve requirements for all of these things start to fly in a huge way.”

Taking comfort in ‘robustness’ of the market

Despite the widespread risks that these potential events pose, Saldanha and his colleague Jamie Althrop, UK and Ireland insurance lead at Accenture, remain positive that because the insurance industry has successfully navigated black swan events in the past, it will do so again in the future.

“You have to expect black swan events,” said Althrop.

“History dictates that unexpected things are going to happen, but because they’re black swans, you can’t necessarily predict what they are going to be. You can have ideas and thoughts, but the mere fact it’s a black swan is it hasn’t happened before.

“We’ve had our fair share of black swan events over the last few years and the insurance industry has done a really good job of dealing with those events. It shows the robustness of the global insurance market and its ability to deal with those things.

“As a society, we should take comfort in that as well. With a couple of black swan events recently, insurance businesses have taken it very much in their stride.”

Saldanha added: “We’re very optimistic about the industry’s ability to resiliently navigate [black swan events] because it’s been doing that. It’s a credit to the industry that [it has] continued to navigate [these events] even in the face of elevated attritional, as well as black swan, risk.”

More education needed

In the face of possible black swan events, however, Althorp believes the “real problem in insurance at the moment” is “reminding people how insurance works”.

This has become a particularly important rhetoric following the Covid-19 pandemic and the confusion between clients, insurers and brokers around associated business interruption claims.

Althorp explained: “There’s a real problem in insurance at the moment of reminding people how insurance works because insurance has a bad rap for people saying ‘I’m paying all these premiums, but I’m not necessarily - as an individual - claiming on it’.

“Insurance as a business - people have forgotten how it works.”