Allianz Risk Barometer 2020 -
From market developments and fire to loss of reputation or brand value

Devastating typhoons in Asia and recordbreaking wildfires in Australia were among the disasters which dominated global headlines in 2019. However, economic losses from natural catastrophe events actually declined 20% year-on-year to around $133bn, according to reinsurer Swiss Re [1]. Insured losses also fell to $50bn from $84bn, driven by Hurricane Dorian in North America ($4.5bn) and typhoons Faxai ($7bn) and Hagibis ($8bn) in Japan.

“2019 was another year without a single major nat cat event comparable in economic loss size with those of the 2017 Atlantic hurricane season (the costliest on record),” says Carina Pfeuffer, Cat Risk Analyst, AGCS. “Rather, aggregated losses from multiple small- to medium-sized events have led to widespread devastation and caused still considerable overall insured losses.”

In recent years, significant non-weather-related nat cat events, such as earthquakes or tsunamis, have been rare and, consequently, the importance of these risks has declined in the Allianz Risk Barometer. “Nevertheless, nat cat risks are in the top three risks in many regions across the globe that are frequently affected by meteorological, geophysical, climatological and hydrological events (e.g. US, China and Japan),” says Pfeuffer. “At the same time climate change/increasing volatility of weather is at its highest ever position in the Allianz Risk Barometer (#7)".

2019 was characterized by high market volatility, which will continue in 2020, according to Ludovic Subran, Chief Economist at Allianz. Uncertainties caused by trade conflict and political risks will continue to affect markets. Lowgrowth-low-inflation may hide more direct pass-through from political risks to financial markets, and the need to manage negative externalities of interventionist policy-makers.

Along with rising volatility, the directionality of global markets will be hard to predict. Historically, fixed income assets have been the outperformers in late cycle periods. A severe economic downturn would lead equity markets to a double digit downward correction. The superdovish central banks will keep bond yields at very low levels. “We expect the 10 year Bund at -0.4% at end-2020 and the 10 year U.S. yield at 1.7%,” says Subran.

“Higher volatility from the US-China trade conflict will keep the dollar strong. The renminbi should depreciate further. A more fragmented world also means volatile commodity prices, currencies and capital flows for emerging markets.”

Fire and explosion incidents may rank as the sixth top peril for businesses in 2020 according to Allianz Risk Barometer respondents but it is actually the number one cause of financial losses based on the results of insurance claims analysis by AGCS. Such events have caused in excess of €14bn ($15.7bn) worth of losses over a five-year period through 2018 – accounting for almost a quarter (24%) of the value of more than 470,000 claims examined by AGCS. This is significantly ahead of the second top cause of loss, aviation collision/crash incidents (14%).

Even the average insurance claim from a fire totals almost €1.5mn ($1.65mn). Although fire losses for large companies have reduced with better protection and risk management, property/asset values per square meter in some industries and manufacturing sites have quadrupled over the past decade, which means that when an event does happen the cost of any damages or subsequent business interruption (fire is also the most frequent driver of business interruption claims) significantly increases. Even a small fire can have a large impact dollar wise, which can ripple through an entire sector. Only by assessing and maintaining a regular upkeep of fire mitigation practices onsite can companies lower the risk of loss.

Corporate scandals involving reputation can originate from an increasing number of scenarios – from cyber breaches to social media to corporate misconduct to even supplier misconduct. Calculating the value of a company’s reputation can be difficult but when bad news comes – and a company suffers a blow to its reputation its value becomes obvious – market value can collapse with astonishing speed. It is estimated that more than one quarter of reputational crises spread within an hour and over two-thirds within 24 hours. The impact of reputation events on stock prices is believed to have doubled since the introduction of social media.

Despite the growing risks, many companies are still inadequately protected against the consequences of a reputational crisis. Effective planning and crisis management have become essential and a professional response can make a difference. Research shows that the value of a company that effectively manages a reputational crisis can rise by 6% the following year. Increasingly, insurance can also provide tangible assistance to an intangible risk, providing solutions such as protection against reduced net operating profit related to a reputational event, rectification advice costs, a 24/7 reputational crisis response and strategic media analysis reports.

New technologies present considerable opportunities for businesses. However, they can also bring risks, sometimes with unintended consequences. According to Allianz Risk Barometer respondents, the increasing utilization of Artificial Intelligence (AI), which is an important driver of change in many industries today, is the new technology that also comes with the greatest future risk potential. “From chatbots to autonomous cars, more widespread implementation of AI applications is transforming industry and society, bringing benefits such as increased efficiencies, new products and less repetitive tasks,“ explains Michael Bruch, Global Head of Liability Risk Consulting/ESG at AGCS.

“For example, in the insurance industry, AI applications will improve the transaction process, with many benefits already apparent. Customer needs can be better identified. Policies can be issued, and claims processed more quickly and cheaply. Large corporate risks, such as business interruptions, cyber security threats or macro-economic crises, can be better predicted. Meanwhile, chatbots can assist customers on a 24/7 basis.”

In the course of 2019, recession risks became more and more visible. In 2019-20, superdovish central bankers, and a new fiscal impulse (US, China and Europe, to a lesser extent) will help avoid a global recession, according to Ludovic Subran, Chief Economist at Allianz. However, flatlining growth will be the norm. Over the summer of 2019, escalating political risks (US-China rivalry, Brexit, a new government in Italy) exacerbated the pockets of recession visible in the first half of the year in trade, manufacturing and a dozen of economies.

“Looking ahead, a soft landing remains our baseline scenario,” says Subran. “Consumers will be a source of resilience. While monetary stimulus has worked well in the past, we believe it will be increasingly ineffective at current rates while it will feed into higher vulnerabilities. Debt accumulation, from already high levels, could start to be a cause of worry in the US and China, notably with regards to the private sector, and in the case of a too-fast-and-badly-managed exit from such accommodative monetary policies.”