The number one emerging risk to property and specialty underwriting lines is the “cascading” fallout from flood, fire and other natural perils, according to Swiss Re’s latest Sonar report.

And casualty lines are deemed most at risk from increasing use of AI, which could trigger claims across many areas of business.

The reinsurer's emerging threats bulletin is published each year, and for 2024 it identifies 13 risk themes to watch. Here are the three it says insurers are most exposed to.

Beyond broken infrastructure – the cascading effects of natural catastrophes
Potential impact: high 

For property and specialty lines, Swiss Re designates this as the top risk.  

It refers to the effects on systems such as energy, water and transport from floods, bushfires and other natural catastrophes that can generate losses in property and business interruption insurance. 

Bushfires leave a “toxic legacy”, polluting water and cutting access, while floods can clog rivers and basins with sediment, inundating treatment plants and leaving communities vulnerable to disease. 

“Where there is coverage, damage to critical infrastructure like transmission lines and power plants from natural peril events results in claims,” the report says. 

“Cascading effects” can include critical service outages, potentially generating claims for business interruption including closure costs, power blackouts, water contamination and transport issues; property damage such as food spoilage; and life insurance liability. 

Contingent business interruption to organisations reliant on continuous power supply such as hospitals, data centres and security systems may also arise, and insurers themselves may face operational disruptions. 

Artificial intelligence – unintended insurance impacts and lessons from silent cyber 
Potential impact: high 

This is deemed the greatest threat to casualty underwriting lines. 

“Insurers will need to develop an understanding of intended and unintended effects, and design products that mitigate the risks,” the report says. 

Operational shutdowns resulting from AI system malfunctions could trigger business interruption claims, while professionals may face claims for AI-driven negative impacts on end users. 

Manufacturers of AI-enhanced products could be subject to property damage and/or bodily injury claims resulting from failures or malfunction, or where product liability regulations are violated. Directors’ and officers’ and liability claims may also be triggered. 

“AI-driven hiring practices that inadvertently introduce bias could trigger discrimination lawsuits and claims against employers,” the report says. “Insurers could face claims increases due to erroneous advice or misinterpretations delivered by AI-driven underwriting tools. Models that inadvertently introduce bias could trigger discrimination lawsuits and claims against insurance companies.” 

Copyright violations and/or patent infringement caused by AI models or data could result in liability claims, while corporate leaders may face accusations of failing to oversee/mitigate the risks associated with implementation of AI-driven processes. 

“Generative AI that produces text, images, videos or other outputs comes with a multitude of benefits, but also risks,” Swiss Re says. Harm caused by AI can be “physical, psychological, societal or economic, and it is unlikely a single insurance policy will cover all potential risks that AI presents”. 

Currently, AI risks are not explicitly mentioned, limited or excluded in policies, though exposures may be covered by different policies already in existence. Swiss Re likens “silent AI” to “silent cyber”, with insurers finding some risks were covered by non-cyber policies, even though that was not the intention. 

“With silent AI, it is time to prevent repetition of the same mistakes by understanding which risks traditional policies already (silently) cover. With the fast development of AI and associated regulations, some of today’s assumptions may turn out to be wrong or incomplete.” 

The report says insurers need to analyse how AI risks are dealt with in existing policies and how best to deal with them in future.  

Cyber-enabled fraud – a new era for organised crime 
Potential impact: medium 

This is the greatest risk to insurer operations and regulation, Swiss Re says. 

Scaling of criminal activities with new technology means the costs to victims can be huge as organised crime “goes digital”. 

Cyber-enabled fraud “no longer requires high technical acumen”, the Sonar report says, and crime-as-a-service products or “business models” can be bought online.  

Operational fraud losses may be direct or through claims fraud – for example, fake emails from a hospital to insurers charging for fictitious care. For insurers, covers for liability, cyber and so on may be triggered, and preventive measures can increase operational costs. 

In the US, the FBI estimates non-health insurance fraud could exceed $US40 billion ($60 billion) a year – equivalent to a premium jump of $US400-$US700 ($602-$1053) per average household. 

See the report here.