Navigating the Evolving Landscape
By Tiana Zhao, FSA, CERA
Actuary of the Future, October 2024
The world is facing a complex and rapidly evolving landscape of risks that threaten global stability and prosperity. From escalating geopolitical tensions and trade conflicts to the looming specter of economic downturns and disruptive technological change, a perfect storm of emerging risks is challenging governments, businesses, and individuals alike. As the interconnected nature of our globalized world amplifies the potential impact of these risks, it has become increasingly crucial for decision-makers to understand and proactively address the multifaceted challenges that lie ahead. This article will explore some of the key emerging risks and their implications, offering insights to help navigate these turbulent times.
Geopolitical
The ongoing conflict between Russia and Ukraine has had significant ripple effects across the global supply chain. As two of the world's major producers of key commodities like oil, natural gas, wheat, and metals, the war has disrupted the flow of these critical raw materials. This has led to sharp price increases and shortages of these goods, which are essential inputs for a wide range of industries. The disruption of energy and food supplies, in particular, has been felt worldwide, with many countries and businesses struggling to adapt. The sanctions imposed on Russia by Western nations have further complicated global trade and logistics, as shipping, banking, and other supply chain operations have been severely impacted. The Russia-Ukraine conflict has thus emerged as a major supply chain crisis, with far-reaching economic consequences that are still unfolding. Geopolitical tensions and economic uncertainty caused by the conflict have led to an increased demand for gold as a safe-haven investment, driving up gold prices.
Next, looking at the conflict between China and Taiwan, should China choose to invade Taiwan, TSMC (Taiwan Semiconductor Manufacturing Company), which is the world’s largest independent semiconductor foundry, providing advanced chip manufacturing services to many of the world’s leading technology companies, will not be able to operate. This would have significant impacts on the world of investment. Out of S&P500’s Magnificent 7 (yes, the name was inspired by the movie), Apple and Nvidia are both customers of TSMC and their stocks could face significant decreases. This is partially why the U.S. has been working to boost its domestic semiconductor manufacturing capabilities in recent years.
Debt
We live in a world of debt. As of March 2024, the U.S.’s debt to nominal GDP ratio is 124.7%, up 0.4% from prior quarter.[1] Taking a step back, debt is the accumulation of deficits when government spending is more than its revenue. So, where does the government spend its money? Take the U.S. as an example, some common areas of spending are Social Security and Medicare, military and education. As of May 2024, The U.S. spends almost one-fifth of total federal spending on Social Security, which provides benefits to nearly 67 million beneficiaries or around 20 percent of American population.[2] That number could continue to increase given the rapid aging of the U.S. population. Let’s look at some statistics to demonstrate the trend of aging population:
- The U.S. population age 65 and over grew nearly five times faster than the total population over the 100 years from 1920 to 2020, according to the 2020 Census. The older population reached 55.8 million or 16.8% of the population of the United States in 2020.[3]
- There are currently roughly 62 million adults ages 65 and older living in the U.S., accounting for 18% of the population. By 2054, 84 million adults ages 65 and older will make up an estimated 23% of the population.[4]
Aging population triggers concerns about the solvency of programs like Social Security and Medicare and the U.S. is not the only country that faces this issue. In 2015, China announced it would allow all couples to have two children, effectively ending its one child policy that was introduced in 1979. In 2021, China furthered relaxed its family planning policies, allowing couples to have up to three children in response to the country’s declining birth rate and growing concerns of an aging population. In 2023, France raised the retirement age from 62 to 64 with a requirement that the retiree has worked at least 43 years. All of these are reforms to lessen government burdens on an aging population with hopes to decrease the government debt. I think we will continue to see governments across the world taking actions to address the issue and aim to reduce debt level. When a country has too much debt, there would be concerns about the government’s ability to repay its debt. This undermines confidence in the currency, leading to currency devaluation, imported inflation and domestic investors looking to foreign investments to diversify their portfolios.
Bubble in Stock Market?
If you paid attention to the stock market in the past few months, you would’ve seen Nvidia’s stocks roaring after announcing Q1’24 earnings and the 10-for-1 stock split. Nvidia stock has increased by over 150% YTD as of July 2024 and over 2500% in the last five years. At the same time, S&P500 has seen tremendous growth since the dip during the pandemic. This makes investors wonder: Is there a bubble in the stock market?
Personally, this reminds me of the Dot-com bubble in the early 2000s. In 1998–1999, low interest rates facilitated an increase in start-up companies. The dot-com bubble burst in March 2000, with the technology heavy NASDAQ Composite index peaking at 5,048.62 on March 10 (5,132.52 intraday), more than double its value just a year before. By 2001, the bubble's deflation was running full speed. A majority of the dot-coms had ceased trading, after having burnt through their venture capital and IPO capital, often without ever making a profit. But despite this, the Internet continues to grow, driven by commerce, ever greater amounts of online information, knowledge, social networking and access by mobile devices.[5]
In a financially volatile environment like the current one, it is important to keep in mind the fundamentals when investing. Just like how a leashed dog will never be far away from its owner no matter how much it could seemly be rushing ahead or dragging behind, a company’s stock prices would eventually land at a spot that’s justifiable by its earnings. This is also a good reminder to diversify your portfolios and to look into insurance products like participating and adjustable insurance and indexed and variable universal life products to achieve peace of mind and reduce volatility in your portfolio.
Environmental
The world has faced severe environmental challenges this year ranging from extreme heatwaves, devastating floods, tornadoes, etc. Figure 1 below illustrates the billion-dollar weather and climate disasters this year in the U.S. only.
Figure 1
U.S. 2024 Billion-dollar Weather and Climate Disasters[6]
Citation: NOAA National Centers for Environmental Information (NCEI) U.S. Billion-Dollar Weather and Climate Disasters (2024). https://www.ncei.noaa.gov/access/billions/, DOI: 10.25921/stkw-7w73
On top of that, the past UN Climate Change Conference (COP28) called for the financial industry to focus more on environmental and social governance (ESG). This encourages actuaries to start thinking more about climate change and considering it as part of the enterprise risk management framework.
Let’s take real estate, a common investment for insurance companies, as an example and look at how climate risk could affect the value of real estate.
The impact of climate change on the value of real estate can be significant and far-reaching. As the effects of global warming become more pronounced, factors such as rising sea levels, increased frequency and intensity of natural disasters, and changes in temperature and precipitation patterns can all have a direct influence on the desirability and value of properties. Coastal regions, for example, are particularly vulnerable to the effects of sea-level rise, with properties located in low-lying areas facing an increased risk of flooding and erosion. This can lead to a decline in property values as homeowners and investors become more cautious about investing in these areas. Similarly, regions that are prone to wildfires, hurricanes, or other extreme weather events may see a decrease in property values as the perceived risk of owning a home in these areas increases. Furthermore, changes in temperature and precipitation patterns can also impact the value of real estate. For instance, areas that experience prolonged droughts or water scarcity may see a decline in property values as the availability of essential resources becomes a concern. Conversely, regions that become more desirable due to milder climates or improved access to natural amenities may experience an increase in property values as demand for housing in these areas rises. Overall, the impact of climate change on real estate values is a complex and multifaceted issue, with the specific effects varying depending on the location, the severity of the climate-related changes, and the adaptability of the local community. As the effects of climate change continue to unfold, it will be crucial for homeowners, investors, and policymakers to closely monitor these trends and take proactive measures to mitigate the risks and capitalize on the opportunities presented by a changing climate.
Disruptive Technology
The insurance industry has been significantly impacted by the emergence of disruptive technologies in recent years. These technological advancements have transformed the way insurance companies operate, interact with customers, and deliver their services. One of the most significant disruptive technologies in the insurance industry is the rise of InsurTech, which refers to the integration of technology and innovation within the insurance sector. InsurTech startups have introduced new business models, products, and services that challenge traditional insurance practices. For example, the use of telematics and wearable devices has enabled insurance companies to gather real-time data on customer behavior and risk profiles, allowing for more personalized and dynamic pricing models.
Another disruptive technology that has impacted the insurance industry is the increasing use of artificial intelligence (AI) and machine learning (ML). These technologies have enabled insurance companies to automate various processes, such as claims processing, underwriting, and customer service. AI and ML algorithms can analyze large datasets, identify patterns, and make more accurate risk assessments, leading to more efficient and effective decision-making. The rise of blockchain technology has also had a significant impact on the insurance industry. Blockchain-based platforms can facilitate secure and transparent transactions, streamline claims processing, and enable the development of new insurance products, such as parametric insurance. This technology has the potential to reduce administrative costs, improve data integrity, and enhance trust between insurers and policyholders.
Furthermore, the COVID-19 pandemic has accelerated the adoption of digital technologies in the insurance industry. With the shift toward remote work and contactless interactions, insurance companies have been forced to rapidly adapt their operations and customer engagement strategies. This has led to increased investment in digital platforms, online sales channels, and virtual customer service solutions. In conclusion, the insurance industry has been profoundly impacted by disruptive technologies, which have transformed the way insurance companies operate, innovate, and deliver their services. As the pace of technological change continues to accelerate, insurance companies must remain agile, embrace new technologies, and adapt their business models to stay competitive and meet the evolving needs of their customers.
Conclusion
The insurance industry is facing a number of emerging risks that will require careful monitoring and strategic planning in the years ahead. From the growing threat of cyberattacks to the potential impacts of climate change, insurers must be proactive in identifying, assessing and mitigating these evolving risks.
Tiana Zhao, FSA, CERA, is a senior associate actuary in Corporate Actuarial Analysis at Sun Life in Toronto, Canada. She is also an active volunteer with the Society of Actuaries as part of the Marketing and Distribution section council and the editorial board for The Actuary Canada. She can be reached at j.zhao@sunlife.com.
Endnotes
[1] https://www.ceicdata.com/en/indicator/united-states/government-debt--of-nominal-gdp#:~:text=United%20States%20Government%20Debt%3A%20%25%20of%20GDP,-1969%20%2D%202024%20%7C%20Quarterly&text=United%20States%20Government%20debt%20accounted,Mar%201969%20to%20Mar%202024.
[2] https://www.pgpf.org/budget-basics/how-does-social-security-work#:~:text=Today%2C%20Social%20Security%20is%20the,percent%20of%20the%20American%20population.
[3] https://www.census.gov/library/stories/2023/05/2020-census-united-states-older-population-grew.html#:~:text=The%20U.S.%20population%20age%2065,the%20United%20States%20in%202020.
[4] https://www.pewresearch.org/short-reads/2024/01/09/us-centenarian-population-is-projected-to-quadruple-over-the-next-30-years/#:~:text=There%20are%20currently%20roughly%2062,estimated%2023%25%20of%20the%20population.
[5] https://en.wikipedia.org/wiki/Dot-com_bubble
[6] NOAA National Centers for Environmental Information (NCEI) U.S. Billion-Dollar Weather and Climate Disasters (2024). https://www.ncei.noaa.gov/access/billions/, DOI: 10.25921/stkw-7w73