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Survey Report

Extreme Risks for Insurers 2019-20

Insurance Consulting and Technology|Reinsurance
Insurer Solutions

February 4, 2020

Extreme risks are potential events that are unlikely to occur but that could have a significant impact on economic growth and asset returns should they happen. We asked (re)insurers to assess how these risks could affect them.

Why do extreme risks matter?

“Most risk management is really just advanced contingency planning and disciplining yourself to realise that, given enough time, very low probability events not only can happen, but they absolutely will happen. The definition of infinity is that if you wait long enough, everything happens.” - Lloyd Blankfein, Goldman Sachs then-CEO, July 20131

This quotation highlights one of the important reasons for considering extreme risks. In addition, we have come up with a few others:

  • We believe that the world is a complex adaptive system2 where sudden and violent regime change is possible. In this description of the world, the tails of the “complexity distribution” are considerably fatter than those of a normal distribution. That means extreme events are much more likely than we previously thought.
  • We all only live once3, in a single universe, and we face problems in series, not parallel. This seemingly naive statement, as we argued in a previous paper4, is in fact often overlooked in the area of finance and economics when thinking about the “average”. This type of thinking has a profound impact on how an extreme risk event should be considered. The very unlucky person who was hit by a lightning strike does not take any comfort from knowing that this is extremely unlikely to happen to anyone. When confronted with an extreme event, there is no going back in time and “diluting” the impact with other less negative outcomes in parallel universes. One must deal with its consequences.
  • Last but not least, is that when it comes to assessing risks, particularly low-probability, high-impact events, our limited understanding of the world can have a material impact. In fact the uncertainty and our proneness to error can dominate when the extreme events involve poorly understood natural phenomena, complex social dynamics such as financial markets, or new technology5. For example, suppose that our body of knowledge indicates that some catastrophic event X has an extremely low probability Pr(X) of occurring. The margin of error associated with this estimate, resulting from flaws in our body of knowledge, could be significant. If this seems a strange concept at first, consider that our body of knowledge once thought the solar system was geocentric. In fact the whole history of scientific progress is one of correcting flaws in the previous body of knowledge. Extreme events might be much less extreme than we thought.


1 “Goldman CEO on risk: The worst ‘absolutely will happen’” 2013.
2 More on this can be found in Thinking Ahead Institute’s paper on stronger investment theory.
3 Belief in reincarnation does not change the logic of our argument.
4 “The irreversibility of time – or why you should not listen to financial economists”, Thinking Ahead Group, Willis Towers Watson, 2012
5 “Existential risk prevention as global priority” Global Policy, Nick Bostrom, University of Oxford, 2013

Highlights of the survey results

Building on Willis Towers Watson Thinking Ahead Institute’s long-running analysis of how extreme risks may impact investment, we asked (re)insurers from late 2019 to early 2020 to assess how those same risks could affect them.

Under six broad headings of political, financial, economic, environmental, social and technological risk, the survey encompassed 30 individual risks ranging from anarchy and alien invasion to a currency crisis and cyber warfare. Over 100 representatives of insurers from around the world evaluated the risks based on their likelihood, intensity, scope and certainty.

By these measures (see Table 1), insurers rank global temperature change, sovereign default and terrorism as carrying the most wide-ranging risks. These findings again signal how perceptions of risk types, severity and endurability have changed over time.

Growing external pressures on both (re)insurers and their clients in areas such as corporate social responsibility, investment choices and public policy means increasingly that climate risk for insurers extends far beyond natural catastrophes (which are nonetheless still ranked fourth in the list of extreme risks). Meanwhile, a sovereign default or major terrorism incidents clearly have the potential to affect multiple lines of business.

Other risks considered relatively likely, such as a banking crisis, organized crime, and infrastructure failure are typically regarded as more endurable and/or local. Meanwhile, several other risk categories, such as a pandemic, nuclear contamination or the breakdown of capitalism, that are recognized as potentially crushing, are viewed as less likely or tempered by high degrees of uncertainty.

The top 15 risks for (re)insurers

The more likely a risk, the higher up the ranking it should be. Likewise, the less uncertain a risk, the greater the intensity of impact and the larger the scope of the impact, the higher up the ranking a risk should be.

Table 1. Top 15 extreme risks ranking
Rank Risk Brief description
1 Global temperature change Earth’s climate tips into a less-habitable state (hot or cold)
2 Sovereign default Non-payment by a major sovereign borrower
3 Terrorism A major ideologically-driven attack
4 Natural catastrophe An extreme natural catastrophe event on an unprecedented scale
5 Organized crime A significant increase in the scale of illegal operations by organised crime in a major economy
6 Infrastructure failure An interruption of a major infrastructure network
7 Food/water/energy crisis A major shortfall in the supply of food/water/energy
8 Cyber warfare Internet being weaponised that causes severe damage to virtual systems vital to the economy and even to hard infrastructure
9 Banking crisis Banking activity halts due to lack of liquidity
10 Currency crisis Extreme movement between exchange rates
11 Deflation Goods and services prices fall for an extended period
12 Political extremism Rise in power of extremist groups
13 Stagnation A prolonged period of little or no economic growth
14 Nuclear contamination A major nuclear disaster, leading to large radioactivity release and lethal effects
15 Insurance crisis Insolvency within insurance sector

For further information on extreme risks and what they might mean for your business, please contact your Willis Towers Watson consultant or

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Extreme Risks for Insurers 2019-20 PDF .7 MB

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