From HRT, flu and obesity to terrorists and pirates, the rising tide of emerging risks encompasses everyday pressures and extreme circumstances. Saxon East outlines the 10 areas of concern, global and close to home, where insurers would do well to keep a watching brief

With the recession deepening, anti-capitalist protesters taking to the streets of the City and fraud on the increase, insurers and brokers have their hands full. But that’s no reason to stop watching the horizon for new and emerging risks. Corporate clients tend to cut spending on emerging risks at times of financial difficulties – after all, who wants to insure themselves against the possibility of avian flu at some point in the future when the business may not survive to witness it? And brokers and insurers have tended to be slow to capitalise on emerging risks, preferring to develop and sell familiar products. But as businesses seek new revenue streams, so do corporate clients need insurance against the rising tide of risks stemming from climate change, technology and increasing civilian unrest. Here we outline 10 of the biggest emerging risks to watch:

Climate change

Windstorms, hurricanes, droughts and floods are just four of the big threats to life and property arising from climate change.

Scientists are still not agreed on what the exact effects of climate change will be, but there is now general consensus that hurricanes will increase in severity. Hurricane Katrina is estimated to have caused almost $90bn (£60.8bn) worth of damage after flooding New Orleans in August 2005.

Stephen Roberts, head of strategic risk at Marsh, says insurers will seek more information about property and business interruption risk linked to adverse weather events.

Trevor Maynard, Lloyd’s emerging risk manager, says that to assess risk properly, insurers will need to carefully monitor climate change trends – such as increases in landfall weather events (storms on land).

Water

With the added effect of climate change causing increased droughts, territorial disputes over water could become more frequent, especially in the Middle East, which could generate claims for political risk and interruption of business.

Maynard says countries that are desperate for water have turned to fossil-drilling: digging deep underground to extract water that may have lain untouched for years. Saudi Arabia, Egypt and Australia are among countries where fossil water cannot be replenished, leaving communities exposed to water shortage. A lack of water could drive up local food prices, and homes and factories could be damaged as the land sinks into a depression because all the underground water has been drained.

The declining world economy has added to the fears of a shortage in water supply. Jim Jeal, Heath Lambert’s national project management director, says: “Obviously the economic climate is creating real worries and the availability of suppliers will bring pressure on developing countries. These could develop further in view of the swiftness of the downturn.”

Nanotechnology

This sounds like something out of science fiction, but is likely to be one of the biggest areas of technological advancement of the 21st century.

Nanotechnology is the manipulation of tiny particles – no more than a billionth of a metre in dimension – to produce materials and devices that could revolutionise medicine, electronics and energy production.

One exciting example is that of tiny devices being used to deliver targeted chemotherapy to cancerous cells. Unlike conventional chemotherapy, this does not indiscriminately wipe out both good and bad cell tissue.

Maynard says such a complex area of innovation could prove to contain hidden risks similar to those that emerged during the asbestos-related claims of the1990s

Political and economic risk

As globalisation accelerates over the next two decades, developed countries are likely to place even more of their resources in emerging countries which are more likely to be politically and economically unstable. Paul Davidson, managing director of Global Markets, Financial Solutions, part of Willis, says insurers will be keeping a watchful eye on physical assets owned by multinationals and financial services in emerging countries, such as manufacturing plants, oil production facilities and banks. In addition, they will be monitoring all the contracts that are tied to emerging countries.

Political risk insurers could be affected by a range of factors from social unrest, strikes and labour shortages to outright political interference. In oil-rich Venezuela, President Hugo Chavez has threatened to nationalise the country's banking system and largest steel producer.

Fiona Denton, executive director in Lockton’s terrorism practice, says the G20 protests, the recent closure of Bangkok airport, and the latest massacre in Darfur are all physical manifestations of social unrest, which is likely to get worse over the next 20 years. Global demand for coverage related to war, insurrection and rebellion will continue to grow significantly, she says.

Obesity

The government predicts that if no action is taken on obesity, 60% of men, 50% of women and 25% of children will be obese by 2050. At present the risk to insurers is low, as the legal system accepts that obesity is a matter of personal responsibility. McDonald’s won a case involving obese US teenagers in 2002.

However, insurers are being warned that they should keep a close eye on developments. A spokesman for the Insurance Information Institute has warned that given the history of litigation arising from asbestos, environmental and tobacco claims, “it would be a mistake to dismiss [obesity claims] as far-fetched”.

Hormone Replacement Therapy (HRT)

HRT has been highly effective in helping many women cope with the symptoms of the menopause. But there is now some evidence to suggest that HRT has been shown to alter the risk of some cancers, especially breast cancer, and cardiovascular diseases. Potential future class actions by users against HRT manufacturers could lead to claims under drug companies’ general and products liability coverage.

About 2 million women in the UK use HRT, the Office for National Statistics says. The potential claims liability is huge.

Piracy

Forget any romantic notions of pirates waving cutlasses that you may have acquired from films or historical fiction: today’s pirates are dangerous criminals who steal millions from cargo ships every year.

The biggest threats are to the oil-trading routes off the Horn of Africa, with a recent high-profile incident being the hijacking in January by

Somali pirates of the oil tanker Sirius Star, containing assets worth $250m. The pirates eventually escaped with their ransom payments and released the ship. The risk of such incidents can lead to insurers paying out on kidnap and ransom cover, or even hull and marine if the ship is damaged.

Roberts says: “Historically, substantial routes have not necessarily had the level of security that they require: understandably, because piracy was not seen as a threat. The use of private security firms is increasing.”

Terrorism

September 11 is engraved so indelibly in the public consciousness that the image most people associate with terrorism is of human life and physical structures being destroyed. Yet insurers need to be aware of the wide range of other ways in which fanatics could strike.

Roberts says: “[Terrorism] is not just an individual working with a bomb. For instance, you have fraud, theft and espionage.” For example, cyberterrorism could cause the collapse of utilities and telecoms.

As a result, says Roberts, organisations are doing more employment background screening. Cleaners coming on site after hours and subcontractors who have access to IT are also being checked.

Viruses

In 1918 Spanish flu killed up to 100 million people. Scientists considering the risk of another serious flu epidemic say the question is not if, but when. In the case of a mass outbreak of a flu virus, claims for interruption of business could be huge. Governments and corporations could be sued for negligence if they fail to supply adequate drugs and provisions to combat the threat to the public or their employees.

Perhaps surprisingly, Roberts says the threat from avian flu is actually quite low. So far there have been relatively few deaths from bird flu and its spread has been contained. However, the prominence of the virus has prompted companies to review their business crisis management strategies. “It may have been the excuse needed to review overall robustness of supply chains,” Roberts says.

Product quality

China is the workshop of the 21st-century world and Western appetite for toys, clothes and electronics produced in China and other Asian countries seems set to continue. Product quality from Asian sources can be unpredictable, which increases the risk of UK retailers being sued by unhappy customers.

Jeal of Heath Lambert says: “A rising problem surrounds the quality of products and parts or materials from China. Economic conditions are hitting manufacturers hard, and there are concerns that strict quality controls may not be being adhered to. This could lead to larger exposures for retailers and corporations around brand protection and health and safety.”