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Swiss Re warns of credit risks from unviable ‘zombie’ companies

8th June 2021 - Author: Matt Sheehan

The latest SONAR report from Swiss Re has identified a number of threats that will shape the future post-COVID risk landscape for insurers, including increased credit and financial market risks due to unviable ‘zombie’ companies, which have been kept alive by government support programs.

Swiss ReOther major risks highlighted by Swiss Re relate to the dangers of restarting undermaintained industrial facilities, and the urgent need to decarbonise the global economy, especially in the area of urban transport.

“When COVID-19 emerged in late 2019, few could have predicted the magnitude of its impact,” noted Swiss Re’s Group Chief Risk Officer Patrick Raaflaub.

“Many of the actions taken to mitigate the pandemic have themselves created new risks, from the widening inequality gap to the dangers of restarting under-maintained industrial operations,” he explained.

“As re/insurers, it is essential that we have the best possible understanding of these emerging risks. It is also important to remain vigilant on the emerging risks that are already known – especially regarding climate change – as these will impact us for years to come.”

RMS

In response to pandemic lockdown measures, many governments decided to enact financial relief programmes to prevent corporate bankruptcies, but Swiss Re notes that company bankruptcies were actually down by 5% in the US year-on-year in 2020, reversing a trend of increasing rates from 2017 to 2019.

It’s likely therefore that many otherwise unviable businesses have been propped up by stimulus measures, meaning there is the potential for a surge of defaults and bankruptcies once government help is withdrawn, Swiss Re warns.

As part of the SONAR 2021 report, Swiss Re also pointed to the income inequality gap, which it says has been worsened by COVID lockdowns.

“The reduction in income for many sections of the global community threatens the recent growth in insurance demand seen in many markets,” Swiss Re said. “It also places the emphasis on the development of affordable private insurance solutions to fill the protection gap for middle and lower-income segments.”

Other emerging risks identified by Swiss Re concerned the effects of global warming and climate change, with transportation flagged as a particularly important area for decarbonisation.

While the move to clean transport promises many benefits, emerging risks are also presents. These include city planning challenges, injury potential, sharing of personal information and data theft, and changes to legislation and regulation.

Besides COVID-19-related emerging risks, Swiss Re’s SONAR also examined new technological risks in the global marketplace. For example, the report examined the importance of accounting for gender, age and other factors in product testing.

Further topics included the longer-term health burden of COVID-19, the risks of restarting industrial installations that have been under-supervised or not maintained during the pandemic, and the ethics of digital nudging.

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