Ferma highlights climate and geopolitics as key risk trends

By Rebecca Delaney

May 12 - (The Insurer) - Climate change, AI, human capital and geopolitical risks are among the medium- to long-term trends with the most potential to disrupt European businesses and society, according to the Federation of European Risk Management Associations (Ferma).

Ferma's inaugural New Exposure Trends report warned that short-term thinking and cognitive biases at all levels are leaving companies and governments "highly vulnerable" to widespread, long-lasting impacts from emerging risk trends.

The report, which was published by Ferma’s foresight committee on Monday, underlined several systemic barriers hindering long-term risk management. This includes the prioritisation of immediate gains over future resilience, which is driven by market pressures, regulatory constraints and operational priorities.

Behavioural economics – including biases such as status quo bias, optimism bias and groupthink – also contribute to resistance to change and an overestimation of companies' ability to manage risk, the report argued.

The report therefore called on risk managers to establish a longer-term risk horizon within their organisations, as well as to actively counter cognitive biases to strengthen resilience at both company and societal levels.

SYSTEMIC RISK TRENDS

The report recommended that risk managers embed climate change at the core of their strategies.

"Climate change is an evolving critically systemic risk, forcing risk managers to adapt to sustainability all across European companies. Being a critically systemic risk means that it magnifies other risks, and intersects with economic developments, geopolitical situations and social structures," said Paulino Fajardo, head of disputes, EMEA at Herbert Smith Freehills and member of Ferma's foresight committee.

"Whilst the problem goes up, the insurance market goes back. There is less capacity and the level of premiums is higher. It's the normal reaction of the insurance market to the growth in size and frequency of disasters that makes the insurance market retract. The obvious consequence is that it poses a bigger vulnerability on corporations. This is not sustainable."

Fajardo added that uncertainty for risk managers is compounded by the perception that sustainability poses a threat to business competitiveness, as well as growing scepticism around conventions, treaties and other multilateral tools to protect against climate change.

Multilateral fragmentation was further highlighted by Daria Krivonos, CEO of Copenhagen Institute for Futures Studies and Ferma foresight committee member, who underlined that the increasingly complex and evolving geopolitical landscape has the potential to impact the EU's stability, security and long-term prosperity.

"One of the key concerns is the erosion of global governance and the weakening of multilateralism. The decline is driven by the deepening of the power imbalances and the lack of consensus between major international partners," said Krivonos.

"This is compounded by the surrounding uncertainties about the future direction of the new U.S. administration and signs that they are more likely to pursue a unilateral and aggressive foreign policy. Systemic geopolitical upheavals, be it the fragmentation of multilateralism or increased rivalries, is all demanding a proactive approach to risk management."

Geopolitical risks are no longer confined to the traditional military or political arenas, now spanning physical, digital and cognitive domains.

In terms of digital transformation, Mantix CEO and foresight committee member Sebastian Wieczorek said that the EU currently stands at a "critical crossroads" as AI reshapes economies and societies at a rapid pace.

"For European risk managers, the immediate challenge is to support the realisation of the immense opportunities AI offers while mitigating the long-term uncertainty it introduces," he said.

"AI gives rise to new cybersecurity threats. If AI systems embedded in crucial sectors such as finance, energy, and distribution are compromised, cascading failures could follow. In such scenarios, the emergence of catastrophic, potentially uninsurable cyber risk must be taken seriously."

Wieczorek continued that the ethical and legal dimension of AI development and deployment requires "careful attention", particularly in sectors such as healthcare, employment and financial services.

"Technology acceleration is a defining megatrend and, perhaps more than anything, it is a force multiplier. Risk professionals must be vigilant in recognising the potential for contagion across different areas of technology risk," Wieczorek concluded.