was the most unpredictable year of the last three decades
QBE Unpredictability Index
Advancements in technology and machine learning are not only changing the ways businesses operate but are also driving a shift in work culture. Different working patterns and agile workforces are increasingly being enabled by improvements in communication.
The ‘globalisation’ of property will also have implications for physical
of the world’s population is predicted to live in cities by 2050
and political risks. Most of the world’s fastest growing cities are in Africa and Asia. More development
in areas prone to natural catastrophes are changing the impact of weather and catastrophic events in terms of physical damage, on a scale not previously seen. The cost of natural disasters has been steadily climbing – extreme weather in 2017 and 2018 cost a total of $487bn, according to data from Swiss Re.
Conversely, unpredictability in the political arena is also having a knock-on effect on real estate development as uncertainty drives cautious investors to adopt a ‘wait and see’ attitude before committing to new projects. Equally, property occupancy rates are also feeling the
brunt of economic and political factors as more premises are unoccupied or remain unoccupied for longer – creating a wholly different risk profile to those properties that are in use.
There is already a trend for industrial, commercial and retail properties to incorporate the use of green energy (including heat recovery and solar farms) while also reducing their water consumption and reliance on single use items, but these can bring enhanced or different inception or damage risks.
Potentially, higher environmental standards or green expectations
could shorten the lives of buildings, making them obsolete or uneconomical. An increasing proportion of new builds are “green”, according to the World Green Buildings Trend report. Almost half of respondents to the survey said the majority of new buildings constructed will be green by 2021, compared with 27% in 2018, according to the report.
New business models, technology and changing environmental standards are expected to affect demand for certain types of commercial real estate. According to PWC, rapid changes in the application of digital technology will continue to reduce demand for retail and office space, but increase
demand for new types of warehousing, close to the customer. For example, internet shopping has resulted in the decline of high street shopping and the creation of huge automated logistics centres. Older or underutilised buildings may need to be refurbished to bring them up to standard, extend their lives or for
change of use – for example, many industrial sites in recent years have been redeveloped into residential, retail and office spaces. However, combustible materials, hot working and electrical installations during refurbishment result in a higher risk of fire.
The pace of change also comes into play post loss. Increasingly, companies that have suffered a loss want flexibility when rebuilding a facility or replacing plant and equipment to consider advances in technology or environmental options.
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Automation is another factor affecting building use with robotics increasingly replacing human workers in factories and offices. According to the International Federation for Robotics - the number of robots has increased by 114% over the past five years, and is expected to double again by 2021. Several companies now operate so-called ‘lights-out’ factories- which are
fully automated. Robots outnumber humans 14-1 at Philips electric razor manufacturing facility in the
Robots outnumber humans 14-1 at Philips electric razor manufacturing facility in the Netherlands
Netherlands while just four people oversee robots at Fanuc’s Japanese robotics plant in Oshino.
Automation and robotics will reshape property exposures. For example, an increased reliance on technology places more emphasis on machinery breakdown risks and business interruption. Plant and equipment is more complex and higher value than in the past, and specialised
machinery can take much longer to repair or replace.
Increased electronics and machinery are also a challenge for fire risk and firefighting. Electronics and machinery tend to generate heat and run the risk of electrical fires, while the design of automated factories and logistics centres is centred around efficiency, rather than human intervention. Access may be
inhibited during a crisis while the absence of employees can also affect the severity of loss – fewer people mean a reliance on fire detection systems, while fire fighters may be more inclined to tackle a
blaze from the outside of the building where lives are not at risk.
There are also the hard to predict, unintended consequences of using new technology in a factory or
warehouse setting. Whereas a human will down tools in the case of a fire, the same may not be true for robots which may indeed hasten the spread of a fire if they continue to operate during a blaze. The fire at a state-of-the-art logistics centre in the UK earlier this year is a case in point. Despite improvements in risk management and safety regulation over the years, insurers have experienced an increase in commercial fire claims. While there is no single cause for this, machinery/electronics and refurbishment of buildings has played a part in several large claims. The adoption of state-of-the-art technology has also figured in this. Different things can go wrong in commercial properties now and the
Despite improvements in risk management and safety regulation over the years, insurers have experienced an increase in commercial fire claims.
impact of incidents can be more pronounced. Scenario planning needs to evolve at the same pace as technology and risk managers need to be able to think quite laterally when putting together their ‘what-if’ scenarios.
So too are the risk mitigation practices business can put in place. The insurance industry has excelled at protecting against property risk for over three centuries but now, more than ever, the importance of risk management comes to the fore. While risk transfer mechanisms will continue to provide a security blanket for companies, in the face of
rising unpredictability, it is the combination of insurance and risk engineering that will see businesses through the vagaries of an ever-shifting landscape.
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