Climate change is the greatest strategic risk currently facing the property/casualty insurance industry, with demographic changes taking priority for the life insurance industry, according to new study from Ernst & Young.

The results are based on interviews with more than 70 industry analysts from around the world to identify the emerging trends and uncertainties driving the performance of the global insurance sector over the next five years. The study identified risks in three broad areas — macro, sector-specific and operational threats. It identified the top 10 risks and five emerging threats.

In addition to climate change and demographics, the third-biggest risk is catastrophic events, followed by emerging markets, regulation, evolving distribution models, technological change, evolving sources of capital, legal risk, and geopolitical or macroeconomic risks.

Many of these risks are interlinked, it noted, with the consequences from one risk having direct impact on others. The analysts told Ernst & Young these are the strategic risks that industry leaders must manage if they are to maintain competitive positions, raising questions about how these risks will change what companies offer customers, the way they offer services and where.

The analysts also identified five emerging risks, just outside the top 10, which have the potential to become as significant during the next five years. These are: over reliance on model-based risk management; threats to industry reputation; losing the war for talent; increasing exposure to global regulatory heterogeneity; and the possible emergence of entirely new risks.

“Change is constant. Ten years ago, would climate change have been top of anyone’s risk list? Demographic change was obvious back then, but it is now a reality,” said Peter Porrino, global director of Insurance Services at Ernst & Young. “Strategic risks vary for individual companies, but for the insurance sector as a whole these are the threats the experts say will have the greatest and most far reaching consequences. Insurers have to deal with them now, as they will change the business environment, the competitive pressures and the business opportunities. They have to view risk management as a way to improve operations, financial performance, and shareholder value.”

Porrino concludes, “As the insurance environment becomes more complex companies need to shift from traditional risk management approaches to integrated processes that add greater value. Understanding how to respond to current trends is paramount for insurers as they seek to manage risk, optimize performance, and increase operational effectiveness. The top three risks — climate change and demographic shifts in core markets, and catastrophic events — are far reaching social and environmental trends with complex long term ramifications for the industry as a whole.”