Finance is at the heart of any economy – those providing credit, holding deposits among other services. Closely related is the insurance sector – activities focused handling the risk for when things go wrong. Businesses who undertake any of these activities are placed in Industry Division K. This division includes organisations undertaking financial transactions, the regulation of financial activities, and those offering financial protection. Whilst the prominence of physical cash in transactions is receding, flows in the order of hundreds of billions of dollars occur each day. And, like other industries, financial and insurance services are continually changing. That is what this article is about – change. What could happen in terms of careers and business in this industry. It is a futurist’s take on how things might pan out over the next 10 years or so.
Specifically, though, for the purposes of this article the future of this industry is viewed through the lenses of climate change and computerisation. For these are the two global megatrends that are shaping much of the world as we know it. There are other global megatrends, such as technological convergence (where increasingly innovation rises from collaborations between experts in disparate fields of scientific study) but their influence on the financial and insurance services industry is not as significant.
About the global megatrend of climate change
The rising atmospheric concentration of green-house gases (ie. carbon dioxide, methane, nitrous oxide, and a range of industrial gases) has had an impact, and will continue to have an impact, upon our world. Scientists have measured a direct correlation between the rising concentration of carbon dioxide in the atmosphere (rising from an historical peak of 300ppm, to about 420ppm today) and the rising average global surface temperature (increasing 0.180C every decade for the last 40 years).
This heating effect is have an impact upon the natural world in many ways. Take the Atlantic Meridional Overturning Circulation as an example of one of the many environmental systems that are being influenced. This particular system of ocean currents acts as a heat exchanger between the Equator and the North pole. It relies upon the relative densities of different ocean temperatures and salinity at key locations. As climate change has warmed the ocean, variations have been introduced into this process. Ocean temperatures aren’t as cool in some places as they should be. In other places, the increased tempo of glacier melts has reduced ocean salinity, and thus the water’s weight. The result - changes to this Atlantic circulation system and thus to the intensity and frequency of weather extremes.
About the global megatrend of computerisation
We are well aware of how the power of computers has increased over time. We may be familiar with Moore’s law, which states that the power of a computer doubles every two years while at the same time its cost halves. Or we may have heard the anecdote that there is more power in a common smartphone, than in all the computers that NASA used to put Apollo 11 on the moon.
However, while it is true that computer hardware has increased in power over the years. So too has the capabilities and performance of the software that runs on the hardware. For the counter proposition to the Apollo 11 anecdote is this – why aren’t you using your smart doorbell to guide a manned probe to the lunar surface! For well coded software is fundamental to unlocking the power of hardware.
It is efficient and effective software, also called computer code or applications, through which we interact with computer hardware. These improvements are due to the often unheralded advances behind the scenes of the productivity, functionality and power of computer languages and software development processes over the years.
During the 1980s software began to be developed for the personal computer. Computer memory was limited and programs were installed from floppy disks. Toward the turn of the century, desktop browsers started to be used to access software running on internet-based servers. Software languages and tools were developed to increase the functionality of this new computing ecosystem. And now, computing devices of all form factors use cloud-based applications that are increasingly being developed with some form of automation rather than manually by human developers.
The impact of these two influences
What of the impact of the climate change megatrend upon the financial and insurance services industry?
Changing local climatic conditions together with an increasing severity and frequency of extreme weather events escalate the risks that insurance companies underwrite. These can be categorised as physical, transition and liability risks. Flood damage to domestic properties and exposure to the deterioration of assets managed by local government agencies are examples of physical risk. Concerning this category, insurance payouts have increased 5-fold to US$50Billion annually over the last 30 years.
Downgrades in securities backed by carbon-intensive assets is how the transition risk manifests. With technology, investment preference and public policy increasingly forcing the issue across the globe, the stranded carbon-economy asset has the potential to have a significant impact upon some sections of the insurance industry.
Liability risk, or climate change litigation, is the third area of concern for the insurance industry. With a growing body of case law supporting this practice, insurers will be increasingly involved in adverse settlements.
Then, on the finance and investment side of this industry, the story is quite different. One marker is the support for clean energy. Global investment in the transition to clean power and electrification rose from $32Billion annually in 2004 to $755Billion in 2019. Compared with an estimated total of almost $2Trillion in energy investment in 2021.
The venture capital sector is increasingly backing climate change opportunities beyond renewable energy, batteries and electric cars. Industry sub-sectors such as agriculture, food production and green transportation are attracting growing interest. The world’s largest fund managers are seeing the next batch of unicorns as those focused on decarbonisation and energy transition.
However, while the attraction of the new is a powerful force in investment an equally powerful and growing force is the clamor among shareholders for the finance industry to divest from carbon-intensive assets and securities. In less than ten years, groups aligned with the fossil-fuel divestment movement have separated themselves from about $40Trillion of fossil fuel assets and other financial instruments.
Onto, now, the global megatrend of computerisation.
The lifeblood of the finance and insurance services division is data. And creating, manipulating, storing, and transferring data is what computers are built for.
With respect to stock market trades, we’ve seen the growth of high-frequency algorithmic trading. Where competitive advantage is measured in millionths of seconds. With respect to financial services, we’ve seen the rise of fintech, where innovations based on digital technology aim to usurp legacy institutions in terms of products, processes, business models and applications.
Since its inception in 2009 we’ve seen the rise of crypto-currency. A currency that is based on a decentralised ledger, called a blockchain, rather than one with a foundation based on a central authority. Examples are Bitcoin, Ethereum and Litecoin. The size of this market is expected to grow from $1Trillion today to over $3Trillion within 8 years.
And we’ve seen the rise of cybersecurity risks. Where digital technology has reduced the barriers to entry for theft and fraud. Where the reputation of financial and insurance services businesses and government entities around the world are compromised on an all-too frequent basis. Where almost , on a global basis, $6trillion is lost annually to cybercrime
Given that the power of computing will continue to increase and these machines will be able to handle increasing complexity the situations canvassed above will continue. The race to dominate in trading, the growth and market penetration of fintech services, the acceptance of crypto-currency for transactions, and the ever present risk of cybercrime. None of these will slow down.
An axiom that applies to this industry division relates to complexity. As the population grows, as the range of financial and insurance services grow, as the cyber and other risks grow – the system becomes more complex. And the more advanced the computing, the greater the ability of digital technology to handle increasingly complex financial and insurance systems.
This implies a greater use of processing technologies such as artificial intelligence, of data gathering technologies such as the internet of things and social media data mining, and of user experience technologies centred around the smartphone and service micro-targeting.
In summary, as with other industry divisions, we can see that the global megatrends of climate change and computerisation will be having an impact upon the financial and insurance services industry well into the future. Climate change will primarily be felt in terms the transition that is underway across many sectors of the economy. From both a positive (new investment opportunities), and a negative (increasing risk associated with change) perspective. Increasing computerisation will be felt in terms of increasing reliance upon digital technology to manage rising complexity.
What are your prospects
From the preceding, and from a career perspective, there are several observations that can be made:
If you are more the “get it done” type: you may well find your people skills in high demand either from a sales perspective or managing various types of projects
If you are more the “thinking” type: there’ll be more data and a greater need to analyse data from a systems perspective in order to manage operations, customers and regulations
If you are more the “creative” type: you’ll have opportunity to develop new financial services. As ways of attacking organisations increase, creative thinking will be essential in preparing for cyber-security defenses
If you are more the “helper” type: you’ll be needed to either support clients as they look for ways to reduce their financial exposure to climate-related risks, or discuss decarbonisation opportunities
If you are more the “leader” type: you’ll need to be very comfortable with leading people in an industry that will become more complex and more dynamic. Your people will be giving advise based on AI models
If you are more the “structure” type: you’ll be faced with rapidly changing regulations with respect to climate change liability and increasingly tighter regulations with respect to individual data privacy as well as any “meaning” of “implications” that can be inferred from financial transactions
Overall, from a career perspective, in the years ahead you’ll need to comfortable with an industry that in many ways is being significantly challenged by these two global megatrends. You’ll need to invest in your career and be a lifelong learner. From a climate change perspective, the challenge will come from the industries served. From a computerisation perspective, the challenge will come from within the industry.
And from a business perspective, like with other industries, when it comes to responding to climate change it is all about mitigation (ie. shifting focus to reduce risk) and resilience (ie. fortification to handle risk). For computerisation, it is all about automation and using data.
So, for those operating within the financial and insurance services industry, likely business prospects are along the following lines:
Mitigation: encourage client climate transition efforts, develop decarbonisation investments
Resilience: encourage portfolio diversity, develop client GHG protocol tools
Automation: reconfigure business models, advanced software training
Data analysis: expand data sources, implement artificial intelligence
Overall, and quite obviously, for businesses there are both risks to be aware of and opportunities to exploit in the change that is happening.
The financial and insurance services industry, like all other sectors of any economy, is being affected by the global megatrends of climate change and computerisation. Not only will these phenomena continue to change the industry, but because this industry is in many ways is the lifeblood of all other industry divisions – what happens in other sectors will influence it. While competition and a changing regulatory landscape will cause change from within. Business as usual may not be reached until decarbonisation is largely complete.
---------------------------------
For available resources and services to assist you with conversations and actions related to this article, please navigate to the "strategic foresight resources" page.