The World Economic Forum (WEF) has warned that systemic risk is increasingly becoming a defining force behind global economic growth, describing it as a “hidden tax” that quietly raises costs, discourages innovation and weakens resilience across economies.
In its latest analysis, the Forum said the world is now operating in an environment shaped by overlapping geopolitical tensions, climate volatility, technological disruption and public health shocks, all of which are making economic systems more fragile and harder to predict.
It explained that while these risks may not always be immediately visible, they often build up beneath the surface and eventually emerge in ways that can trigger widespread economic disruption.
According to the Forum, systemic risk does not behave like a typical market shock. Instead, it spreads across sectors and borders, affecting financial systems, investment flows and overall economic confidence. When these risks materialise, they can slow down credit, weaken business expansion and reduce job creation.
The COVID-19 pandemic was cited as a key example, with the global economy contracting by about 4.4 percent in 2020, as the health crisis quickly spread into supply chain breakdowns, labour disruptions and financial instability across countries.
Beyond the pandemic, the Forum pointed to rising climate-related disasters as another major driver of systemic risk. It noted that in some regions, insurers are already scaling back or withdrawing coverage due to increasing losses from extreme weather events. This development, it said, is creating wider protection gaps that extend beyond the insurance sector and begin to affect property markets, infrastructure investment and local economic stability.
Geopolitical tensions were also highlighted, particularly disruptions in global trade routes and energy supply chains. The Forum referenced recent conflicts that have threatened key maritime corridors responsible for transporting a significant share of global oil, stressing that such shocks can quickly translate into inflationary pressure and broader market instability.
“Most recently, war in the Middle East has threatened key shipping routes that carry a significant share of the world’s oil supply, underscoring how quickly geopolitical shocks can ripple through energy markets and the broader global economy,” the WEF noted.
It further observed that the global economy is gradually shifting away from deeply interconnected risk-sharing systems towards more fragmented regional approaches. In some cases, countries are beginning to build domestic risk mechanisms in response to restricted access to international insurance and reinsurance markets.
“…Where global risk pools once enabled diversification and efficient risk sharing across borders, countries and regional blocs are increasingly being forced to develop localised solutions. For example, as access to international reinsurance markets becomes more constrained in certain geopolitical contexts, India has begun developing its own domestic reinsurance facility to cover the shipping of oil and gas through the Strait of Hormuz,” the WEF explained.
The Forum said this trend reflects a growing reality in which systemic risk is becoming more concentrated within regions, rather than being evenly distributed across global markets, raising concerns around capital efficiency and long-term resilience.
It added that systemic shocks differ from isolated financial disruptions because they affect the entire financial ecosystem at once. When uncertainty rises, financial institutions often become more cautious, reducing lending and limiting access to capital for businesses. This, in turn, slows investment and weakens economic activity.
The interconnected nature of modern financial systems was also identified as a major amplifier of risk. The Forum explained that distress in one institution or market segment can quickly spread across others, creating chain reactions that intensify downturns, similar to what was witnessed during the global financial crisis.
A further concern raised is that many financial institutions are exposed to the same types of macroeconomic risks at the same time, including prolonged market volatility and interest rate pressures. When these risks materialise simultaneously, the impact can be felt across the entire financial system, especially during periods when economic support is most needed.
The analysis also pointed to shifting investor behaviour in uncertain environments, where capital tends to move away from productive long-term investments towards safer assets. This, the Forum noted, slows innovation and reduces overall economic momentum.
Emerging risks such as climate change, cyber threats and pandemics were described as increasingly interconnected, with the potential to disrupt entire economies simultaneously without regard for national borders or industry boundaries.
A new dimension of systemic vulnerability, the Forum said, is being introduced by artificial intelligence. It noted that AI systems are increasingly concentrated within a small number of large models and infrastructure hubs, many of which depend on geographically limited data centres, semiconductor supply chains and cloud networks. This concentration, it warned, could create points of failure that ripple across multiple industries if disrupted by geopolitical or physical shocks.
While the assessment is global in scope, its implications are particularly significant for emerging markets, including those in Africa.
In regions such as Nigeria, where insurance penetration remains relatively low and economic systems are more exposed to external shocks, the impact of systemic risk tends to be more pronounced. Limited coverage depth means that households, small businesses and even public infrastructure often carry a higher share of risk directly.
This makes economies more vulnerable when shocks occur, whether from climate events, currency instability, supply chain disruptions or health emergencies. In such environments, a single disruption can quickly escalate into broader economic strain, affecting investment confidence and slowing down growth recovery.
The Forum stressed that in a world of rising uncertainty, growth is increasingly shaped not only by economic policy but also by how effectively risks are identified, shared and managed across systems.
It argued that the insurance industry sits at the centre of this challenge, with the capacity to convert uncertainty into structured protection. By doing so, it said, insurance enables governments, businesses and individuals to make long-term decisions with greater confidence.
The report outlined three key areas where the sector can play a stronger role. First is risk anticipation through improved modelling and early warning systems. Second is the design of products that encourage resilience, including support for climate adaptation and cybersecurity improvements. Third is the expansion of partnerships between governments and private insurers to address large-scale risks such as pandemics and natural disasters.
It also highlighted the importance of widening access to insurance in underserved markets, noting that millions of small businesses and individuals globally remain unprotected against shocks that could wipe out years of progress.
Ultimately, the Forum concluded that systemic risk is no longer a background concern but a central feature of the global economic landscape. However, it maintained that with stronger risk management frameworks and deeper insurance penetration, uncertainty can be transformed from a drag on growth into a foundation for resilience and long-term economic stability.
