The need to improve resilience
By Ranamita Chakraborty
It would be common to assume that the global economy has grown to be more resilient after experiencing several economic crises over the last decade. However, that is not case according to Swiss Re group chief economist Dr Jérôme Jean Haegeli in a keynote address on the third day of the SIRC.
In fact, the world economy is less resilient than it was 10 years ago mainly due to a high debt burden of over $70tn, negative yielding bonds of $14tn and economic growth that is lower by 2 percentage points.
Meanwhile protection gaps have more than doubled over the past two decades with Asia seeing the largest gap at more than $500bn. In addition, there is a 35% likelihood of a US recession with the US-China trade war posing the biggest risk.
Insurance builds resilience
This is where the insurance sector has a large role to play in fixing the system by helping markets and the global economy become more resilient, said Dr Haegeli.
"Despite such huge fiscal spending, having loaded so much debt and so much monetary policy accommodation, we have not achieved the income trend growth that we had seen before the crisis. To me, it's a clear signal that not only is the economy less resilient but that we need to do things differently."
Referring to the latest sigma research report produced by the Swiss Re Institute entitled, ‘Indexing resilience: A primer for insurance markets and economies’, Dr Haegeli pointed out that the global economy has less capacity to absorb the impact of a shock than it did 10 years ago.
However, he noted that the resilience scores for Asia and Oceania have been relatively stable despite the weakening of global resilience according to the jointly-developed Swiss Re Institute-London School of Economics macroeconomic resilience index.
Asian economies improve
Even though advanced western economies such as Switzerland, Canada and USA ranked as the most macro resilient, Dr Haegeli said it is important to find out about the economies which have improved and moved up the index from 2007 to 2018. These economies are Japan, South Korea, China, Australia and New Zealand.
“The top movers over the last 10 years of economies are either Asian or associated with Asia. I wouldn't expect this picture to change over the next 10 years. I would expect the ranking of some of these countries to actually improve further,” he said.
The index assesses countries based on macro buffers like fiscal policy space and monetary policy space as well as structural factors like banking industry backdrop, labour market efficiency and financial market development.
More than just GDP
“We need to go beyond just looking at a traditional GDP factors. This is what we do here with our analysis,” said Dr Haegeli.
According to the report, Swiss Re defines resilience as the capacity of an economy or society to minimise income and asset losses resulting from shock events.
With the United Nations Sustainable Development Goals including insurance as a main tool to strengthen the resilience of societies, insurance is regarded as a central component of building resilience at the macro and micro levels across disaster-risk reduction and achieving development goals such as inclusive and sustainable economic growth, social protection, food security, agricultural as well as rural and urban development.
Bridging the protection gap
Based on Swiss Re Institutes’ separately developed insurance resilience indices, insurers have an opportunity to close a combined record protection gap of $1.2tn in 2018 premium equivalent terms across three main areas of risk: Nat CAT, mortality and healthcare. The reinsurer estimates that closing this protection gap would improve global financial resilience by more than $1tn each year.
With increasing extreme weather events, the global Nat CAT global protection gap now stands at $222bn with unprotected Nat CAT losses comprising 76% of all losses according to Dr Haegeli. However, this protection gap is the most pronounced in Asia with 96% of unprotected Nat CAT losses in emerging Asia and 80% in advanced Asia.
Call for capital
“Record high protection gaps are opportunities to strengthen economic resilience. We need more private capital and insurance solutions,” he said.
To develop resilience, Dr Haegeli called for the industry to take action in supporting trend growth, building financial market infrastructure, leveraging data analytics, enabling regulation, pushing forward private market solutions in addition to lowering excessive debt.
He also urged insurers to adapt to the current economic situation by employing a more disciplined underwriting strategy and incorporating technology in order to be prepared for additional risk pools which are untapped resilience opportunities.