Swiss Re Institute sigma 2/2023 – Restoring resilience: the need to reload shock-absorbing capacity
Armonk, NY (June 30, 2023) – From the COVID-19 pandemic to war in Ukraine and 40-year high inflation in major economies, the world has faced extraordinary shocks in the five years since we launched our annual resilience and protection gap research. This measures how well economies, businesses and households can withstand an unexpected financial shock such as a recession or a natural catastrophe, with a focus on the role of insurance in transferring and absorbing these risks. Given the vast economic policy shifts in response, it is vital we understand what drives risk absorption, the contribution of insurance, and the actions we can take to restore resilience.
We see a global need to reload resilience as about 43% of health, mortality, natural catastrophe property and (newly added for this sigma) crop farming risks are still unprotected by insurance and other resources. The global protection gap reached a new high of USD 1.8 trillion in premium equivalent terms in 2022, up from a comparable USD 1.5 trillion in 2018, as the value of risk exposures have steadily risen. We explore two strategies to reload resilience: reducing expected losses and risk transfer via insurance markets.
We measure resilience as how well an economy, business or household can withstand an unexpected financial shock such as a natural catastrophe or the death of a breadwinner. Our index of macroeconomic resilience captures the extent to which an economy can withstand a shock such as a recession; and our insurance resilience indices measure how insurance contributes to maintaining households’ and businesses’ financial stability by transferring or absorbing key risks to life, health and property. The protection gap is the uninsured or unprotected portion of the resources needed to fully mitigate a risk.
The global protection gap reached a new high of USD 1.8 trillion in 2022
We see the world economy today as in need of a sustained reload in resilience. The value of unprotected risk exposure globally has risen steadily in the past five years. We estimate the global protection gap at USD 1.8 trillion in premium equivalent terms for 2022, a cumulative 20% increase on the comparable-terms USD 1.5 trillion estimate for 2018. We have expanded the insurance resilience indices with a new crop protection index, and have added the severe convective storm peril to our natural catastrophe index. We estimate about 43% of risk globally was unprotected by assets or insurance in 2022, improved from 46% a decade ago.
Economic resilience rose in 2022 as monetary policy normalised
Macroeconomic resilience strengthened globally in 2022 as central banks increased interest rates, and our macroeconomic resilience measure returned to its pre-pandemic level. However, it remains 15% weaker than in 2007, prior to the Global Financial Crisis (GFC). Risk is elevated: the inflation-taming monetary tightening process has laid bare financial stability and recession risks, while persistent inflation increases the need for fiscal support to offset the erosion of households’ purchasing power. We expect little improvement in resilience in 2023 or 2024.
About 60% of global insurable crop exposure is unprotected against natural hazards
Our insurance market research also signals a need for resilience in four key perils. The agrifood system supports almost half of the world’s population and food security has been a key concern since the outbreak of war in Ukraine. Yet our new crop index finds about 60% of global insurable crop production was unprotected against natural disasters and accidents (eg, fire, disease and insect swarms) in 2022. We estimate the global crop protection gap at USD 113 billion (premium equivalent), up by 28% in nominal terms from 2016, emphasising the importance of agricultural insurance to smooth farmers’ income fluctuations. Our natural catastrophe resilience index estimates that about 75% of global risk was unprotected in 2022, with protection gaps largest in emerging markets.
Health resilience shows encouraging strength, standing at 78% in 2022, as living and health standards improved alongside economic growth, particularly in emerging Asia. However, mortality resilience is low at 43%, implying that many households are vulnerable to the loss of a breadwinner. We estimate the global mortality gap widened to USD 406 billion in 2022, a record high, driven by inflation, wage rises and weaker financial markets. Life insurance has helped to improve protection in most countries, particularly those with higher resilience, but more still needs to be done.
Reloading resilience through reducing expected losses and expanding insurance coverage
To reload resilience requires two strategies: reducing expected losses and expanding insurance coverage. For example, investment can lower the risk of damage to crops, property and infrastructure from natural catastrophes to structurally narrow protection gaps while supporting economic growth. Such investment can generate economic dividends that outweigh the cost by multiples from 2:1 to 10:1. Every USD $1 invested in loss prevention in lower income countries creates a relatively larger resilience dividend than in wealthier economies. By reducing risk, loss prevention also fosters insurability.
At the limit of loss prevention, risk transfer comes into play. For example, the European Insurance and Occupational Pensions Authority (EIOPA) estimates that a large-scale disaster causing direct losses of more than 0.1% of GDP, can reduce GDP growth by around 0.5ppts in the quarter of impact if the share of insured losses is low – but where sufficiently insured, events are inconsequential in terms of foregone output. The insurance industry can incentivise loss mitigation behaviour and support risk transfer at the household and corporate levels.
- Access the full report: sigma 2/2023 – Restoring resilience: the need to reload shock-absorbing capacity
About Swiss Re
The Swiss Re Group is one of the world’s leading providers of reinsurance, insurance and other forms of insurance-based risk transfer, working to make the world more resilient. It anticipates and manages risk – from natural catastrophes to climate change, from ageing populations to cyber crime. The aim of the Swiss Re Group is to enable society to thrive and progress, creating new opportunities and solutions for its clients. Headquartered in Zurich, Switzerland, where it was founded in 1863, the Swiss Re Group operates through a network of around 80 offices globally. For more information, please visit www.swissre.com.
Forward-Looking Statements
Certain statements and illustrations contained herein are forward-looking. These statements (including as to plans, objectives, targets, and trends) and illustrations provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to a historical fact or current fact. Further information on forward looking statements can be found in the Legal Notice section of Swiss Re’s website.
SOURCE: Swiss Re
Tags: protection gap, sigma, Swiss Re
