Insurers' opportunities could boost global financial resilience

Tracy Li
Filling a record-high US$1.2 trillion protection gap could buffer a global economy that's now more vulnerable than in 2007, a new report argues.
Tracy Li

Insurers could boost global financial resilience by closing a record-high US$1.2 trillion protection gap, as the world economy is less resilient now than in 2007 at the onset of the global financial crisis, according to a recent industry report.

The global economy now has less capacity to absorb a shock than it did in 2007, according to the new Macroeconomic Resilience Indices jointly developed by Swiss Re Institute and the London School of Economics.

Among the 31 sample countries and regions which represent around three quarters of the world GDP, Switzerland, Canada and the US have the highest economic resilience, while euro area resilience has decreased most since 2007.

Asia and Oceania had fairly stable economic resilience scores between 2007 and 2018. Resilience levels in China, Japan and Australia improved slightly, while India's resilience declined mostly due to lower index scores for the financial-sector components.

Separate to the macroeconomic indices, the study has also constructed Insurance Resilience Indices based on measures of protection available relative to need. The resilience of households against three main areas of risk — natural catastrophes, death of a household's main earner and health-care spending — has improved in most regions since the turn of the century, the report said.

Taking a longer-term view than for the macroeconomic indices, Swiss Re Institute found the protection gap for the three risk areas combined more than doubled between 2000 and 2018 to US$1.2 trillion, a record high.

"It is a trillion-dollar opportunity for the insurance industry," said Jerome Jean Haegeli, group chief economist at Swiss Re.

"The insurance industry has largely kept pace with growing loss potentials and can do more to improve resilience. Emerging markets, in particular, benefit more strongly from insurance protection than mature economies, which often have greater access to alternative sources of funding."

In relative terms, the composite insurance resilience index improved in both advanced and emerging countries in Asia Pacific, but in emerging Asia Pacific countries, insurance protection against the main three risks continues to be at significantly lower levels compared with advanced economy counterparts, the study noted.

Data showed that emerging economies in the region have the largest absolute insurance protection gap of US$456 billion, representing almost 80 percent of the region's total of US$572 billion.

One notable development in emerging Asia Pacific countries is the strong gain in resilience against health-care spending risk, reflecting the major universal health coverage-inspired reforms that have been implemented in China, India, Indonesia, Philippines, Thailand and Vietnam, Swiss Re Institute added.

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