Closing the insurance protection gap will help create economic stability, finds Swiss Re debate at SIRC 2019

The world is less resilient than it was 10 years ago and in insurance markets protection gaps are at record levels; they are at their largest in Asia, at more than $300 billion. Narrowing these is positive for the re/insurance industry as well as for macro stability.

These were the key messages delivered by Jérôme Jean Haegeli, Swiss Re’s group chief economist at a roundtable event at the Singapore International Reinsurance conference yesterday.

“There has been a short summer with winter coming soon for the global economy,” Haegeli warned.

Drawing on findings from Swiss Re’s sigma report, released last month, Indexing resilience: a primer for insurance markets and economies, he highlighted the fact that the global economy now has less capacity to absorb a shock than it did in 2007.

The top macroeconomic risks for 2019/2020 are the US-China trade war (35 percent); US recession (35 percent) and Central Bank Policy Error (20 percent).

The current economic environment is characterised by lower economic growth, a high debt burden, and a new record for negative yielding bonds. Ageing populations are also a key factor.

“In 10 years’ time Germany is going to have exactly the same old-age dependency ratios as Japan,” Haegeli said.

“In Europe, lots of people are talking about ‘Japanification’ as if it is the worst case for Europe, but from an economic point of view it’s not the worst case.

“Just look at productivity growth Japan’s is better than the US’s, better than the G7’s. Even if you are faced with ageing demographics, it doesn’t mean you have to do badly as a society but it means the average gross domestic product growth rate and interest rates are low,” he explained.

Closing the gap
Haegeli highlighted the fact that the record-breaking size of the protection gap represents more than just an opportunity for the re/insurance industry it is also a chance to help create greater economic stability.

“Resilience is key. Our industry, and macroeconomic stability, both benefit from narrowing protection gaps,” he said.

For developed regions in Asia the protection gap stands at 80 percent unprotected, while overall in the world the figure is 76 percent unprotected. The figure is even bigger in emerging Asia, where 96 percent of all natural catastrophes are not protected.

“With only 4 percent protected, there is huge potential for our industry to take the burden from those governments the hardship and financial strain,” Haegeli said.

“Our research shows that if you have insurance on the nat cat front and a crisis hits, you recover quickly.”

He sees a stronger role for the private capital markets to improve resilience: the industry needs to leverage this huge asset base better. He added that governments have an important part to play.

“Our call to action is really this: we need to do something. We need to strengthen our industry and we need to strengthen private capital markets.

“Private capital markets have a larger role to play in terms of market solutions and insurance solutions.”

“Policymakers can do a lot: they can support more trend growth, they can also do more in the financial market architecture side,” he said.

“Governments can do more on the regulatory front. In Europe they now have the benefit of a more refined regulatory framework; I think we also need a refined regulatory framework for ‘green’ investment or sustainable investment.

“There is a lot that technology and data analytics can do, but most important it will always be positive to have more capital market solutions as well,” he concluded.