Swiss Re’s Haegeli urges re/insurers to do things differently to narrow $1.2 trillion protection gap.

Swiss Re’s group chief economist Jerome Jean Haegeli urges re/insurers to do things differently to narrow the $1.2 trillion protection gap.

Swiss Re group chief economist Jerome Jean Haegeli has urged re/insurers to help improve the resilience of the world economy by closing the “record high” protection gap of $1.2 trillion, which he called a “risk iceberg”.

He said different action was needed as “more of the same was not the answer”.

Speaking to Monte Carlo Today after the launch of the new ‘Indexing Resilience’, which ranks countries according to their macroeconomic resilience, he said that the global economy is less resilient to absorbing shocks than 10 years ago.

This has been caused by excessive debt, a lack of growth-enhancing reforms and monetary policy that has been pushed beyond its limit.

Haegeli pointed to factors such as the $70 trillion increase in global debt burden since the 2007/8 global financial crisis as evidence that the world is less resilient, while “extremely accommodating central bank policies that have made it too easy for politicians to avoid bringing in structural reforms” have decreased the economy’s capacity to absorb shocks.

Negative (nominal) yielding debt now amounts to $17 trillion and may well increase, given that central banks continue to push interest rates lower.

Haegeli said central bank policies disincentivise structural economic reforms. Together with the fiscal expansion, they failed to increase economic trend growth, which has decreased by 2 percent compared with before the global financial crisis.

“Australia is a good example of where structural reforms have made a difference and supported 29 years of economic expansion. If you look back to the economic crisis in the early 1990s in Australia, they used it as an opportunity to bring in structural reforms,” he said.

“Europe also had an economic crisis, but it didn’t use the time well to do structural reforms.

“There’s a risk that the EU will now face a recession. It’s very close given that half the EU member countries have seen their economies contracting measured by GDP growth. It’s a bad sign.

“Our forecast is that Germany will be the first G7 country to fall into a shallow, but potentially more protracted, recession, while the US has a 35 percent likelihood of recession over the next 12 months.”

Trade concerns
Another risk for the global economy is the potential China–US trade war.

“Even if it is resolved, the fact that it has dragged on for such a long time means it has had an effect already, especially on the confidence of investors and consumers. At worst it will lead to longer-lasting effects,” Haegeli said.

It is in this less resilient global economic climate that the $1.2 trillion insurance protection gap means that 46 percent of nat cat, mortality and health risks are not being covered. The gap is about double what it was a decade ago, he added.

“Whether efforts to narrow the ever-growing protection gap are realistic or not, it is important to track how the protection gap is evolving. The fact it is at a record high is not good.

“We have to ask ‘what is working in the global economy, what is not working, and where do we need progress?’. There is evidence that the relationship between insurance markets, insurance coverage and macro stability is a strong positive one.

“As Swiss Re we can track the risks out there on the macro front and have a consistent analysis of the protection gap measures, and we can propose reforms on the insurance front,” he explained.

“For example, we need to have structural reforms that should have happened already. We need to build stronger private capital markets and corporate solutions, and this includes insurance solutions.”

The top five
With any index there is a top five. The country ranked top for macro resilience in 2018 was Switzerland, followed by Canada, the US, Finland and Norway.

The index shows the top movers between 2007 and 2018: Japan, ranked 9th, up eight places since 2007; South Korea in 14th place, up seven places; China in 20th position, up six places; Australia in 12th, up six; and New Zealand in 13th spot, up six.