Indexing Resilience A primer for insurance markets and economies: starting the USD 1trillion debate Dr. Jérôme Haegeli, Group Chief Economist Monte Carlo, September 7 2019 ( sigma 5/2019)
R-word(s) in focus. Resilience is key! R R 35% >USD 1trn / year Recession risk Risk pools (additional) Economic Resilience Insurance Resilience 2
Welcome to our new «R-index» family Resilience: The ability to absorb shocks SRI-LSE Macro Resilience Index SRI Insurance Resilience Indices Tracks the ability of economies to withstand Measure the contribution of insurance to the shocks over time financial stability of households and organisations Health Macro Buffer, structural components Nat cat Mortality Closing gaps: positive for macro resilience 3 Source: Swiss Re Institute
Macroeconomic Resilience ”The global economy is less resilient to absorb shocks than 10 years ago given excessive debt, lack of growth enhancing reforms and monetary policy pushed beyond its limit.’’ 4
10 Years after the global financial crisis: The world is less resilient High debt Negative yielding Lower economic burden bonds growth +70trn 17trn -2% pts Sources: IIF, Swiss Re Institute, BoC 5
Winter is arriving for global macro. 35% likelihood for US recession Top macro risks for 2019/20 EMs will continue to grow significantly faster than DMs (likelihood) Top macro risks for 2019/20 (likelihood) EMs will continue to grow significantly faster than DMs Trade war 35% US recession 35% Euro area: United States: Latin America: 2019: 1.1% (1.1%) 2019: 2.3% (2.5%) 2019: 1.8% 2020: 1.1% (1.2%) 2020: 1.6% (1.9%) 2020: 2.8% Central Bank China: EM Asia excl. China: policy error 2019: 6.2% (6.3%) 2019: 6.2% 2020: 6.1% (6.1%) 2020: 6.1% 20% Real GDP growth in 2019 <-2.5% -2.5% 0% 1% 2% 4% 6% >6% Source: Swiss Re Institute, Note: Consensus forecasts 6 in brackets
SRI-LSE macro resilience index: going beyond traditional GDP analysis to track economic resilience. See today’s top resilient countries & the top movers Top macro resilient (2018) Macroeconomic resilience factors Top movers (2007 to 2018) Rank change Macro Buffers Country Rank Country Rank since ‘07 Fiscal policy space Switzerland 1 Japan 9 +8 50% Monetary policy space Canada 2 South Korea 14 +7 Structural factors USA 3 China 20 +6 Banking industry backdrop Finland Australia 12 +6 4 50% Labour market efficiency Norway 5 New Zealand 13 +6 Fin. market development Note: Other structural elements not listed here include economic complexity, low carbon economy, human capital and insurance penetration 7 Sources: Swiss Re Institute and London School of Economics and Political Sciences
Lower G4 macro resilience since 2007, but improvements over last years: next recession likely to be more prolonged, even if not as deep SRI – LSE G4 macro resilience index and Fiscal policy the «only game (left) in town» structural elements 0.7 0.6 Resilience Index Fiscal policy space 0.5 Monetary policy space 0.4 Structural reforms 0.3 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Structural elements G4 resilience index 8 Source: Swiss Re Institute
Six global macro resilience take-aways Fiscal policy = “only game in town” in ↑ Domestic resilience = ↑ Global 1 4 the next crisis resilience Central bank’s low to negative rates Sound fiscal positions, deep financial 2 5 do more harm than good markets = + Macro resilience Lower buffers & insufficient reforms = ESG and insurance coverage also 3 6 future recessions more prolonged strengthens macro resilience 9 Source: Swiss Re Institute
Insurance Resilience “Resilience against core areas of risk – such as natural catastrophes, mortality and healthcare spending – improved, as shown in our new SRI Insurance Resilience Index. Importantly, the risk transfer to insurance markets promotes macroeconomic stability.” 10 10
SRI Insurance Resilience Indices: New record high protection gaps Starting the USD 1 trillion debate Protection Gap Insurance Resilience Need (N) Available (A) (N – A) Index (A ÷ N) Expected annual loss from Estimated insurance Nat Cat USD 222bn 24% storms, earthquakes and coverage for primary nat floods cat perils Income needed to maintain Life insurance, financial Mortality USD 386bn 45% survivors’ living standards assets, social security Total healthcare Total healthcare expenditures minus Health USD 616bn 93% expenditure (funded) households’ stressful out- of-pocket expenses Composite USD 1.2trn 54% -- -- Note: All figures for 2018 and global; Protection gap is in premium equivalent terms 11 Source: Swiss Re Institute
The resilience gap remains huge, even as it improved mostly on Nat Cat in advanced countries and with large gap in emerging markets SRI Insurance Resilience Index: SRI Insurance Resilience Index: Advanced economies Emerging economies 65% 42% 3% 37% 94% 75% 23% 64% 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% Nat cat Mortality Health Composite Nat cat Mortality Health Composite 2000 2007 2018 2000 2007 2018 Source: Swiss Re Institute 12
Opportunity and Risk Pools ‘’Closing the insurance protection gaps is a one trillion dollar opportunity to boost global financial resilience.’’ 13 13
The protection gap has more than doubled over the past two decades Protection gap in advanced and emerging economies Untapped resilience opportunity = New risk pools 456 400 additional claim >1trn 300 payments USD bn 200 208 175 159 100 116 115 103 98 91 91 73 68 45 34 0 US & EMEA Asia-Pacific Latin Middle East Emerging Asia-Pacific profit potential 60-80 bn Canada advanced advanced America and and Africa Europe and emerging Caribbean Central Asia +27% of current Advanced markets Emerging markets profit pools 2000 2018 Source: Swiss Re Institute 14
Insurance resilience bolsters the overall economy, especially for emerging economies 1) Effect of more insurance coverage 2) Variables correlated for cat losses on economic variables with lower economic volatility stronger recovery (GDP higher non-life insurance growth) penetration less government spending above-potential GDP growth quality of economic less private borrowing institutions Source: Swiss Re Institute 15
Call for Action Support Financial market Data analytics trend growth infrastructure Enabling Private capital market Lower regulation solutions excessive debt Source: Swiss Re Institute 16
Conclusion “Narrowing protection gaps is a USD1 trn opportunity and makes not just commercial, but also economic sense.“ 17 17
Key takeaways Starting the “1 trillion dollar debate” in improving resilience Macro: With monetary policies at or beyond their limit, fiscal policy will be the “only game in town” in next crisis Less resilient than pre-crisis Insurance resilience has improved in most regions, but Insurance: global record protection gaps of USD 1.2 trillion outline Improving but… the great potential for risk transfer Resilience boost Insurance promotes macro resilience : higher insurance penetration => stronger growth & lower macro volatility from insurance to whole economy Call for actions Promote private capital market and insurance solutions to alleviate societal challenges and government to improve resilience contingent liabilities 18
Appendix 19
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