The global economy has become less resilient to shocks in the ten years following the financial crisis, but new public-private partnerships, in combination with the use and development of new technological capabilities, can help to strengthen it, according to reinsurance giant Swiss Re.
In the company’s latest sigma report, titled ‘Global economic and insurance outlook 2020,’ Swiss Re claimed that major economies are now less well-equipped to rebound from unexpected shocks than they were before the 2008-09 global financial crisis.
The report urged policy makers to focus on increasing cooperation at the global level and encouraged a move towards more private and capital markets solutions to remedy the situation.
It added that private market solutions should also be looking to integrate new technologies and data analytics, as well as innovative new products such as parametric insurance, to improve insurance take-up.
Re/insurance is a central component of global economic resilience, Swiss Re said, and yet its latest estimates put the global protection gap for mortality and property risk at $500 billion, or roughly 70% of the size of the respective markets (or 0.6% of global GDP).
Public-private insurance partnerships are therefore to the benefit of both parties, as closing the protection gap represents a huge opportunity for re/insurers and will help support global economic resilience.
“Building risk awareness and encouraging consumers to take up insurance coverage is a key area of action in both the advanced and emerging markets,” the report stated. “Insurance is an automatic stabiliser to smooth financial volatility for households and businesses. In this function, it makes economies more resilient to shocks.”
Insights from behavioural economics will also help re/insurers to better understand consumer buying behaviour, Swiss Re suggested, while digital technologies will help streamline the sales process and reduce distribution and administrative costs.
In the long-term, developments in technology and data analytics will contribute to resilience by making cover more affordable and accessible to lower income groups, although it will also help to expand the boundaries of insurability and facilitate access to new risk pools, the report said.
Product innovations such as parametric insurance triggers will also help expand insurability and, by broadening the reach and take up of covers, reduce the insurance protection gap.
Swiss Re pointed to examples such as its Typhoon Index solution for coastal regions in China, which helps small and medium-sized enterprises and individual families protect themselves against the financial impacts of typhoons.
Additionally, the report highlighted the importance of a conducive regulatory environment, which can support the implementation of private market solutions and thereby improve global economic resilience.
In property and natural catastrophe related lines, a strong regulatory environment is needed to set and enforce building standards and promote risk mitigation strategies, Swiss Re suggested.
Similarly, it recommended that the public sector promotes financial market standards wherever possible (e.g. for sustainable and infrastructure investments), state contingent debt instruments for sovereigns, further country-specific structural reforms and less central bank intervention.
With a more supportive policy environment, Swiss Re said that re/insurers will be better able to expand their risk-absorbing capacity and long-term investment activities in resilience-building projects such as infrastructure, as the sector currently manages total assets of around $30 trillion.