The impact of the ongoing COVID-19 pandemic is expected to drive an almost 20% reduction in global macroeconomic resilience in 2020, while the global protection gap (disparity between economic and insured losses) has hit a new high of $1.24 trillion, according to Swiss Re Institute.
In its latest annual resilience indices, Swiss Re Institute warns of a sharp fall in global resilience from the levels seen last year as government enforced stimulus packages exhaust the fiscal and monetary buffers of countries in all corners of the world.
Despite a year-on-year improvement, the global economy entered the ongoing crisis with less “shock-absorbing” capacity than it did when entering into the 2008 global financial crisis.
Swiss Re Institute’s Macroeconomic Resilience Index (E-RI) shows that for the world, a score of 0.62 in 2019 represented an improvement on the 0.61 for 2018. However, this is predicted to fall by almost 20% to 0.50 in 2020.
The index shows that for advanced markets, the E-RI score is projected to fall by around 24%, from 0.71 in 2019 to 0.54 in 2020, and for emerging markets by approximately 10%, from 0.52 in 2019 to 0.47 in 2020.
Of course, stimulus packages have been of huge importance and have softened the economic impacts, but at the same time, such measures have depleted many countries’ fiscal and monetary reserves, leading to resilience score declines.
According to Swiss Re, the majority of buffers will be largely depleted in most advanced economies, with the UK, Japan and the U.S. expected to see the biggest impacts to their fiscal buffers. On the other side of the spectrum, the report finds that Switzerland, Finland and Canada are the three most resilient economies, while China’s score is anticipated to remain largely in-line with last year owing to a rapid response to the outbreak.
Swiss Re’s Group Chief Economist, Jerome Jean Haegeli, commented: “The fiscal and monetary stimulus response to COVID-19 was key to cushioning the economic impact of government-ordered lockdowns.
“However, the reality of wartime-like spending is that it leaves much less room for future policy manoeuvre. What’s more, the key economic policy risk is that these temporary government measures are too challenging to unwind and become permanent, leaving economies dependent on ongoing stimulus. A focus on replenishing resilience by reinstating fiscal and monetary buffers, through structural reforms to improve long-term growth prospects, will be critical.”
Additionally, the report warns that insurance resilience against mortality, health spending and natural catastrophes weakened in 2019, with the combined global protection gap for the three perils now standing at a new high of $1.24 trillion.
Across the world, mortality resilience fell by the most, driven mostly by a widening protection gap in the Asia-Pacific region as China’s protection gap swelled on the back of burgeoning household debt. In spite of some declines in emerging markets, Swiss Re says that health resilience was stable, while the global health protection gap widened by over 5% to $588 billion.
While Swiss Re notes that the lowest ranked of the three perils was natural catastrophe resilience, the reinsurer does expect that both health and mortality protection gaps will continue to widen as the financial implications of the pandemic continue to be felt across the globe.
“The widening global protection gap is a huge opportunity for insurers to fulfil their mandate as risk absorbers and improve societal resilience. In times of crisis, households need risk protection. Insurance is a key tool to help households reduce their financial vulnerability in disruptive environments,” said Haegeli.
The global protection gap is seen as one of the re/insurance industry’s greatest opportunities and challenges, and the fact it continues to grow is a stark reminder of the need for affordable and adequate insurance protection to reach the world’s most vulnerable.