Insurance: A central component of system resilience

We define economic resilience as the capacity of a system to regenerate after a significant shock event. Shock buffer capacity is a blend of quantitative and qualitative factors, including trend growth, public and private debt stocks, and institutional stability.

The capacity of several key global resilience factors, or shock buffers, has weakened over the last 10 years:

Lower growth paths: Global economic trend growth has declined significantly. According to some estimates, the growth trend has decreased from around 5% in 2006 to just over 3% in 2018.¹

Higher debt: total debt ratios are much higher than 10 years ago, standing at 318% of GDP in the first quarter of 2018, compared with 282% in the first quarter of 2008, according to the Global Debt Monitor database of the Institute of International Finance.

Financial market structure: central banks have become major actors in financial markets. We estimate that the Fed, ECB, Bank of England and Bank of Japan all own 20–45% of their domestic government bond markets. Bond prices have thus lost their price/risk signalling function.

Less open economies: Some advanced economies have exhibited a tendency towards less open systems in the past years, for example by restricting trade and migration. Openness increases exposure to crisis via contagion but arguably, openness also allows stricken nations to bounce back more quickly.

Insurance is another central component of system resilience. It plays a vital role in stabilising financial volatility for households and businesses. Nevertheless, there are still large “insurance protection gaps” across all levels of society. We define this gap as the uninsured portion of losses from an adverse event. For example, we estimate that the gap for global mortality and property risk currently stands close to USD 500 billion, or 70% of the size of the current respective insurance markets (or 0.6% of global GDP).²

We expect insurance protection gaps to grow further in absolute terms, as the economies expand. In relative terms, the insurance industry has made inroads to reduce protection gaps in certain regions and lines of business, but more is needed. Building risk awareness and encouraging consumers to take up insurance coverage is a key area of action in both the advanced and emerging markets. Insurers can gain insights from behavioural economics to better understand consumer buying behaviour. Digital technology can help streamline the sales process, and reduce distribution and administrative costs. This makes insurance more affordable and also accessible to lower income groups. Given its importance, resilience will be among the key research areas of the Swiss Re Institute in 2019.