As exposure rises, insurance capital central to global recovery: Research

The University of Cambridge Centre for Risk Studies has updated its annual Global Risk Index, finding that the value of gross domestic product (GDP) at-risk from catastrophic events continues to rise, but highlights insurance capital as a key tool for global recovery.

The research states that as much as $584 billion, or 1.55% of 2020 global GDP, could be erased from the global economy by catastrophic events in 2020, which is a 3% increase from the prior year.

The Global Risk Index analyses the potential impacts of catastrophic events, including natural catastrophes, to 279 major cities around the world that account for 41% of global GDP.

These are ground-zero for insurance, reinsurance and insurance-linked securities (ILS) capital, in being the major threats these markets protect against.

The amount of GDP at-risk, in terms of value, has risen for the major threats of commodity price shocks, extreme weather, power outages and pandemics.

Natural catastrophe exposure threatens $179 billion of GDP, according to the study, which is up almost 3% on the prior year.

Natural catastrophes are the largest single risk contributor to the Index and the exposure is rising, with major cities at the top of the Index being particularly exposed to catastrophe risks.

In terms of city specific exposures, top of the list is Tokyo, followed by Istanbul, New York, Manilla, Taipei, Osaka, Los Angeles, Shanghai, Seoul and Mexico City.

Financial, economic and trade risk are the next largest at $149 billion, the research says, followed by geopolitical and security risks at $141 billion of GDP.

Insurance, reinsurance and insurance-linked securities (ILS) capital are key in how the world manages its exposure to these threats and recovers when the worst happens.

Andrew Coburn, Chief Scientist, commented, “Corporate risk is escalating along with the cadence and ferocity of climate-related catastrophes. While reinsurers saw a year of below-average insurance losses in 2019, they remain wary of events that could generate record losses like the 2017 hurricanes and an increasing number of wildfires. As such, ratings agencies predict premiums could rise as much as 5% from January. Power outages, like those forced by the Californian wildfires, have also highlighted the ripple effects impacting societies and their ability to manage throughout, and recover from, catastrophic events.

“Rate of recovery is critical to reducing relative risk exposure. Insurance pay outs are funding the recovery process of cities. The time a city takes to recover also depends on access to funding, including both insurance and aid. Better access enables faster recovery and therefore higher resilience to shocks to the global economy. The insurance world is central to global recovery.”

As the world becomes increasingly connected and values-at-risk soar, the need for efficient insurance and reinsurance capital to support the global recovery from catastrophes is going to be key, with the role of ILS set to increase as a result.