Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Nat cat protection gap widens to $368bn. Cat / resilience bonds needed: Swiss Re


The gap between natural catastrophe exposure and how much of it is covered by insurance has widened in dollar terms, with the natural catastrophe protection gap now seen to be $368 billion by global reinsurance firm Swiss Re, who also says that catastrophe bonds and resilience bonds are valuable tools to deploy.

swiss-re-logo-buildingThis is because exposure growth is outpacing resilience increases around the world, leaving some 76% of natural catastrophe exposure unprotected by insurance and reinsurance.

Overall, the global insurance protection gap has also widened, demonstrating the need for much more insurance capital to crowd in and support global resilience needs across the full-range of unprotected classes.

A new report from Swiss Re’s sigma research unit finds that closing global protection gaps for natural catastrophes, crop, mortality and health insurance would require US $1.8 trillion in insurance premium annually, which is a record high level.

Swiss Re notes that this insurance protection gap has risen by a cumulative 20% in the past five years, driven by rising demand from economic growth and the effects of inflation.

Despite this, the world is seen as more resilient, and “Society’s ability to absorb unexpected financial shocks has improved over the past 10 years, with 57% of the global risks across natural catastrophes, crop, mortality and health now covered by insurance. This represents an increase of three percentage points from 2012,” Swiss Re said.

Jerome Haegeli, Group Chief Economist of Swiss Re, commented, “We’ve seen tectonic shifts in economic policies across the globe as governments have responded to war, a pandemic, and rising inflation. Despite the uncertainty and volatility, the world is more resilient today, and insurance is playing a stronger role than it did a decade ago. However, resilience remains 15% weaker than before the Global Financial Crisis and the risk is elevated. The inflation-taming monetary tightening process has laid bare financial stability and recession risks, while persistent inflation increases households’ need for more fiscal support to offset their erosion of purchasing power. We expect little improvement in macroeconomic resilience in 2023.

“Insurance helps people absorb financial shocks when they occur. However, building resilience also requires investments into adaptation and mitigation measures to reduce losses in the first place. More investment is needed in this area. For example, the development of resilience bonds can attract new sources of capital, while delivering economic benefits.”

Natural catastrophe resilience is overall seen as low, with 76% of global exposures unprotected.

As a result of this, a further US $368 billion in future insurance premiums would be required to cover the gap, Swiss Re explained.

Swiss Re explains the growth of natural catastrophe exposure, “Our re-assessment of exposure estimates, taking into account economic growth and migration of people to areas more exposed to natural hazards, combined with updated views of the natural hazard risks themselves, drove up expected losses and the resulting protection gap. High inflation has also upped exposure values and associated claims in the past two years.”

The Natural Catastrophe Insurance Resilience Index has increased slightly for most regions of the world, except emerging markets where it is seen as relatively flat year-on-year and still down on two years ago.

In aggregate, the natural catastrophe protection gap is now about the same for the advanced and the emerging regions of the world.

The size of the gap shows the need for more capital to back insurance and reinsurance, as ultimately risk capacity is needed to support exposures.

However, there’s also a need for lateral thinking around how capital is deployed, to enhance its efficiency, as well as how to use different types of funding tools for pre- and post-disaster risk capital financing.

Swiss Re highlights resilience bonds as a tool with some promise, saying they could be more widely used as a way to connect insurance premiums to resilience-building projects.

Swiss Re explained that, “We believe resilience bonds will be on investors’ radars in the future because they make economic sense.”

Explaining, “The aim of resilience bonds is to prevent not only financial but also physical disasters, which is why they entail embedded insurance.”

Of course, we’ve yet to see a live example of a resilience bond, that really integrates catastrophe bond risk transfer with resilience, but the groundswell of effort behind them is once again building, it seems.

Swiss Re also believes there is a case for more catastrophe bonds as well, as part of an effort to bring private capital alongside public funding and resilience initiatives.

Saying there is, “A strong case for transforming international disaster assistance from post-event grants to ex ante solutions via insurance or cat bonds.”

Ultimately, there is a huge need for more risk capital, integrated thinking around how to deploy it, and the use of advanced financial techniques to connect natural catastrophe risk to capital markets, when it comes to addressing the expanding insurance protection gap.

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