Global reinsurance firm Swiss Re has newly identified an enormous $500 billion global property (catastrophe and non-catastrophe) and mortality risks protection gap, saying that this is an opportunity for insurance and reinsurance markets to boost global resilience.
Of course we’d also say that such a gap is an opportunity for the capital markets and insurance-linked securities (ILS) funds, given the appetite to invest in insurance and risk-linked assets.
Reporting on the outlook for insurance through to 2020 today, Swiss Re said that innovation is key for the insurance and reinsurance market to grow, as it expands the boundaries of insurability and also helps to improve global resilience by plugging holes in protection gaps.
Global economic growth is set to continue for the next couple of years, Swiss Re’s chief economist noted today, but he said that it has peaked and that while it remains solid it is slowing.
“The global economy has been performing well, and growth will remain solid,” explained Jérôme Jean Haegeli, Chief Economist at Swiss Re. “However, the best is probably over. Cyclical momentum is positive but we expect real GDP to slow by about 1-2 percentage points in most parts of the world over the next two years. This also takes into account mounting structural challenges to growth, such as higher debt burdens, reduced savings on account of aging societies, and low productivity.”
As a result re/insurers need to look to macroeconomic trends that are shifting the balance of economic and consumer power from west to east, as emerging markets such as Asia are set to be the main drivers of growth, but also they need to look to innovation and to what they should be doing, rather than what they have always done.
Global insurance premiums are forecast to grow by around 3% annually in 2019 and 2020, which is 1% up on the growth seen in 2018, but in emerging Asia they will grow by around three times more than this with close to 9% premium growth anticipated.
“With the global economic power shift from west to east continuing unabated, China and emerging Asia in particular, will be the main source of insurance demand in the coming years,” Haegeli explained. “Based on our models, we project that in US dollar terms, the growth rate of insurance premiums in emerging Asia will be more than three times that of the world average over the next two years.”
As a result, re/insurers who want to succeed need to be set up to capitalise on growing demand in Asia, able to drive innovation in their product design and offerings, and offer solutions that can address areas of underinsurance and the evident protection gaps.
Swiss Re urges a “more-supportive policy environment” to help insurers and reinsurers to put more of their capital to work, to help build global resilience.
“Insurance is a central pillar of resilience and with a more-supportive policy environment, insurers will be better able to expand their risk-absorbing capacity and long-term investment activities in resilience-building projects such as infrastructure,” the company explained today.
Its estimates suggest that the global re/insurance sector has total assets under management of about US $30 trillion and Swiss Re says that “this large asset base should be fully mobilised as risk absorber.”
The firm found that the global mortality and property protection gap now stands at US $500 billion, in insurance premium- equivalent terms.
“The gap represents the still elevated vulnerability to adverse events for many households and businesses across the world, and the very large opportunity for insurers to further contribute to improving resilience,” Swiss Re said.
Here the firm urges innovation as a tool to expand insurability, so broadening the scope of coverage available in existing products, as well as developing entirely new products to answer risk management needs.
Opportunities in corporate risk insurability, as well as in the use of parametric triggers to expand the insurability of catastrophe risks, plus insuring the intangible, or previously uninsurable with the aid of technological developments, are all avenues of opportunity going forwards.
In addition, the firm also urges the use of more “private capital market solutions” to help build the economies capacity to absorb major shocks and says the public sector should promote private financial market standards wherever possible.
It’s also worth considering the role of the capital markets more broadly, in addressing these protection gaps and providing the capacity required to underpin new areas of insurability, a role for the ILS market and at the least securitization of insurance risks, we’d suggest.
Swiss Re says that the US $500 billion gap, “signals the existing high level of unprotected risks and significant growth potential for insurers.”
The firm notes that re/insurers “will continue to play a main role in strengthening system resilience” but it’s clear that outside of the traditional re/insurance business model there are opportunities for those able to marshal large quantities of financing from the capital markets as well.
The largest business opportunity is in mortality risks, Swiss Re says, where a near US $270 billion protection gap is almost 90% of the size of the current relevant market. A clear opportunity for the securitization of mortality risk to make a comeback, to support re/insurers efforts to close this gap, in tandem with the priorities of governments around the world.
The firm notes that in addressing this gap, as well as the catastrophe and non-catastrophe property insurance gap, both public and private efforts are required.
This is where the opportunity exists for re/insurers to leverage the capital markets and work with governments to provide risk buffering and absorbing solutions, that through the protection they offer will better enable local insurance markets to become established and to flourish.