Indexing Resilience A primer for insurance markets and economies: - - PowerPoint PPT Presentation
Indexing Resilience A primer for insurance markets and economies: starting the USD 1trillion debate Dr. Jrme Haegeli, Group Chief Economist Monte Carlo, September 7 2019 ( sigma 5/2019) R-word(s) in focus. Resilience is key! R R 35%
A primer for insurance markets and economies: starting the USD 1trillion debate
(sigma 5/2019)
Monte Carlo, September 7 2019
R-word(s) in focus. Resilience is key!
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>USD 1trn / year
Recession risk Risk pools (additional)
35%
Economic Resilience Insurance Resilience
Welcome to our new «R-index» family
SRI-LSE Macro Resilience Index Tracks the ability of economies to withstand shocks over time
Closing gaps: positive for macro resilience
Resilience: The ability to absorb shocks
Macro Buffer, structural components
SRI Insurance Resilience Indices Measure the contribution of insurance to the financial stability of households and organisations
Mortality Health Nat cat
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Source: Swiss Re Institute
”The global economy is less resilient to absorb shocks than 10 years ago given excessive debt, lack of growth enhancing reforms and monetary policy pushed beyond its limit.’’
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10 Years after the global financial crisis: The world is less resilient
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High debt burden Negative yielding bonds Lower economic growth
Sources: IIF, Swiss Re Institute, BoC
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Winter is arriving for global macro. 35% likelihood for US recession
Source: Swiss Re Institute, Note: Consensus forecasts in brackets
EMs will continue to grow significantly faster than DMs Top macro risks for 2019/20 (likelihood)
Euro area:
2019: 1.1% (1.1%) 2020: 1.1% (1.2%)
United States:
2019: 2.3% (2.5%) 2020: 1.6% (1.9%)
Latin America:
2019: 1.8% 2020: 2.8%
China:
2019: 6.2% (6.3%) 2020: 6.1% (6.1%)
EM Asia excl. China:
2019: 6.2% 2020: 6.1%
Real GDP growth in 2019 <-2.5% 1%
2% 4% 6% >6% 0%
EMs will continue to grow significantly faster than DMs
Trade war
US recession
35%
Central Bank policy error
20%
Top macro risks for 2019/20 (likelihood)
50% Macro Buffers Fiscal policy space Monetary policy space 50% Structural factors Banking industry backdrop Labour market efficiency
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SRI-LSE macro resilience index: going beyond traditional GDP analysis to track economic resilience. See today’s top resilient countries & the top movers
Sources: Swiss Re Institute and London School of Economics and Political Sciences
Macroeconomic resilience factors
Note: Other structural elements not listed here include economic complexity, low carbon economy, human capital and insurance penetration
Top macro resilient (2018) Top movers (2007 to 2018) Country Rank Switzerland 1 Canada 2 USA 3 Finland 4 Norway 5 Country Rank
Rank change since ‘07
Japan 9 +8 South Korea 14 +7 China 20 +6 Australia 12 +6 New Zealand 13 +6
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Lower G4 macro resilience since 2007, but improvements over last years: next recession likely to be more prolonged, even if not as deep
SRI – LSE G4 macro resilience index and structural elements Fiscal policy the «only game (left) in town» Fiscal policy space Monetary policy space Structural reforms
0.3 0.4 0.5 0.6 0.7 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Resilience Index Structural elements G4 resilience index
Source: Swiss Re Institute
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Six global macro resilience take-aways
Fiscal policy = “only game in town” in the next crisis Central bank’s low to negative rates do more harm than good Lower buffers & insufficient reforms = future recessions more prolonged ↑Domestic resilience = ↑ Global resilience Sound fiscal positions, deep financial markets = + Macro resilience ESG and insurance coverage also strengthens macro resilience
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Source: Swiss Re Institute
“Resilience against core areas of risk – such as natural catastrophes, mortality and healthcare spending – improved, as shown in our new SRI Insurance Resilience Index. Importantly, the risk transfer to insurance markets promotes macroeconomic stability.”
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SRI Insurance Resilience Indices: New record high protection gaps
Nat Cat
Expected annual loss from storms, earthquakes and floods Estimated insurance coverage for primary nat cat perils
USD 222bn 24% Mortality
Income needed to maintain survivors’ living standards Life insurance, financial assets, social security
USD 386bn 45% Health
Total healthcare expenditure (funded) Total healthcare expenditures minus households’ stressful out-
USD 616bn 93% Composite
54%
Starting the USD 1 trillion debate
Source: Swiss Re Institute Note: All figures for 2018 and global; Protection gap is in premium equivalent terms
Need (N) Available (A) Protection Gap (N – A) Insurance Resilience Index (A ÷ N)
The resilience gap remains huge, even as it improved mostly on Nat Cat in advanced countries and with large gap in emerging markets
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SRI Insurance Resilience Index: Advanced economies SRI Insurance Resilience Index: Emerging economies
0% 20% 40% 60% 80% 100%
Nat cat Mortality Health Composite 2000 2007 2018
0% 20% 40% 60% 80% 100%
Nat cat Mortality Health Composite
2000 2007 2018
Source: Swiss Re Institute
65% 42% 3% 37% 94% 75% 23% 64%
‘’Closing the insurance protection gaps is a one trillion dollar
financial resilience.’’
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The protection gap has more than doubled over the past two decades
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Source: Swiss Re Institute
60-80 bn
profit potential additional claim payments
Untapped resilience opportunity = New risk pools
175 91 91 73 45 34 98
208 159 116 103 115 68 456
100 200 300 400 US & Canada EMEA advanced Asia-Pacific advanced Latin America and Caribbean Middle East and Africa Emerging Europe and Central Asia Asia-Pacific emerging Advanced markets Emerging markets USD bn 2000 2018
Protection gap in advanced and emerging economies
+27% of current profit pools
Insurance resilience bolsters the overall economy, especially for emerging economies
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1) Effect of more insurance coverage for cat losses on economic variables
Source: Swiss Re Institute
2) Variables correlated with lower economic volatility
stronger recovery (GDP growth) less government spending less private borrowing higher non-life insurance penetration above-potential GDP growth quality of economic institutions
Lower excessive debt
Call for Action
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Data analytics Financial market infrastructure Support trend growth Enabling regulation Private capital market solutions
Source: Swiss Re Institute
“Narrowing protection gaps is a USD1 trn opportunity and makes not just commercial, but also economic sense.“
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Key takeaways
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Less resilient than pre-crisis
Improving but…
from insurance to whole economy
to improve resilience
With monetary policies at or beyond their limit, fiscal policy will be the “only game in town” in next crisis Insurance resilience has improved in most regions, but global record protection gaps of USD 1.2 trillion outline the great potential for risk transfer Insurance promotes macro resilience: higher insurance penetration => stronger growth & lower macro volatility Promote private capital market and insurance solutions to alleviate societal challenges and government contingent liabilities
Starting the “1 trillion dollar debate” in improving resilience
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SRI-LSE Macro Resilience Rankings
Rank Country Fiscal Space Mon. Pol. Space Low Carbon Econ. Insurance Penetration Fin. Market Dev. Human Capital Econ. Compl. Labor Market Eff. Banking Industry Backdrop 2018 Resi. Index 2007 Rank Change in rank 07 to 18* Ave. 07-11 Rank
Ave. 14-18 Rank 1 Switzerland 0.99 0.1 1 0.72 1 0.86 1 1 0.91 0.84 1
1 2 Canada 0.99 0.18 0.29 0.61 0.85 0.93 0.55 0.94 1 0.81 3 +1 2 2 3 United States 0.95 0.21 0.21 0.57 1 0.74 0.93 1 0.77 0.79 2
9 4 4 Finland 0.99 0.12 0.73 0.89 0.57 1 0.91 0.69 1 0.77 9 +5 7 4 5 Norway 0.98 0.15 1 0.26 0.73 0.71 0.57 0.79 0.87 0.75 4
3 4 6 United Kingdom 0.95 0.15 0.86 0.97 0.72 0.76 0.81 0.92 0.67 0.74 7 +1 14 8 7 Netherlands 1 0.12 0.5 0.82 0.59 0.89 0.68 0.86 0.7 0.73 6
7 9 8 Denmark 0.99 0.11 1 0.95 0.16 0.8 0.6 0.98 0.79 0.72 8
11 9 Japan 0.88 0.11 0.56 0.77 0.83 1 1 0.7 0.77 0.72 17 +8 18 11 10 Sweden 0.99 0.11 1 0.53 0.54 0.71 0.96 0.7 0.73 0.71 5
4 7 11 Germany 1 0.12 0.62 0.44 0.58 0.87 1 0.82 0.56 0.7 10
12 10 12 Australia 0.87 0.19 0.15 0.39 0.9 0.84 0.01 0.59 0.98 0.7 18 +6 20 14 13 New Zealand 0.87 0.2 0.92 0.34 0.08 0.79 0.23 1 0.89 0.67 19 +6 16 9 14 South Korea 0.95 0.19 0.27 1 0.99 1 0.95 0.33 0.42 0.66 21 +7 20 17 15 Austria 0.99 0.12 1 0.26 0.28 0.79 0.86 0.54 0.68 0.66 11
8 16 16 Chile 1 0.39 0.73 0.28 0.28 0.37 0.97 0.65 13
9 13 17 France 0.95 0.12 0.93 0.77 0.45 0.71 0.73 0.3 0.73 0.64 12
12 16 18 Ireland 0.99 0.12 0.97 0.54 0.43 0.91 0.74 0.93 0.1 0.62 15
24 20 19 Belgium 0.96 0.12 0.54 0.45 0.13 0.8 0.47 0.42 0.58 0.57 14
17 21 20 China 1 0.3 0.04 0.23 0.58 0.24 0.35 0.21 0.29 0.55 26 +6 19 18 21 South Africa 0.78 0.56 1 0.18 0.11 0.28 0.54 0.53 22 +1 14 16 22 Spain 0.76 0.12 0.77 0.35 1 0.69 0.39 0.21 0.37 0.53 16
22 25 23 Hungary 0.86 0.29 0.56 0.02 0.69 0.73 0.14 0.52 0.51 20
22 27 24 Mexico 0.85 0.34 0.66 0.05 0.57 0.67 0.51 27 +3 25 22 25 India 1 0.29 0.37 0.17 0.03 0.16 0.16 0.34 0.5 24
18 25 26 Turkey 0.96 0.25 0.62 0.24 0.34 0.06 0.34 0.48 31 +5 29 23 27 Russia 0.97 0.29 0.76 0.44 0.21 0.44 25
22 24 28 Portugal 0.74 0.12 0.89 0.49 0.39 0.71 0.11 0.43 0.41 23
26 29 29 Brazil 0.32 0.24 1 0.2 0.24 0.3 0.75 0.34 30 +1 27 27 30 Italy 0.33 0.12 0.78 0.71 0.78 0.69 0.58 0.15 0.3 28
28 29 31 Greece 0.12 0.49 0.21 0.42 0.03 0.06 29
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* + denotes moving up in rank, - moving down in rank
Sources: SRI-LSE Macroeconomic Resilience Index
21 Indicator Weight Rationale Macro buffers Fiscal space 35% We consider fiscal policy the most important policy tool to mitigate the length and depth of an economic shock. Monetary policy space 15% Monetary policy is a key policy instrument to absorb economic shocks. Macro structural elements Banking industry backdrop 18% A fragile banking industry backdrop propagates shocks given the sector's interconnectedness with the economy. Labour market efficiency 12% More efficient and dynamic labour markets allow for easier reallocation of workers during times of stress. Financial market development 10% Developed financial markets diversify the funding sources available for the real economy. Economic complexity 4% An economy producing sophisticated and a variety of goods will be less affected by shocks in specific sectors. Insurance penetration 2% Insurance acts as a shock absorber and smoothens financial volatility. Human capital 2% High social mobility and skill levels make a country more dynamic, such that it can better withstand and adjust to shocks. Low-carbon economy 2% Climate change has disruptive effects on global supply chains and
capital, and household wealth.
SRI-LSE Macro Resilience Indicators
Source: Swiss Re Institute
Macro resilience levels across regions and time
22 0.3 0.4 0.5 0.6 0.7 0.8 0.9 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Latin America North America Eurozone WORLD Asia & Oceania
Sources: SRI-LSE Macroeconomic Resilience Index