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Indexing resilienceA primer for insurance markets and economies: starting the USD 1trillion debate
(sigma 5/2019)
Dr. Jérôme Haegeli, Group Chief EconomistMonte Carlo, 7 September 2019
R-word(s) in focus. Resilience is key!
2
>USD 1trn / year
RR
Recession riskRisk 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 HealthNat cat
3Source: Swiss Re Institute
Macroeconomic Resilience
”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.’’
44
-2%pts17trn+70trn
10 Years after the global financial crisis: The world is less resilient
5
High debt
burden
Negative yielding
bonds
Lower economic
growth
Sources: IIF, Swiss Re Institute, BoC
6
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%-2.5% 2% 4% 6% >6%0%
EMs will continue to grow significantly faster than DMs
Trade war
35%
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
Fin. market development
7
SRI-LSE macro resilience index: going beyond traditional GDP analysis to trackeconomic 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
8
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 elementsFiscal policy the «only game (left) in town»
Fiscal policy space
Monetary policy space
Structural reforms0.3
0.4
0.5
0.6
0.7
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Re
sil
ien
ce
In
de
x
Structural elements G4 resilience index
Source: Swiss Re Institute
9
Six global macro resilience take-aways
Fiscal policy = “only game in town” in the next crisis
Central banks’ low to negative ratesdo 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
1
2
3
4
5
6
Source: Swiss Re Institute
Insurance
Resilience
“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.”
1010
11
SRI Insurance Resilience Indices: New record high protection gaps
Nat CatExpected annual loss from storms, earthquakes and
floods
Estimated insurance coverage for primary nat
cat perilsUSD 222bn 24%
MortalityIncome needed to maintain survivors’ living standards
Life insurance, financial assets, social security USD 386bn 45%
HealthTotal healthcare
expenditure (funded)
Total healthcare expenditures minus
households’ stressful out-of-pocket expenses
USD 616bn 93%
Composite -- -- USD 1.2trn 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
12
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%
Opportunity and Risk Pools
‘’Closing the insurance protection gaps is a one trillion dollar opportunity to boost global financial resilience.’’
1313
The protection gap has more than doubled over the past two decades
14Source: Swiss Re Institute
>1trn
60-80 bn profit potential
additional claim
payments
Untapped resilience opportunity =
New risk pools
175
91 9173
45 34
98
208
159
116 103
115
68
456
0
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
US
D b
n
2000 2018
Protection gap in advanced and emerging economies
+27% of current
profit pools
Insurance resilience bolsters the overall economy, especially for emerging economies
15
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
16
Data analyticsFinancial market
infrastructure
Support
trend growth
Enabling
regulation
Private capital market
solutions
Source: Swiss Re Institute
Conclusion
“Narrowing protection gaps is a USD1 trn opportunity and makesnot just commercial, but also economic sense.“
1717
Key takeaways
18
Macro:Less resilient than pre-crisis
Insurance:Improving but…
Resilience boostfrom insurance to whole economy
Call for actionsto 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
Appendix
19
20
SRI-LSE Macro Resilience Rankings
Rank CountryFiscal
Space
Mon.
Pol.
Space
Low
Carbon
Econ.
Insurance
Penetration
Fin.
Market
Dev.
Human
Capital
Econ.
Compl.
Labor
Market
Eff.
Banking Industry
Backdrop
2018
Resi.
Index2007
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 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 -1 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 -1 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 -1 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 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 -5 4 7
11 Germany 1 0.12 0.62 0.44 0.58 0.87 1 0.82 0.56 0.7 10 -1 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 -4 8 16
16 Chile 1 0.39 0.73 0.28 0 0.28 0 0.37 0.97 0.65 13 -3 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 -5 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 -3 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 -5 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 0 1 0.18 0 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 -6 22 25
23 Hungary 0.86 0.29 0.56 0.02 0 0.69 0.73 0.14 0.52 0.51 20 -3 22 27
24 Mexico 0.85 0.34 0.66 0 0 0.05 0.57 0 0.67 0.51 27 +3 25 22
25 India 1 0.29 0.37 0.17 0.03 0 0.16 0.16 0.34 0.5 24 -1 18 25
26 Turkey 0.96 0.25 0.62 0 0.24 0.34 0.06 0 0.34 0.48 31 +5 29 23
27 Russia 0.97 0.29 0 0 0 0.76 0.44 0.21 0 0.44 25 -2 22 24
28 Portugal 0.74 0.12 0.89 0.49 0.39 0.71 0.11 0.43 0 0.41 23 -5 26 29
29 Brazil 0.32 0.24 1 0.2 0.24 0 0.3 0 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 0.3 28 -2 28 29
31 Greece 0 0.12 0.49 0 0.21 0.42 0.03 0 0 0.06 29 -2 30 31
* + denotes moving up in rank, - moving down in rank
Sources: SRI-LSE Macroeconomic Resilience Index
21
Indicator Weight Rationale
Ma
cro
b
uff
ers 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.
Ma
cro
str
uctu
ral e
lem
en
ts
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 infrastructure. This negatively impacts government finances, firms' 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
sigma Research
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23
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