In dollar terms, the gap between natural catastrophe exposure and insurance coverage has widened, with global reinsurer Swiss Re now pegging the natural catastrophe protection gap at $368 billion, the company said, adding that catastrophe bonds and resilience Bonds are valuable tools to deploy.
Overall, the global insurance protection gap also widened, pointing to the need for a greater influx of insurance capital and support for global resilience demand across all unprotected categories.
A new report from Swiss Re’s sigma research arm has found that closing the global protection gap in natural catastrophe, crop, death and health insurance would require a record $1.8 trillion in annual premiums.
Swiss Re noted that this insurance protection gap has widened cumulatively by 20% over the past five years, driven by the effects of economic growth and inflation.
Still, the world is seen as more resilient, “society’s ability to absorb unexpected financial shocks has increased over the past decade, with 57% of global risks such as natural disasters, crops, mortality and health now covered by insurance. This is more than in 2012 year-on-year increase of three percentage points,” Swiss Re said.
Swiss Re Group Chief Economist Jerome Haegeli commented: “We have seen a structural shift in global economic policy as governments respond to wars, pandemics and rising inflation. Despite uncertainty and Volatility, but the world is more resilient today, with insurance playing a stronger role than it was a decade ago. Resilience, however, remains 15% weaker than before the global financial crisis and risks rise. Monetary tightening processes to curb inflation expose financial stability and recession risks, while persistent inflation increases households’ need for more fiscal support to offset the erosion of their purchasing power. We expect little improvement in macroeconomic resilience in 2023.
“Insurance can help people absorb financial shocks as they occur. However, building resilience also requires investment in 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 source of capital while bringing economic benefits.”
Overall, resilience to natural disasters is low, with 76% of global exposures unprotected.
As a result, Swiss Re explained that an additional USD 368 billion in premiums would be needed in the future to make up the shortfall.
Swiss Re explained the increase in natural catastrophe risk, “The reassessment of our risk estimates, taking into account economic growth and the migration of people to areas more vulnerable to natural catastrophes, combined with the latest view on natural catastrophe risk itself, pushed up the Expected losses and resulting protection gaps. High inflation has also boosted exposure values and associated claims over the past two years.”
The natural catastrophe insurance resilience index rose slightly in most regions of the world, with the exception of emerging markets, where the index was relatively flat year-on-year but still below the level of two years ago.
Overall, the natural disaster protection gap is now about the same in developed and emerging regions of the world.
The size of the gap indicates the need for more capital to support insurance and reinsurance, as risk capacity is ultimately required to support exposure.
However, there is also a need for lateral thinking about how to deploy capital to increase its efficiency, and how to use different types of financing instruments for pre- and post-disaster venture capital financing.
Swiss Re highlighted resilience bonds as a promising tool, saying they could be used more broadly as a way to link insurance premiums to resilience-building projects.
Swiss Re explained, “We believe elastic bonds will gain investor attention in the future because they make economic sense.”
Explains, “The purpose of elastic bonds is not only to protect against financial catastrophe, but also to protect against physical catastrophe, which is why they need embedded insurance.”
Of course, we have yet to see live examples of resilience bonds that truly combine cat bond risk transfer with resilience, but the wave of effort behind them seems to be gathering again.
Swiss Re also sees a need to issue more catastrophe bonds as part of efforts to align private capital with public funding and resilience planning.
Saying yes, “there are good reasons to move international disaster assistance from ex post grants to ex ante solutions delivered through insurance or catastrophe bonds.”
Ultimately, there is an urgent need for more venture capital, comprehensive thinking around how to deploy venture capital, and the use of advanced financial technologies to link natural catastrophe risk to capital markets when addressing the widening insurance protection gap.
