The world economy has become less resilient, but the insurance industry is keeping pace with changes in the risk landscape. Nevertheless, the newly developed SRI Insurance Resilience Indices, based on measures of protection needed relative to that available, show a huge opportunity for the insurance sector to close a combined record protection gap of $1.2 trillion in 2018 premium equivalent terms, in three main risk areas: natural catastrophe, mortality and health care. Swiss Re estimates that closing this protection gap would improve global financial resilience for policyholders by more than $1 trillion each year.

Insurance resilience indices measure the difference between needed and available protection.

The new Insurance Resilience Indices are based on measures of protection in place relative to protection needed between 2000 and 2018. These indices consider how insurance helps households withstand financial shocks from:

  1. Natural catastrophes;
  2. Death of a breadwinner; and
  3. Catastrophic health care spending.
Insurance resilience for these three core risk areas has improved in most regions since 2000, indicating the insurance industry is keeping pace with the growing risk landscape. At individual peril level, we observe an increase in advanced market resilience to natural catastrophe risks (+ 8 pts), and a strengthening of mortality protection in the emerging markets (+9 pts). Notable also is the progress made in closing the health protection gap in the Asia Pacific. However, average RIs are much lower for emerging economies, and there has been a marginal decline in the global all-peril insurance index. This is because the fast-growing emerging regions, with lower levels of insurance penetration, have garnered a higher weight in the world economy, which has weighed on the global index.

The protection gap has more than doubled over the past two decades.

Our research also indicates that in absolute terms, the combined protection gap for the three risk areas more than doubled from 2000 to $1.2 trillion in 2018. That is roughly equivalent to a quarter of all premiums written by the global insurance industry. This demonstrates that the industry is operating far below its potential, a state of affairs that can burden governments, households and businesses with large financial losses in the event of a catastrophe or shock. The global natural catastrophe protection gap in premium equivalent terms was $222 billion in 2018. The protection gap for mortality risks was $386 billion, and it was $616 billion for catastrophic health care spending risks. Emerging Asia has the largest aggregate protection gap for the three risk areas combined ($456 billion). The region with the second-largest combined protection gap is North America ($208 billion), mostly driven by the U.S. ($194 billion). Advanced Europe has the third largest combined protection gap ($159 billion). Advanced Europe is the only region where the mortality protection gap is the largest of the three and higher than the health care protection gap. The latter reflects the well-established health care systems in the region. Advanced Asia is the only region where the natural catastrophe protection gap is the largest of the three, given the large earthquake exposures there.

How does insurance contribute to macro resilience?

We find that beyond the benefits at the micro-level, risk transfer to insurance markets has a macroeconomic value of increasing overall societal resilience. We modeled the response of GDP growth to major natural catastrophes and found that risk transfer to insurance markets boosts stronger recoveries post-disaster, particularly for emerging economies. In addition, in a different set of modeling, we found that higher insurance penetration is correlated with lower macroeconomic volatility. What are the transmission mechanisms from insurance to macro resilience of societies? First, insurers enhance the efficiency of risk management through risk pricing, transformation and pooling. This includes risk management in the corporate sector, where commercial insurance helps firms better withstand external shocks. Ex-ante risk management enables entrepreneurship and supports more efficient resource allocation. Through ex-post financial protection, insurance accelerates recovery. These micro-level impacts aggregate to build overall economic resilience. Second, insurance promotes financial stability by providing a stable source of long-term capital. Life insurers, in particular, are long-term institutional investors, a role that is important in stabilizing financial markets and improving macro resilience. Insurers are able to do this because of their illiquid liabilities and low capital leverage. Third, private insurance can complement or even substitute for government programs, reducing the burden on taxpayers. The relief offered by insurers is of particular relevance to fiscally- stressed governments, provided prudential regulation ensures the performance of the insurance sector during times of external shocks. Lastly, re/insurers provide economic incentives to facilitate loss mitigation, benefiting policyholders and society at large. Insurance can provide financial incentives and risk management expertise that promote best practice loss prevention measures, such as building standards, fire protection, etc. In catastrophe scenarios, the aggregate level of individual mitigation measures becomes part of resilience on a macro level. We estimate that closing this protection gap would improve global financial resilience by more than $1 trillion each year in the form of average additional insurance claims pay-outs for covered events. In order to realize this potential, governments, regulators, insurers and businesses need to work together to overcome the various supply and demand-side barriers that hold back greater uptake of insurance. Thomas Holzheu ([email protected]) is Swiss Re's chief economist for the Americas. See also: