Construction worker on scaffold

Re/insurance risk transfer creates value

Re/insurers enable many entrepreneurial activities and support the economy. Through their risk transfer services and investment choices, insurers and reinsurers contribute to innovation and economic growth.

No aircraft anywhere in the world is permitted to take off without a legally required insurance policy in place. Therefore insurance is among the most vital and valuable of assets enabling an aircraft to fly. On average, aviation insurers grant liability policy limits of around USD750 million for every single departure – of which there are roughly 31 million annually.

Consequently, the sums potentially at risk amount to hundreds of billions of US dollars. Despite these substantial exposures, global airlines go about their normal daily business. They are able to do this with the support of the re/insurance industry, which has relieved them of the financial burden of backing these enormous exposures.

This example illustrates that many economic activities would simply not take place without insurance because of the associated risks. Job creation and growth would slow down and innovation – which is risky by definition - would be discouraged.

A benefit to the economy

Re/insurance supports the economy in other ways. Its long investment horizons – for life re/insurance up to many decades – provide long-term capital to the economy on a continuous basis. Premiums invested in the economy can be used by companies for growth and job creation.

In fact, the re/insurance sector is among the world's largest institutional investors. In 2009, the sector managed USD 22.7 trillion in assets, about 13% of the world’s total financial assets. Re/insurers are naturally conservative, long-term oriented, buy-and-hold investors, thus helping to support the real economy.

Through risk-transfer in new technology projects requiring huge investments – such as wind farms or large bridge projects like the Hong Kong-Zhuhai-Macau Bridge  – insurers and reinsurers can encourage investments in these sectors. Such project-related risk transfer is also often a critical factor for project financing to be successful because investors will often prefer these projects to those where risk is not insured and thus remains with the investors.

And a benefit to society as well

Re/insurance also helps make societies more resilient to large disasters. It provides swift financial relief when catastrophes strike, thus enabling affected communities to recover quicker from the damage suffered. In the same way individuals benefit from insurance cover, governments can also arrange for the transfer of large risks and thus effectively protect their communities. Swiss Re works with many governments, such as the Caribbean states, China, Mexico, Malawi and Vietnam, to develop adequate risk-transfer solutions.

A particular challenge lies in securing food supply for a growing world population. The negative effects of climate change on agricultural production are being felt in more and more countries. This calls for new solutions to protect farmers from adverse weather, such as drought or flood. Re/insurance can help to stabilize agricultural production in both developed and emerging economies. Indeed, in less-developed economies, such insurance can protect smallholder farmers from falling back into the poverty trap by providing them with the financial means to buy food and seed in the event of a bad harvest. Similarly, the fact that a country's agricultural production is effectively protected against weather-induced mishaps may attract investments into the sector which in turn supports the needed increase in food production.

Published 16 August 2011

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