Taking the guesswork out of measuring resilience

For most of us, it takes a lot of guesswork in deciding how much insurance coverage we need. In case we need to stay in a hospital, do we want a more private room? What about loss of income protection? Am I really getting the value out of how much I am paying in medical insurance premiums each year?

It's the same with financial and global risk patterns, which have changed due to more frequent occurrences of extreme weather events, unstable geopolitical and macroeconomic environments, ageing populations and increases in medical expenses. So how do we know when enough is enough?

That's why the Swiss Re Institute (SRI) and the London School of Economics and Political Science (LSE) have jointly researched and published a new overall Economic Resilience Index, which provides a more holistic assessment on economic health rather than just referring to Gross Domestic Product (GDP) output as a measure of what's needed.

The answer: global economic resilience is weaker now than in 2007 at the onset of the Global Financial Crisis.

We are less resilient? How is that possible?

The Economic Resilience Index identifies three risk categories - natural disasters, accidental death and healthcare expenses. It then measures how resilient a particular society is to these shocks, It could be based on migration to coastal regions, how exposed a country is to climate risks or a food supply shock. It could be its resiliency to deal with aging or the cost of cancer treatment. Based on these factors, the protection gap doubled from 2000 to 2018, reaching a new record of USD1.2 trillion. However, data indicates that family resilience against the three core risk categories has seen progress in most areas since the beginning of this century.

For example, the overall insurance resilience in developed and emerging countries and territories in the Asia-Pacific region has increased by 4% to 59%. This is the percentage that tells us how shock absorbent we are. But measured against accidental death risks, the region’s developed countries and territories ranks first in the world at 62%. Among these economies, Taiwan, Hong Kong, South Korea and Japan have the highest life insurance penetration, thanks to insurance and savings products.

The Asia-Pacific region’s emerging countries and territories are lagging behind their developed counterparts in the same area in terms of protection against the three major risks. It is worth mentioning that resilience against healthcare expenses in this region is seeing stable progress, indicating that reforms based on the national universal healthcare concept are achieving success in China, India, Indonesia, the Philippines, Thailand and Vietnam. However, emerging economies in the Asia-Pacific region still have the largest absolute insurance protection gap, estimated at USD456 billion. This accounts for 80% of the total gap in this region, which is USD 572 billion.

Why these categories?

The insurance resilience index is based on the ratio of needed protection to obtainable protection. This index analyses how insurance helps families deal with natural disasters, the loss of a family breadwinner, or healthcare expenses.

Natural disasters pose a major threat to families and businesses and have widespread and substantial negative impacts on the financial health of families, including aspects such as credit ratings, debt, bankruptcy and credit card exposure. Insurance plays an important role in protecting the insured from disastrous financial expenditures. Empirical studies have shown that insurance improves the likelihood of recovery for families, reduces financial difficulties and shortens the time needed for economic recovery.

Secondly, life insurance companies have been focusing on retirement savings management over the past few decades. Since the GFC however, there has been a shift to risk protection. Many life insurance companies are now promoting insurance against accidental death risks. It is a positive step, because many families nowadays still lack economic protection against the early death of their main breadwinner.

In addition, healthcare remains a major challenge to regional resilience. According to the WHO, more than half of the world's population still lack basic healthcare protection. Moreover, about 100 million people are in dire poverty because of medical expenses each year. All of the UN's member states are aiming at nationwide healthcare coverage by 2030 as part of their sustainable development goals.

Encouraging the insurance industry to work more closely with other industries to boost social resilience

For the insurance industry, this gap in overall protection translates to trillions of dollars’ worth of opportunity. Helping our societies become more resilient should be a goal. We believe the resilience index will help increase awareness of the protection gap, facilitating closer cooperation between governments, regulatory bodies, insurance companies and businesses to build societal resilience.

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