Insurance is bucking the downward trend. Here’s how it can boost our economies

COVID-19 has caused the deepest recession of our lifetimes, shrinking the world economy twice as sharply as the global financial crisis. But the insurance industry looks set to continue to grow and to play a leading role in helping the world to recover.

The latest Swiss Re Institute sigma report Rebuilding better: global economic and insurance market outlook 2020/21 forecasts that global GDP will contract by 4.2% this year and the recovery will be slow and uneven in 2021.

The report says global insurance markets have been less severely impacted than expected. Total global premiums are now forecast to decline by 1.4% in real terms this year, half the decline predicted as recently as June 2020.

Excluding the impact of the pandemic on the life sector, the sigma expects global non-life income to rise by 1.3% this year and forecasts total premium growth across all sectors of 3.4% in 2021 and 3.3% in 2022.

Higher premiums, smarter spending

Part of the growth will be driven by higher premiums. “Market conditions from both the demand and supply sides point to continued pricing strength,” said Andreas Berger, Chief Executive Officer of Swiss Re Corporate Solutions. “The low interest environment and the ongoing social inflation in the US will be key drivers of market hardening.”

As a result of its forecast growth, the insurance industry will be able to use its position of financial strength to help power the global economic recovery from the effects of the pandemic.

But it will need to be done in partnership with governments and the public sector, as economies struggle to recover and countries are burdened by borrowing to finance measures to tackle the effects of lockdowns, through schemes such as furloughing and universal credit.

"For sustainable economic recovery, we need a policy reset,” says Jerome Jean Haegeli, Swiss Re Group Chief Economist. “Public policy should focus on areas such as infrastructure, technology and climate. Building new sustainable infrastructure will have a significant impact on GDP growth."

"In addition to smarter spending, policymakers should make more use of public-private partnerships and establish the operational and regulatory frameworks to better recycle private finance, such as insurance funds, into the real economy," Haegeli adds.

Tackling inequality

COVID-19 has widened inequality with the burden of lay-offs falling disproportionately on the least well paid. In the US, while the easing of lockdowns resulted in employment among high earners returning to pre-crisis levels, a fifth of low earners were still jobless in October.

“Industries with a large share of jobs that are telework-able, essential and do not require physical interaction tend to have higher earnings. Workers in those sectors hardest hit by COVID-19, meanwhile, tend to earn less than those in more shielded jobs,” says the sigma.

“The double whammy of the most vulnerable jobs also being lower-paid work will exacerbate income inequality over time.” The sigma says the picture is clouded because official unemployment figures often understate the scale of the problem.

By using a measure which captures those furloughed and people who have simply given up looking for work, a “shadow unemployment rate” of almost 25% emerges in the EU’s four largest economies: Germany, UK, France and Italy.

Unless inequality is tackled, the recovery will be slower than it could be if living standards were improved, says the sigma. The authors expect governments to use taxation to redistribute wealth in the wake of the crisis.

Partnership with the public sector

And the growth of public sector interventions will also drive the need for more insurance cover. “The COVID-19 shock has accelerated several paradigm-shifts that were already in the making,” the report says, “including a larger role for governments in the economy, digital transformation and a de-risking of global supply chains.”

Working with the public sector is one of the key ways in which the insurance industry can help drive a resilient recovery. As government debt mushrooms to levels not seen since the world wars, the sigma says public-private partnerships have a key role to play.

As major institutional investors, insurers and reinsurers can help alleviate the effects of inevitable government borrowing to fight the pandemic and, at the same time, deliver long-term sustainable infrastructure to help economies recover.

As well as being a clear social good, helping societies defend themselves against catastrophic events driven by climate change, infrastructure investments offer exactly the type of long-run returns that insurance balance sheets need.

“Building new sustainable infrastructure and upgrading the old has a significant multiplier effect on GDP growth,” says the report, citing US government figures that the economic benefits may be double or even three times the project costs."

“As many government budgets are under pressure, mobilising private capital and forming public-private partnerships will be key to shouldering the costs and delivering infrastructure at the quality and scale required,” conclude the authors of the report.

The digital route to resilience

One of the most striking impacts of the pandemic has been the rapid digitisation of business and personal life. As people conduct more of their daily lives online, it creates opportunities for both the industry and its customers.

Insurance has a key role to play in supporting inclusive growth and improving resilience by providing protection for businesses and households against future economic shocks. The pandemic has heightened appreciation of the need for such cover.

By broadening its digital reach, the industry can raise awareness of the risks and offer more people and businesses access to insurance products that provide the appropriate cover for their needs.

As the proportion of individuals and companies with insurance grows, the capacity of economies to recover from shocks increases. It’s a virtuous circle which makes societies more resilient and alleviates individual suffering when disaster strikes.

At the same time, data derived from the digital world can help insurers provide more tailored and affordable products, such as pay-as-you-go cover. Data analytics provide insights into customer needs and behaviour, enabling cover to be priced more accurately.

As well as reducing underwriting risks, data-driven insights can also point the way to potential new areas of business for insurers. The rise of parametric cover is a good example of this type of innovation in action.

Faced with a growing number of natural catastrophe events, Swiss Re has pioneered cover based on independently verified weather data which triggers a payout without the need to submit a claim.

Building back resilience

The global economy went into the COVID-19 pandemic in a weaker position than before the 2008/9 global financial crisis. In the 2020 Swiss Re Institute Resilience Index, eight out of 10 countries had lower scores for 2019 than in 2007 – 45% were significantly lower.

As a result, the ability of the world economy to absorb future shocks is still weakened and the report highlights the vital importance of building greater resilience. With government finances committed to continued stimulus, private capital will be crucial.

This is where the re/insurance industry has a critical role to play. As investors re/insurers can strengthen economies by co-funding sustainable infrastructure, and as risk takers, they can provide the cover which will allow households and businesses to recover quickly from shock events.

Building back resilience is the key to a sustainable global recovery. And the re/insurance industry has a unique opportunity to use its financial strength to make the world more sustainable and equitable.

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​sigma 7/2020 - rebuilding better

Global economic and insurance market outlook 2021/22