Measuring resilience: what it tells us about our world

The ability to recover well from shocks is beneficial in many walks of life. A new Resilience Index measures how prepared we are as a society and shows how resilience can unlock better economic stability.

As risks to the global economy continue to mount, quantifying and pinpointing weak spots could help dial down exposure to unexpected events and improve resilience. That’s the focus of the Swiss Re Institute's sigma report Indexing Resilience.

It not only shows how sound economic policies make countries more resilient, but also how fostering insurance more widely at an individual level helps mitigate threats to society and bolster growth.

By measuring resilience at both the macro and micro levels, we can gain a better picture of how to manage risk in a world grappling with challenges such as a slowing economy, rising national debt, climate change and pressure on our natural resources. According to our latest analysis, the world economy is less resilient today than before the global financial crisis began in 2008.

By unpacking the concept of resilience from both a macro and micro perspective, we can explore how it varies from region to region and identify insurance protection gaps in key areas that, if closed, could greatly improve societal resilience.

“Greater insurance uptake improves resilience not just for developing and emerging-market countries, but also for developed countries,” says Jerome Haegeli, Swiss Re Group Chief Economist. “That’s the important takeaway. If the insurance-market gap supports economic stability, then it is in the shared interest of policymakers, society, as well as the insurance industry, to narrow the gap.”

Unforeseen issues

The Resilience Index uses two gauges to identify the risks. The Macroeconomic Resilience Index, developed in conjunction with the London School of Economics, paints a global picture, while a second set of indices assess how insurance helps individuals, households and organizations to withstand shock scenarios in three key areas: natural catastrophes, mortality and healthcare spending.

Examining and quantifying risk events that affect individuals demonstrates how they can translate into macroeconomic consequences. This could include the unforeseen medical costs of treating someone with a life-threatening disease or how well a family can financially withstand a death.

Countries and regions with “higher levels of insurance penetration tend to exhibit less volatile growth,” the sigma report concludes. “Further, we model the response of gross domestic product growth to major natural catastrophes and find that risk transfer to insurance markets boosts stronger recoveries after a disaster, thereby increasing the resilience of entire economies.”

While the overarching benefits of closing the insurance gap are probably clear, it also makes commercial sense. The Swiss Re Institute's analysis identifies an additional USD 80 billion potential profit for the global insurance industry.

Mind the gap

“Closing the global protection gap is a 1 trillion dollar opportunity,” Haegeli explains. That’s equivalent to a quarter of all premiums written by the global insurance industry in a single year.

And that number could be even higher, since the calculations focus just on natural catastrophes, mortality and funded healthcare spending. Other risk pools remain unaccounted for, like the large protection gaps for motor and general property risks in emerging economies. Other emerging risk pools like business interruption and cyber threats could also push the number higher.

Even so, many barriers prevent the insurance industry fulfilling its potential and contributing fully to growth and economic resilience. Governments, regulators, insurers and businesses all need to pull together to help overcome them

Cost is a key reason for underinsurance, alongside availability of the right products and trust in the sector. Product innovation may offer some of the answers, with new offerings able to reach previously underserved segments of the population. Digital technology and the internet of things could also help get the right products in front of the right consumers at the right time.

Improving education

“There is no simple answer,” says Haegeli. “It’s multifaceted. It starts with education; it starts with putting down the facts. Yes, insurance costs. And yes, it can be very low risk, but if it happens and if you're not insured, then you have a problem.”

Governments can also play a role, not only by ensuring the sector is well regulated and transparent, but also by mandating coverage in some lines of business, offering tax benefits to low-income households, and encouraging financial literacy so that the risks of not taking insurance are fully understood by a larger number of people.

“Having insurance pays off,” says Haegeli. “Not just for the insurance companies, but it pays off for the macroeconomy. Private enterprises and individuals always need to take risk, but you need to take a calculated risk and insurance helps you do that in the best way.”

While the research exposes the world’s growing vulnerability to shocks, it also identifies some key gaps that can be plugged, offering a way to strengthen our collective resilience and underpin our future prosperity.

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