Smarter together - why governments and insurance industry should team up to enhance financial resilience

Ivo Menzinger, Managing Director, Global Partnerships, Swiss Re

Governments across the globe are reeling from high debt levels and sluggish growth despite historically low interest rates. Others are worried about a fragile growth trajectory and what a hike in interest rates elsewhere could do to Foreign Direct Investment (FDI). The last thing these governments need are additional shocks to the economy which would not only slow down recovery, but also increase cost of debt. We now have certainty that natural disasters such as earthquakes and floods have the potential to provide such shocks, especially in countries where there is little or no insurance protection to dampen the blow.

Rating agency Standard & Poor's (S&P) just released an analysis of the potential impact of natural disasters on the financial resilience of sovereigns. S&P estimates that earthquake and tropical cyclone exposed countries such as Bangladesh, Chile, Dominican Republic, Japan, Panama, the Philippines, Taiwan, Turkey or Vietnam could suffer from downgrades between one and three notches, if a significant catastrophe occurred. Since sovereigns typically experience a 25-30 bps increase of their cost of capital for every notch downgrade, the price will be steep. And that, at a time when governments will need additional capital for disaster relief and reconstruction.

In the report, S&P tests hypothetical scenarios that underline the importance of insurance to the financial resilience of countries. In a scenario where 50% of the damage is absorbed by insurance, the negative growth impact will be mitigated by about 40% over a 5 year period. This, compared to a scenario with no insurance coverage at all. In summary, an economy with higher insurance coverage recovers more quickly and suffers from a lower cumulative GDP damage, than an economy with no insurance coverage at all.

These findings do not only present a compelling argument why it makes economic sense for governments to put pre-financing mechanisms in place. They also send a strong signal to the insurance industry to engage more vigorously with governments to ramp up financial protection. After all, only 30% of disaster related economic losses are currently absorbed by the industry globally and much less in today's growth markets.

The very act of supporting risk-exposed countries with traditional as well as innovative instruments such as parametric re/insurance and capital market solutions to fast track access to disaster funds, is an important growth opportunity for the insurance industry.

There are many good reasons for governments and the insurance industry to work together to shape a safer and more sustainable future for us all. And it makes economic sense.

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