Protection gaps widening around the world

Swiss Re Institute has released its fifth resilience sigma report titled Restoring Resilience: The Need to Reload Shock-Absorbing Capacity.

The report highlights the escalating global protection gaps in natural catastrophes, crop, mortality, and health insurance, which now demand a staggering US$1.8 trillion in annual insurance premiums—a record high. Over the past five years, these protection gaps have surged by 20%, propelled by growing economic demands and the impact of inflation.

Despite the alarming rise in the protection gap, the report showed a positive development in society's ability to withstand unexpected financial shocks, Swiss Re said. Currently, 57% of global risks associated with natural catastrophes, crop, mortality, and health are covered by insurance—a three-percentage-point increase since 2012.

This year's report introduces a novel indicator of resilience focused on food security. It examines the extent of underinsurance in global crop production, revealing that 60% of the world's crop production remains uninsured, with the most significant protection gap observed in emerging Asia. Closing this gap would necessitate US$113 billion in annual insurance premiums for crop coverage.

“We’ve been seeing tectonic shifts in economic policies across the globe as governments have responded to war, a pandemic, and rising inflation,” said Jerome Haegeli, group chief economist at Swiss Re. “Despite the uncertainty and volatility, the world is more resilient today, and insurance is playing a stronger role than it did a decade ago. However, resilience remains 15% weaker than before the Global Financial Crisis, and the risk is elevated. The inflation-taming monetary tightening process has laid bare financial stability and recession risks, while persistent inflation increases households’ need for more fiscal support to offset their erosion of purchasing power. We expect little improvement in macroeconomic resilience in 2023.”

To enhance resilience, Haegeli emphasised the importance of investing in adaptation and mitigation measures to minimise losses. He underscored the need for increased investment in this area, suggesting the development of resilience bonds as a means to attract new sources of capital while delivering economic benefits.

Read next: Swiss Re releases report on emerging risks

Alongside the focus on crop resilience, the report provided updates on overall global economic resilience, health insurance, mortality, and natural catastrophe lines for 2022.

Key findings from the report include:

• Global resilience has improved over the past decade, primarily driven by advancements in crop, natural catastrophe, and health resilience, where available protection is growing at a faster pace than the overall protection needs.
• Approximately 43% of global risks remained uninsured in 2022, an improvement from 46% a decade ago.
• The global protecti on gap continues to widen, reaching an all-time high of US$1.8 trillion in premium equivalent in 2022, surpassing the US$1.5 trillion reported in 2018.
• Health resilience experienced an overall improvement in 2022, with 78.3% of protection needs covered by insurance, up from 77.5% in 2021. Emerging Asian markets drove this positive change, benefiting from improved health standards. However, there remains a health protection gap of US$889 billion in premium equivalent.
• The mortality protection gap, measuring the insurance required to fully cover families' financial needs in the event of a breadwinner's death, slightly increased to 43.4% in 2022—an all-time high of US$406 billion in premium equivalent. This increase can be attributed to inflation, wage hikes, and weaker financial markets.
• Natural catastrophe resilience remained low in 2022, with 76% of global exposures lacking coverage. Closing this gap would require an additional US$368 billion in future insurance premiums.
• Strategies for bolstering resilience encompass investing in loss prevention and expanding insurance coverage.
• Emerging markets require an estimated US$100 billion in annual investments throughout this decade to enhance resilient infrastructure, real estate, and agriculture against natural catastrophes.
• Resilience bonds and other innovative financial instruments can facilitate investments in infrastructure, property, and crop resilience. These proactive investments offer substantial cost-benefit ratios ranging from 2:1 to 10:1.
• As loss prevention reaches its limits, risk transfer through increased insurance uptake necessitates closer collaboration between the public and private sectors to facilitate incentives and enhance the insurability of hard-to-insure risks.

Have something to say about this story? Let us know in the comments below.