The COVID-19 pandemic and the Ukraine conflict have exacerbated deglobalisation, creating concerns about supply chain resilience, energy and food security, according to a new report from Swiss Re Institute.
“Friend-shoring” of supply chains to allied countries and reshoring production capacity domestically, investments in green energy and mitigating a food crisis will reshape the risk landscape and likely spur increased investment into the real economy, the study found.
“Six months into the war in Ukraine, our world has changed dramatically,” said Jérôme Haegeli, group chief economist at Swiss Re. “Triggered by the war and the pandemic, we are shifting from an interconnected to a multi-polar world faced with disrupted supply chains, energy and food crises. Insurance is becoming even more vital to the economy, contributing to the financial stability of businesses by covering supply chain risks.
“The industry can also facilitate the transitions to a green economy by insuring and investing in renewable energy infrastructure, and by expanding agricultural insurance, it can contribute to global food security.”
Supply chain restructuring is predicted to create investments in new infrastructure and production facilities, driving increased demand for engineering insurance, Swiss Re said. Reshoring is predicted to generate an additional $30 billion in global commercial insurance premiums over the next five years, mostly from engineering, property and liability coverage. Friend-shoring would add $3 billion in premiums, Swiss Re said. Marine and trade credit premiums would see a slight decline, as global trade is expected to slow.
“In the changing risk landscape, commercial property and casualty insurance will remain a mainstay of resilience, for instance by helping businesses maintain financial stability as operating circumstances change, providing solutions to help reduce cash-flow volatility and stabilising earnings while supply chains are being realigned,” said Gianfranco Lot, head of global reinsurance at Swiss Re.
The effects of climate change have already hammered home the importance of the green transition, and the Russia-Ukraine war has added new urgency to the shift to renewables, Swiss Re said. Building and operating renewable energy assets involves complex risks that need to be managed to avoid large revenue losses.
“The insurance industry can play a key role in enabling the expansion of renewable energy by providing risk protection covers for the complex risks inherent in constructing and operating renewable energy infrastructure,” Swiss Re said.
Since renewables are only one component of the green transition, more investment in decarbonisation is also needed if the world is to meet the goals of the Paris Agreement, Swiss Re said. If countries succeed in building all the renewable energy capacity they have targeted so far, Swiss Re Institute estimates these investments will generate additional premiums from the energy sector of $237 billion by 2035. However, the transition to a green economy requires a global effort, and fragmentation due to geopolitical and security concerns could impede the coordinated action needed.
Food prices have soared due to supply chain disruptions from the pandemic and the Ukraine war, Swiss Re said. With the global population expected to hit 10 billion over the next 30 years, global food security has become more and more vital. Agriculture insurance can play a key role in helping farmers maintain income levels and continue farming even in the event of a crop loss, Swiss Re said. Global agriculture insurance premiums are expected to hit $80 billion by 2030, from $46 billion in 2020.