The global insurance protection gap, or the gap between economic losses and those that are insured, increased again in 2021, reaching a new all-time high of US $1.42 tr, according to reinsurance giant Swiss Re.
The trend is expected to continue in 2022, with Swiss Re warning that the current inflationary environment is expected to widen the gap further this year.
Reinsurance firm Swiss Re measures insurance resilience using its sigma Resilience Index and explained that while insurance resilience did improve in 2021, thanks to strong insurance premium growth supported by rising risk awareness among customers and governments’ pandemic-related health spending, it has still not recovered to pre-COVID or global financial crisis levels.
As a result, “The world insurance protection gap for health, mortality and natural catastrophe risks combined reached a new high of USD 1.42 tr in 2021 and the current inflationary environment is expected to widen the gap further this year,” Swiss Re explained.
Adding that, “Despite a strong forecast for nominal insurance premium growth, insurance resilience is expected to weaken in 2022 due to scaled-back government benefits and declining asset values.”
Jerome Haegeli, Group Chief Economist of Swiss Re provided more colour on this, saying, “The cyclical recovery in both macroeconomic and insurance resilience in 2021 cannot hide the fact that deep structural reforms are needed to drive long-term growth.
“The current inflation shock and cost of living crisis are disproportionately affecting the lowest-income households and will only widen protection gaps this year.
“To secure greater resilience and support long-term economic stability, structural parameters such as infrastructure and human capital need to be strengthened and inequality reduced.
“Against this challenging backdrop, the insurance industry plays an important role in shifting financial risks away from individuals and ultimately increasing their resilience.”
In 2021, Swiss Re reports that global mortality resilience dropped to 45.7%, led by falls in emerging Asia, emerging Europe and North America.
At the same time, natural catastrophe resilience remained low, with 75% of global exposures unprotected in 2021.
The current global inflationary environment is set to exacerbate the global insurance protection gap, Swiss Re believes.
The reinsurance firm estimates that price increases in 2022 could drive a US $55 bn widening in the global insurance protection gap, or about 3.8% of the total gap.
The natural catastrophe protection gap has been widening steadily in recent years, from US $169 bn in 2019, to US $216 bn in 2020 and US $251 bn in 2021.
It’s not an even picture across the globe though, with the natural catastrophe insurance protection gap growing more slowly in some regions than others, helped by increasing insurance penetration.
An example is Asia, where higher penetration of property insurance in China has improved natural catastrophe resilience in the emerging Asia Pacific region.
Conversely, nat cat resilience is falling where it is highest, in North America, Latin America and EMEA, while their natural catastrophe insurance protection gaps are widening faster than Advanced AsiaPac.
Higher inflation is expected to worsen protection gaps and this may also become evident in catastrophe claims inflation, as well as through higher costs and insurance pricing.
Overall, it seems the world is not really improving its resilience except in regions where development is accelerating and uptake of financial products like insurance increasing.
In what we’d call the advanced economies of the United States and Europe, for example, we see resilience falling or stagnant, with insurance protection gaps expanding, suggesting a need for more cost-efficient insurance and reinsurance solutions, as well as alternative products that can boost resilience and narrow protection gaps (parametric triggers being one example that may help on the nat cat side).
With around 75% of natural catastrophe exposures across the globe unprotected by insurance and reinsurance, it underscores the need for efficient risk capital, risk transfer and risk syndication, to spread risk and tap into capital markets and expand coverage of global catastrophe risks, a key area the insurance-linked securities (ILS) market can assist with.