Indexing ResilienceA primer for insurance markets and economies: starting the USD 1trillion debate

(sigma 5/2019)

Dr. Jérôme Haegeli, Group Chief EconomistMonte Carlo, September 7 2019

R-word(s) in focus. Resilience is key!

2

>USD 1trn / year

RRRecession risk

Risk pools(additional)

35%

Economic Resilience

Insurance Resilience

Welcome to our new «R-index» family

SRI-LSE Macro Resilience Index

Tracks the ability of economies to withstand shocks over time

Closing gaps: positive for macro resilience

Resilience: The ability to absorb shocks

Macro Buffer, structural components

SRI Insurance Resilience Indices

Measure the contribution of insurance to the financial stability of households and organisations

Mortality HealthNat cat

3Source: Swiss Re Institute

Macroeconomic Resilience”The global economy is less resilient to absorb shocks than 10 years ago given excessive debt, lack of growth enhancing reforms and monetary policy pushed beyond its limit.’’

44

-2%pts17trn+70trn

10 Years after the global financial crisis: The world is less resilient

5

High debt burden

Negative yielding bonds

Lower economic growth

Sources: IIF, Swiss Re Institute, BoC

6

Winter is arriving for global macro. 35% likelihood for US recession

Source: Swiss Re Institute, Note: Consensus forecasts in brackets

EMs will continue to grow significantly faster than DMs Top macro risks for 2019/20 (likelihood)

Euro area:2019: 1.1% (1.1%)2020: 1.1% (1.2%)

United States:2019: 2.3% (2.5%)2020: 1.6% (1.9%)

Latin America: 2019: 1.8%2020: 2.8%

China: 2019: 6.2% (6.3%)2020: 6.1% (6.1%)

EM Asia excl. China: 2019: 6.2%2020: 6.1%

Real GDP growth in 2019

<-2.5% 1%-2.5% 2% 4% 6% >6%0%

EMs will continue to grow significantly faster than DMs

Trade war

35%

US recession

35%

Central Bank policy error

20%

Top macro risks for 2019/20 (likelihood)

50%

Macro Buffers

Fiscal policy space

Monetary policy space

50%

Structural factors

Banking industry backdrop

Labour market efficiency

Fin. market development

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SRI-LSE macro resilience index: going beyond traditional GDP analysis to trackeconomic resilience. See today’s top resilient countries & the top movers

Sources: Swiss Re Institute and London School of Economics and Political Sciences

Macroeconomic resilience factors

Note: Other structural elements not listed here include economic complexity, low carbon economy, human capital andinsurance penetration

Top macro resilient (2018) Top movers (2007 to 2018)

Country Rank

Switzerland 1

Canada 2

USA 3

Finland 4

Norway 5

Country Rank Rank change

since ‘07

Japan 9 +8

South Korea 14 +7

China 20 +6

Australia 12 +6

New Zealand 13 +6

8

Lower G4 macro resilience since 2007, but improvements over last years: next recession likely to be more prolonged, even if not as deep

SRI – LSE G4 macro resilience index andstructural elements Fiscal policy the «only game (left) in town»

Fiscal policy space

Monetary policy space

Structural reforms0.3

0.4

0.5

0.6

0.7

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Res

ilien

ce In

dex

Structural elements G4 resilience index

Source: Swiss Re Institute

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Six global macro resilience take-aways

Fiscal policy = “only game in town” in the next crisis

Central bank’s low to negative ratesdo more harm than good

Lower buffers & insufficient reforms = future recessions more prolonged

↑Domestic resilience = ↑ Global resilience

Sound fiscal positions, deep financial markets = + Macro resilience

ESG and insurance coverage also strengthens macro resilience

1

2

3

4

5

6

Source: Swiss Re Institute

InsuranceResilience“Resilience against core areas of risk – such as natural catastrophes, mortality and healthcare spending – improved, as shown in our new SRI Insurance Resilience Index. Importantly, the risk transfer to insurance markets promotes macroeconomic stability.”

1010

11

SRI Insurance Resilience Indices: New record high protection gaps

Nat CatExpected annual loss from storms, earthquakes and

floods

Estimated insurance coverage for primary nat

cat perilsUSD 222bn 24%

Mortality Income needed to maintain survivors’ living standards

Life insurance, financial assets, social security USD 386bn 45%

Health Total healthcare expenditure (funded)

Total healthcare expenditures minus

households’ stressful out-of-pocket expenses

USD 616bn 93%

Composite -- -- USD 1.2trn 54%

Starting the USD 1 trillion debate

Source: Swiss Re Institute

Note: All figures for 2018 and global; Protection gap is in premium equivalent terms

Need (N) Available (A) Protection Gap (N – A)

Insurance Resilience Index (A ÷ N)

The resilience gap remains huge, even as it improved mostly on Nat Cat in advanced countries and with large gap in emerging markets

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SRI Insurance Resilience Index: Advanced economies

SRI Insurance Resilience Index: Emerging economies

0%

20%

40%

60%

80%

100%

Nat cat Mortality Health Composite

2000 2007 2018

0%

20%

40%

60%

80%

100%

Nat cat Mortality Health Composite

2000 2007 2018

Source: Swiss Re Institute

65% 42% 3% 37% 94% 75% 23% 64%

Opportunity and Risk Pools‘’Closing the insurance protection gaps is a one trillion dollar opportunity to boost global financial resilience.’’

1313

The protection gap has more than doubled over the past two decades

14Source: Swiss Re Institute

>1trn

60-80 bn profit potential

additional claim payments

Untapped resilience opportunity = New risk pools

175

91 9173

45 34

98

208

159

116 103 115

68

456

0

100

200

300

400

US &Canada

EMEAadvanced

Asia-Pacificadvanced

LatinAmerica andCaribbean

Middle Eastand Africa

EmergingEurope andCentral Asia

Asia-Pacificemerging

Advanced markets Emerging markets

US

D b

n

2000 2018

Protection gap in advanced and emerging economies

+27% of current profit pools

Insurance resilience bolsters the overall economy, especially for emerging economies

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1) Effect of more insurance coverage for cat losses on economic variables

Source: Swiss Re Institute

2) Variables correlated with lower economic volatility

stronger recovery (GDP growth)

less government spending

less private borrowing

higher non-life insurance penetration

above-potential GDP growth

quality of economic institutions

Lower excessive debt

Call for Action

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Data analyticsFinancial market

infrastructureSupport

trend growth

Enabling regulation

Private capital market solutions

Source: Swiss Re Institute

Conclusion“Narrowing protection gaps is a USD1 trn opportunity and makesnot just commercial, but also economic sense.“

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Key takeaways

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Macro:Less resilient than pre-crisis

Insurance:Improving but…

Resilience boostfrom insurance to whole economy

Call for actionsto improve resilience

With monetary policies at or beyond their limit, fiscal policy will be the “only game in town” in next crisis

Insurance resilience has improved in most regions, but global record protection gaps of USD 1.2 trillion outline the great potential for risk transfer

Insurance promotes macro resilience: higher insurance penetration => stronger growth & lower macro volatility

Promote private capital market and insurance solutions to alleviate societal challenges and government contingent liabilities

Starting the “1 trillion dollar debate” in improving resilience

Appendix

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20

SRI-LSE Macro Resilience Rankings

Rank CountryFiscal Space

Mon. Pol.

Space

Low Carbon Econ.

Insurance Penetration

Fin. Market

Dev.

Human Capital

Econ. Compl.

Labor Market

Eff.

Banking IndustryBackdrop

2018 Resi. Index

2007 Rank

Change in rank 07 to18*

Ave. 07-11 Rank

Ave. 14-18 Rank

1 Switzerland 0.99 0.1 1 0.72 1 0.86 1 1 0.91 0.84 1 - 1 12 Canada 0.99 0.18 0.29 0.61 0.85 0.93 0.55 0.94 1 0.81 3 +1 2 2

3 United States 0.95 0.21 0.21 0.57 1 0.74 0.93 1 0.77 0.79 2 -1 9 4

4 Finland 0.99 0.12 0.73 0.89 0.57 1 0.91 0.69 1 0.77 9 +5 7 45 Norway 0.98 0.15 1 0.26 0.73 0.71 0.57 0.79 0.87 0.75 4 -1 3 4

6 United Kingdom 0.95 0.15 0.86 0.97 0.72 0.76 0.81 0.92 0.67 0.74 7 +1 14 8

7 Netherlands 1 0.12 0.5 0.82 0.59 0.89 0.68 0.86 0.7 0.73 6 -1 7 98 Denmark 0.99 0.11 1 0.95 0.16 0.8 0.6 0.98 0.79 0.72 8 - 11 119 Japan 0.88 0.11 0.56 0.77 0.83 1 1 0.7 0.77 0.72 17 +8 18 11

10 Sweden 0.99 0.11 1 0.53 0.54 0.71 0.96 0.7 0.73 0.71 5 -5 4 711 Germany 1 0.12 0.62 0.44 0.58 0.87 1 0.82 0.56 0.7 10 -1 12 1012 Australia 0.87 0.19 0.15 0.39 0.9 0.84 0.01 0.59 0.98 0.7 18 +6 20 14

13 New Zealand 0.87 0.2 0.92 0.34 0.08 0.79 0.23 1 0.89 0.67 19 +6 16 9

14 South Korea 0.95 0.19 0.27 1 0.99 1 0.95 0.33 0.42 0.66 21 +7 20 17

15 Austria 0.99 0.12 1 0.26 0.28 0.79 0.86 0.54 0.68 0.66 11 -4 8 1616 Chile 1 0.39 0.73 0.28 0 0.28 0 0.37 0.97 0.65 13 -3 9 1317 France 0.95 0.12 0.93 0.77 0.45 0.71 0.73 0.3 0.73 0.64 12 -5 12 1618 Ireland 0.99 0.12 0.97 0.54 0.43 0.91 0.74 0.93 0.1 0.62 15 -3 24 2019 Belgium 0.96 0.12 0.54 0.45 0.13 0.8 0.47 0.42 0.58 0.57 14 -5 17 2120 China 1 0.3 0.04 0.23 0.58 0.24 0.35 0.21 0.29 0.55 26 +6 19 18

21 South Africa 0.78 0.56 0 1 0.18 0 0.11 0.28 0.54 0.53 22 +1 14 16

22 Spain 0.76 0.12 0.77 0.35 1 0.69 0.39 0.21 0.37 0.53 16 -6 22 2523 Hungary 0.86 0.29 0.56 0.02 0 0.69 0.73 0.14 0.52 0.51 20 -3 22 2724 Mexico 0.85 0.34 0.66 0 0 0.05 0.57 0 0.67 0.51 27 +3 25 2225 India 1 0.29 0.37 0.17 0.03 0 0.16 0.16 0.34 0.5 24 -1 18 2526 Turkey 0.96 0.25 0.62 0 0.24 0.34 0.06 0 0.34 0.48 31 +5 29 2327 Russia 0.97 0.29 0 0 0 0.76 0.44 0.21 0 0.44 25 -2 22 2428 Portugal 0.74 0.12 0.89 0.49 0.39 0.71 0.11 0.43 0 0.41 23 -5 26 2929 Brazil 0.32 0.24 1 0.2 0.24 0 0.3 0 0.75 0.34 30 +1 27 2730 Italy 0.33 0.12 0.78 0.71 0.78 0.69 0.58 0.15 0 0.3 28 -2 28 2931 Greece 0 0.12 0.49 0 0.21 0.42 0.03 0 0 0.06 29 -2 30 31

* + denotes moving up in rank, - moving down in rank

Sources: SRI-LSE Macroeconomic Resilience Index

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Indicator Weight Rationale

Mac

ro

buff

ers Fiscal space 35% We consider fiscal policy the most important policy tool to mitigate

the length and depth of an economic shock.

Monetary policy space 15% Monetary policy is a key policy instrument to absorb economic shocks.

Mac

ro s

truc

tura

l ele

men

ts

Banking industry backdrop 18% A fragile banking industry backdrop propagates shocks given the sector's interconnectedness with the economy.

Labour market efficiency 12% More efficient and dynamic labour markets allow for easier reallocation of workers during times of stress.

Financial market development 10% Developed financial markets diversify the funding sources available for the real economy.

Economic complexity 4%An economy producing sophisticated and a variety of goods will be less affected by shocks in specific sectors.

Insurance penetration 2% Insurance acts as a shock absorber and smoothens financial volatility.

Human capital 2% High social mobility and skill levels make a country more dynamic, such that it can better withstand and adjust to shocks.

Low-carbon economy 2%Climate change has disruptive effects on global supply chains and infrastructure. This negatively impacts government finances, firms' capital, and household wealth.

SRI-LSE Macro Resilience Indicators

Source: Swiss Re Institute

Macro resilience levels across regions and time

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0.3

0.4

0.5

0.6

0.7

0.8

0.9

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Latin America North America Eurozone WORLD Asia & Oceania

Sources: SRI-LSE Macroeconomic Resilience Index