Restoring resilience: the need to reload shock-absorbing capacity

We measure resilience as how well an economy, business or household can withstand an unexpected financial shock such as a natural catastrophe or the death of a breadwinner. Our index of macroeconomic resilience captures the extent to which an economy can withstand a shock such as a recession; and our insurance resilience indices measure how insurance contributes to maintaining households' and businesses' financial stability by transferring or absorbing key risks to life, health and property. The protection gap is the uninsured or unprotected portion of the resources needed to fully mitigate a risk.

We see the world economy today as in need of a sustained reload in resilience. The value of unprotected risk exposure globally has risen steadily in the past five years. We estimate the global protection gap at USD 1.8 trillion in premium equivalent terms for 2022, a cumulative 20% increase on the comparable-terms USD 1.5 trillion estimate for 2018. We have expanded the insurance resilience indices with a new crop protection index, and have added the severe convective storm peril to our natural catastrophe index. We estimate about 43% of risk globally was unprotected by assets or insurance in 2022, improved from 46% a decade ago.

Macroeconomic resilience strengthened globally in 2022 as central banks increased interest rates, and our macroeconomic resilience measure returned to its pre-pandemic level. However, it remains 15% weaker than in 2007, prior to the Global Financial Crisis (GFC). Risk is elevated: the inflation-taming monetary tightening process has laid bare financial stability and recession risks, while persistent inflation increases the need for fiscal support to offset the erosion of households' purchasing power. We expect little improvement in resilience in 2023 or 2024. 

SRI Macroeconomic Resilience Index (E-RI) and its sub-components, 2007–2023E

Our insurance market research also signals a need for resilience in four key perils. The agrifood system supports almost half of the world's population and food security has been a key concern since the outbreak of war in Ukraine. Yet our new crop index finds about 60% of global insurable crop production was unprotected against natural disasters and accidents (eg, fire, disease and insect swarms) in 2022. We estimate the global crop protection gap at USD 113 billion (premium equivalent), up by 28% in nominal terms from 2016, emphasising the importance of agricultural insurance to smooth farmers' income fluctuations. Our natural catastrophe resilience index estimates that about 75% of global risk was unprotected in 2022, with protection gaps largest in emerging markets.

Health resilience shows encouraging strength, standing at 78% in 2022, as living and health standards improved alongside economic growth, particularly in emerging Asia. However, mortality resilience is low at 43%, implying that many households are vulnerable to the loss of a breadwinner. We estimate the global mortality gap widened to USD 406 billion in 2022, a record high, driven by inflation, wage rises and weaker financial markets. Life insurance has helped to improve protection in most countries, particularly those with higher resilience, but more still needs to be done. 

SRI insurance resilience indices (I-RI) and protection gap by region

To reload resilience requires two strategies: reducing expected losses and expanding insurance coverage. For example, investment can lower the risk of damage to crops, property and infrastructure from natural catastrophes to structurally narrow protection gaps while supporting economic growth. Such investment can generate economic dividends that outweigh the cost by multiples from 2:1 to 10:1. Every USD 1 invested in loss prevention in lower income countries creates a relatively larger resilience dividend than in wealthier economies. By reducing risk, loss prevention also fosters insurability.

The channels through which insurance supports resilience on a household and societal level

At the limit of loss prevention, risk transfer comes into play. For example, the European Insurance and Occupational Pensions Authority (EIOPA) estimates that a large-scale disaster causing direct losses of more than 0.1% of GDP, can reduce GDP growth by around 0.5ppts in the quarter of impact if the share of insured losses is low – but where sufficiently insured, events are inconsequential in terms of foregone output. The insurance industry can incentivise loss mitigation behaviour and support risk transfer at the household and corporate levels.