We must build resilience to face the future – but will we be fast enough?

(Unsplash, 2019)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Christian Mumenthaler, Group Chief Executive Officer, Swiss Re Group, Switzerland

The effects of climate change are undeniable. Ice caps are melting, sea levels are rising and according to recent projections, 2018 is likely to go down as the fourth-warmest year on record. At the same time, the frequency and intensity of extreme weather events is increasing. No doubt you will have read about the devastating consequences of last year’s heatwaves, droughts and wildfires in Europe and California, floods in India, or typhoons in Japan and the Philippines.

What is at stake is visible in the figures: tragically, more than 11,000 people lost their lives in the catastrophic events of 2018. And we at Swiss Re estimate that total economic losses from natural and man-made disasters in 2018 amount to around $155 billion, of which approximately $79 billion are insured. Individuals, companies and governments carry the remaining financial burden. With population growth and more people living in areas that are prone to natural disasters, climate change has the potential to even further impact societies and threaten entire economies.

The re/insurance industry plays an important role in helping people and businesses get back on their feet after events like those in 2018, and in accelerating the transition towards a low-carbon economy. But to address a challenge of such magnitude, we need to collaborate across sectors, and urgent, large-scale changes from governments, companies and individuals are required.

To make real gains towards strengthening resilience, more public-private partnerships (PPPs) are crucial. They help countries become stronger financially, as well as prepare for and bounce back from the effects of climate change. Just as insurance smooths financial volatility for individuals and businesses, it does the same for countries. Consider the Caribbean nations, which are heavily exposed to tropical cyclones, earthquakes and excessive rainfall, and where funding relief measures and maintaining vital government functions after a disaster creates a significant funding challenge. The Caribbean Catastrophe Risk Insurance Facility (CCRIF), a multi-country risk-pooling initiative, provides Caribbean countries quick access to emergency funding by using parametric policies that are automatically triggered based on the physical characteristics of an event. For example, when Hurricanes Irma and Maria caused significant damage in the Caribbean in 2017, payouts were triggered without the need for time-intensive loss assessments on the ground.

There is enormous potential for even more cooperation between the public and private sectors – and it is urgently necessary to strengthen and improve resilience. The financial market landscape has changed significantly since the global financial crisis of 2008/09 and central banks have become dominant market players. With higher debt burdens, weaker financial market structures and a move to less openness, the global economy today actually has less capacity to absorb shocks than it did 10 years ago, as shown in our latest sigma outlook published by the Swiss Re Institute. Interest rates have been kept too low for too long. In fact, the stock of negative yielding sovereign bonds amounts to $9.5 trillion globally – putting that into perspective, that is equivalent to around three-quarters of China’s GDP. Deposit rates remain negative in a number of countries and this is counterproductive, especially now with the structure of the yield curve in core currencies. Progress on structural reforms has been slow, meanwhile – held back in part by ultra-expansionary policies. We therefore encourage policymakers to focus on increasing competitiveness at the national level and cooperation at the global level, as outlined by the G20 Eminent Persons Group report on Global Financial Governance.

Policymakers should focus on three dimensions:

1) Encouraging private capital market solutions

The change in market ownership from private to public players over the past 10 years has had several unintended side effects, including crowding out long-term investors such as re/insurers, which are a central component of system resilience. A more supportive policy environment would enable the private sector to play a bigger role in building resilience and help to alleviate government-contingent liabilities. For example, re/insurers could play a key role in narrowing the global pension gap – which is forecast to grow by 5% annually to $400 trillion by 2050 – by providing risk-transfer solutions for underfunded private pension schemes, and annuity products to encourage more discretionary saving for retirement.

2) Introducing a tradable infrastructure asset class

At the same time, new asset classes and products should be developed – for example, to address the large infrastructure financing gap, estimated at $97 trillion through 2040 and relieve the burden on government budgets. The starting point for establishing a tradable infrastructure asset class is promoting standardization and transparency through a common disclosure framework and related documentation. This would go a long way towards unlocking the global re/insurance sector’s estimated $30 trillion of assets under management for investments in critical infrastructure projects that support the low-carbon economy. It would also strengthen our industry’s dual role: as well as pricing and underwriting the risk of adverse climate-related weather events, we would invest in long-term resilience-building projects. As such, we not only focus on mitigating climate risks, but also adaptation, which is crucially important.

3) Promoting sustainable investing

Additionally, further progress towards a common classification system – a so-called taxonomy – for sustainable finance is needed, outlining whether an economic activity is environmentally sustainable. Through close collaboration between the private and public sectors, policymakers should establish a risk-based market-consistent regulatory framework for environmental, social and governance (ESG) investments and increase the importance of ESG in financial analysis. As well as making economic sense, including sustainable considerations in investment processes would help to strengthen our economies and societies now and for future generations.

Globalisation 4.0 must be truly different from what we have seen so far. New approaches, policies and a shift towards long-term thinking are urgently needed to create a more resilient future. Building a solid macro-economic environment and resilient societies is in the interest of both the public and private sectors – recent market volatility only underscores this need. With no time to spare, let’s combine our knowledge and resources and partner up to help reduce threat of climate change, create next wave of economic growth and, in doing so, secure the future for generations to come. The question is: will we act fast enough?