World Economic Forum
Two decades into the 21st century, the global economy has already sustained two “once-in-a-generation” shocks—the global financial crisis and the COVID-19 pandemic. The economic disruption that resulted from each has shone a spotlight on the susceptibility of world economies to major systemic shocks and put households, businesses and governments around the world in an increasingly precarious position. While it is impossible to know what the next major disruption will be (pandemic, climate, cyber, geopolitical or otherwise), it is certain that there will be another.
However, the current model by which society manages catastrophic risks is fundamentally unsustainable. What is most striking about the current pandemic is how unprepared the world seemed to be for it. Public health experts and risk reports (including the World Economic Forum’s Global Risk Report) have for years pointed to the possibility of a widespread flu pandemic. And yet the world’s response to the crisis has been largely reactive. With regard to many aspects of public health, employee safety and fiscal response, many leaders are scrambling to define solutions on the fly.
Companies, for their part, have not adequately anticipated and protected against high-cost (“risk-of-ruin”) perils. As a whole, businesses have underestimated the likelihood of such events, and shown limited understanding of their own exposures to them, relying on a relatively narrow set of protection tools (e.g. financial hedges), rather than a broader set of strategic and operational levers for building resiliency. And they have believed (thus far, correctly) that governments will ultimately pick up the tab, creating moral hazard and a tendency to dismiss such perils as being simply “uninsurable”.
This model is not serving society well. During the past two recessionary cycles, US companies gave back over 60% of the shareholder value they had created during the preceding expansions. Between 2008 and 2019, governments spent roughly $10 trillion on fiscal stimulus and quantitative easing, vastly subsidizing the cumulative $22 trillion in corporate profits generated over the same period. In many societies, this model may no longer be viable. Even before the COVID-19 crisis, public debt ratios in developed economies stood at 100% of GDP. For many governments, backstopping another COVID-like event may be fiscally impossible.
The risk of a future pandemic-, climate-, or cyber-related shock remains real, even as resiliency—specifically, the capacity of companies and institutions to withstand disruption before government intervention is required—has been eroded. Rebuilding and enhancing societal resiliency is therefore an urgent priority, and one in which both the insurance and asset management industry have a critical role to play. Two imperatives emerge where insurers and asset managers can assume a leadership role in preparing for the future:
- A new approach to managing catastrophic risk is needed. Imagine a new “Societal Risk Compact”, wherein companies, regulators, policy-makers, insurers and investors all play a part in a more proactive approach to managing catastrophic risk. Insurers, reinsurers, risk advisers and asset managers have a central role to play—creating new mechanisms for affordable risk sharing and transfer, partnering with governments to improve loss remediation and public-assistance schemes, and, most importantly, helping corporate and institutional clients do a better job of ex-ante risk avoidance and mitigation.
- Corporate and investor agendas do not adequately prioritize resiliency, which too often takes a back seat to near-term efficiency goals. In the absence of a common taxonomy for disclosures and reinforcing policy and regulatory frameworks, chief executive officers, shareholders and regulators often find they lack a common language to discuss and justify investments in resiliency against events that may never occur. As stewards of significant capital, asset managers and insurers should lead in drawing a clearer link between resiliency and long-term value creation.
This document represents a potential path forward, outlining a series of steps that the insurance and asset management industry can take to help rebuild resiliency ahead of future crises. This paper also represents a call to action for the industry to work collectively and in concert with the public sector to help drive a multistakeholder, multiyear dialogue on how the world’s economic and social models must evolve in the face of inevitable future catastrophic risks.
This statement of intent has been informed by months of discussion in the Forum’s Insurance and Asset Management Industry Action Group (IAG)—comprised of 21 of the leading insurers, asset managers and risk advisers from across the globe. The members of the IAG recognize the pressing need for greater resiliency and are committed, together and with other stakeholders, to build a more resilient and sustainable world.