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Issue Overview

The insurance and asset management industries play a critical role in the global financial system and aim to contribute to economic growth in both mature and emerging markets. The main function of the insurance and asset management industries involves helping individuals and companies to devise mitigation strategies for risks that often cause extensive human and property losses, strain business activities and deplete wealth accumulation rapidly. Thus they could be a pivotal provider of financial security for individuals and families and an enabler of economic activity across the full spectrum of industries by allowing the transfer and management of risks. Another main function of insurance and asset management companies is managing the investment of trillions of dollars in funds, which could facilitate long-term mobilization of finance for growth as well as for long-term savers, including public and private pension funds.

The work and discussions of the Global Agenda Council on Insurance and Asset Management  over the 2011-2012 period have thus generally focused on some of the challenges they face as providers of financial security and in managing investment to facilitate long-term growth and how they can perform more efficiently.

 Council Focus

The Council held wide-ranging discussions during the autumn of 2011, including in its working sessions in Abu Dhabi in October at the Summit on the Global Agenda. The Council focused on two main topics for the year and has just begun work on a third topic.

1. Prerequisites for large-scale private investment in climate solutions  – The insurance and asset management industries have a strong interest in reducing the risks that might accompany a rise in global temperatures, including extreme weather events such as storms, floods or droughts, that could have short- and long-term economic costs. However, global policy and regulation remains too uncertain for adequate risk assessment in many of the most important large-scale climate solutions, including energy efficiency, renewable energy, reducing deforestation and degradation of forests (REDD+) and carbon capture and storage (CCS). The Council called for action to create the necessary environment for investment in climate solutions, and urged policy-makers to make specific progress in the following five key areas:

  1. Establish a Green Climate Fund (GCF) and mechanisms to mobilize adequate private sector investment
  2. Establish a predictable macro environment for green investing
  3. Create a favourable climate for early adoption of energy saving technologies
  4. Commit to rapidly expanding Climate Bonds as a new and liquid fixed income asset class
  5. Move quickly to establish a large-scale, long-term funding mechanism for Reducing Deforestation and Degradation of Forests (REDD+)

The Council also urged policy-makers to establish high-level and technically experienced working groups to lay out a clear work plan to deliver a “green investment revolution” within this decade through a statement ( see http://www.forumblog.org/blog/2011/12/a-green-investment-revolution.html) noting that financing and investment for the development and deployment of greener technology, especially low-carbon energy, should be mobilized. The Council also calls on policy-makers to recognize that, with over US$ 54 trillion in assets under management, insurers and pension managers are fiduciaries, investing on behalf of policyholders, shareholders, and pension funds, and are therefore looking for predictable returns commensurate with risk.

The Council called for the discussion of those recommendations to begin at the World Economic Forum Annual Meeting in Davos in January 2012. Several members of the Council participated in discussions with other councils (e.g. Council on Climate Change) and agreed to maintain discussion and communication on these issues throughout 2012.

2. Social benefit systems  – Social benefit systems are under stress from demographic developments aggravated by financial market developments. Life expectancy has risen as birth rates have declined, so fewer people are entering the workforce than are retiring. Thus fewer workers pay into the social benefit system, while longer life expectancy means that benefits will be paid for longer periods. The financial crisis has aggravated this by devaluing a significant part of asset-backed annuity schemes. Low interest rates limit the ability of private pension supplements to make up the difference. Developed economies in general face much more immediate demographic issues of aging, making their problem more urgent and extreme.

During the 2010-2011 term, the Council recommended that a group of relevant Global Agenda Councils work together to create a paper on how social security systems should and should not be rebuilt. The Forum responded by creating a special project on Creating Future Social Protection Systems, which is underway and is expected to be completed by 2013. This year’s Council was briefed periodically on that project and has continued to provide advice informally on the project’s work plan and focus. The newly planned Global Agenda Council on Social Security Systems, which will integrate some members of the current Council on Insurance and Asset Management, will continue to contribute to this project later in 2012. Both the project and the new Council will also aim to involve key public sector leaders and academia in order to facilitate a public-private dialogue to tackle this very challenging issue and come up with viable action plans that would have real policy impact.

3. Role of insurance in reducing losses from natural disasters  – The Council has started planning work on a third important project that would develop a set of insurance principles to guide the analysis and then address a series of questions exploring how insurance, in conjunction with other policy tools, could reduce future natural disaster losses. The Council on Insurance and Asset Management calls on the Forum to encourage the Councils to carry it forward in 2012-2013. While some principles are not adhered to in most countries regarding coverage and pricing against losses from natural disasters, the Council endorses the following as guiding principles in the analysis:

  • Premiums reflecting risk –  in order to provide signals to individuals as to the hazards they face and to encourage them to engage in cost-effective loss reduction measures
  • Dealing with equity and affordability issues –  special treatment given to homeowners currently residing in hazard-prone areas (e.g. low-income uninsured or inadequately insured homeowners) to come from general public funding and not through insurance premium subsidies
  • Minimize likelihood of insolvency –  insurers and reinsurers should determine how much coverage to offer, and what premiums to charge against a specified risk; combined with capital adequacy rules, sound reinsurance strategies and the role of rating agencies and regulators, this will reduce the chances of insolvency below some predefined acceptable threshold
  • Premium reductions for encouraging risk reducing measures –  if prices reflect risk, insurers can encourage investments in risk reducing measures through premium reduction; property owners can take steps to reduce their losses from natural disasters or other damage to their structures or facilities by undertaking protective measures
  • Consider interdependencies –  insurers should recognize interdependencies in evaluating specific risks; more specifically, insurers should take into account the impact of indirect losses caused by exogenous events (e.g. supply chain interruptions due to an earthquake) in their premium-setting process and encourage key decision-makers to take protective measures before the next disaster to reduce these impacts.

The following questions should be addressed in the proposed study:

  • How can insurance encourage residents and business in hazard-prone areas to adopt loss protection measures?
  • What role can insurance play in incentivizing disaster victims who suffer repetitive losses to relocate to less hazard-prone areas after suffering damage to their property from a disaster?
  • How can insurance stem the tide of individuals moving into hazard-prone areas by charging premiums reflecting risk that is also realistic, transparent and affordable in conjunction with suitable public policy measures?
  • How can well-enforced standards (e.g. building codes) and regulations (e.g. zoning and permit restrictions) complement insurance in reducing future disaster losses?
  • What are the challenges and opportunities in developing long-term enforceable contracts (e.g. multi-year insurance, mitigation loans) that are tied to the property?

There is considerable interest in reforming the US National Flood Insurance Program (NFIP) so that it can reduce losses from future flooding and storm surges. This project might address the above questions in the context of the NFIP and a market-based insurance programme (e.g. flood insurance in the UK). The Council on Insurance and Asset Management recommends that this topic be integrated in the agendas of relevant councils such as Catastrophic Risks and Climate Change for wider discussion and debate in the multistakeholder community.

Disclaimer

The opinions expressed here are those of the individual members of the Council and not of the World Economic Forum or any institutions to which they are affiliated.