In the not-so-distant past, busy professionals racked up mileage awards jetting around the world to close business deals, enjoy face time with clients or to attend far-flung conferences. Constant globetrotting was a sign of professional achievement in a thriving economy.
As recently as February 2020, face-to-face interaction was essential to strike deals and partnerships that could define the fate of a transaction. After all, how could one create trust and form a connection without that warm handshake and eye contact?
Then COVID-19 came, turning our world upside down and changing the rules of the game. By grounding airlines, shutting down borders, and confining families at home, the pandemic showed us overnight that despite all our scientific progress, Mother Nature can still have the upper hand.
A true black swan event?
COVID-19 has given us a lot to reflect on. First and foremost, is the pandemic a black swan, or in other words, a completely unpredictable event? There is consensus in our industry that the coronavirus disease had been on the insurance radar for a long time.
In 2007, Swiss Re group CEO Christian Mumenthaler co-authored a study with fellow insurance industry CROs to simulate the impact of a ‘Spanish flu-type’ event, a reference to the 1918 pandemic that killed tens of millions of people and infected more than 500 million worldwide.
The study concluded that excess mortality today would be much lower and that a simple extrapolation of the excess mortality rate observed in 1918 to today’s global population is unrealistic. The study served, however, to feed insurance pandemic models and sought to inform policymaking and governmental action. Mr Mumenthaler observed in a recent article that the sheer magnitude and ripple effects of a global pandemic limits what the insurance industry alone can do, despite being financially healthy and well-capitalised.
Given the potential of pandemics to cause massive losses on a global scale, we must look at mitigating such risks through public-private partnerships (PPPs) in the form of a ‘pandemic pool’. With a potential second wave of coronavirus lurking on the horizon, we need to be ready for the next battle.
The importance of resilience
On the bright side, COVID-19 has shown us the importance of resilience, the ability to recover from stresses and shocks owing to the strength of existing local institutions, infrastructure, and health and social systems. Creating resilience is one of the core tenets of our industry. This crisis raised the awareness that we still have plenty of work to do to close the protection gap.
And then there is the philosophical debate over how this pandemic could shape our society. Optimists say the effects will be positive, pointing to the outpouring of support for the elderly and at-risk individuals during lockdown, the cheering for healthcare and essential workers, solidarity building neighbourhood serenades, and leaders of countries sharing information and resources to vanquish the virus together.
Meanwhile, pessimists see fear taking over, resulting in more isolationism and protectionism, leading to dismantled value chains, inefficient use of resources, and global segregation.
Whichever scenario prevails, one silver lining of the pandemic is in that COVID-19 has put the fight against climate change back on the agenda with a clear call to action, after the world witnessed the visible and positive effect containment measures have had on the environment. Finally, science-based approaches to issues like pandemics and climate change are back in vogue.
However, we must remain vigilant. As economies reopen eager to recoup the economic losses of the past months, we risk landing exactly where we started, from an ecological-threat perspective. A recent article in The Guardian reports that air pollution in China has already returned to levels similar to those prior to the crisis, and that this will likely be the case elsewhere.
The potential of RETs
This is where policymaking could play a role in supporting sustainability and the environment. According to a Swiss Re Institute study on renewable energy in Africa, modern renewable energy technologies (RETs) such as wind, solar and geothermal are becoming increasingly economically viable both small and large scales. And the potential is huge: Africa’s theoretical potential for photovoltaic solar is estimated at 1700PWh, which represents 25 times the electricity generated in 2018 in the whole world.
Today RETs are cheaper than fossil fuels, and their costs of production are expected to fall even further. Furthermore, targeted infrastructure investment programmes into RETs have the potential to become an important driver of economic recovery by building vital infrastructure and providing millions of new jobs over the next decade.
Historically state-funded projects, these transformative RET projects will require contributions also from the private sector. This is where insurers can play an important role.
Our industry can help de-risk private investments from the financial and physical risks inherent of RET projects. Both traditional and non-traditional covers can protect RET projects against the variability of natural resources (wind, sun or rainfall), the technical performance of a renewable energy production plant or market risks like unexpected price changes.
These insurance products help make RET projects more attractive for private investors by lowering the cost of financing of these capital-intensive projects. The Swiss Re Institute estimates the RET insurance potential in Africa to represent an opportunity of up to $800m in insurance premiums per year, with traditional engineering and property covers contributing about two thirds and non-traditional accounting for the rest.
A sustainable future
Clean energy is at the heart of building a sustainable future. Swiss Re has had a long track record in the field of sustainability, which represents an important competitive advantage in the long run. Our sustainability strategy today guides our business efforts around mitigating climate risk and advancing the energy transition, building societal resilience and driving affordable digital insurance solutions that increase insurance penetration where the largest protection gaps are.
We have embedded sustainability in all aspects of our business activities and link them to the UN’s Sustainable Development Goals as a frame of reference.
When disaster strikes, especially in developing countries where the insurance penetration is low, it is clear that the industry has not delivered up to its full potential. But we can change it. We need to be more creative and innovative, leveraging technology to make insurance affordable and available for all.
This is an investment in our collective future as humankind and also, at the micro-level, this is an investment in the future of our industry.
If we do not manage to address climate change and and its impact on society, our blue planet is soon going to look quite different. The implication of our failing to act is that many of the current risk pools and businesses could no longer be insurable. Governments must prioritise how we manage climate change and reduce emissions on an accelerated timeline to limit global warming to 1.5 degrees Celsius above pre-industrial levels.
It is obviously an ambitious target, but there is no other option if we are to survive as species. In our mission to make the world more resilient, we will continue to take active part in this dialogue and to engage in this effort. M
Mr Lukas Müller is head of Middle East at Swiss Re.