How the finance community and the private sector can increase resilience in a world of growing uncertainty

“Just a few years ago, we could not have thought up the level of fragility and the confluence of crises that we are currently going through.”

This was how Ivo Menzinger, Head of EMEA Public Sector Solutions at Swiss Re, introduced the opening panel debate of the 2022 IDF Summit on June 13.

The compound impact of the climate crisis, COVID-19 and the war in Ukraine has led to a ballooning debt crisis, concerns over food security and a reversal of decades of progress in the developing world. This, Menzinger added, has put the spotlight on the importance of resilience and being prepared.  

And while the need to prepare for such shocks is widely acknowledged, substantially more funding goes into responding to them than hedging against them. In an increasingly volatile economic climate, what can governments, multilaterals and private players such as insurers do to overcome this bias? 

Ingrid Hoven, Member of the Management Board of GIZ (Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH), stressed the enormous impact of the compounding risk landscape on emerging markets.

Building resilience is a multifaceted task that requires comprehensive solutions, she added. This is because many of the issues impacting emerging economies mutually affect one another, whether it’s reinforcing health systems, hedging against severe weather events, shoring up global supply chains or protecting food security.

A lack of rapid, concerted action, Hoven pointed out, “would lead to a world that is less secure; a world with increased inequality; a world that diverges further, is less inclusive and will not have the prosperous future that could happen if we forcefully embarked on a transformation process”.

The outcome of the transformation, Hoven went on to explain, would lead not only to ecologically sustained growth, but also greater resilience of people and societies.

There was general consensus that achieving this vision would require two major changes of mindset. The first is for governments to shift from dealing with crises after the fact (ex post) to investing in preparedness (ex ante). The second is a return to multilateral approaches and, for the insurance industry, to share its expertise collaboratively with other players.   

“If we look at crisis financing, at least 98% of crisis financing is actually ex post and only very little ex ante,” said Swiss Re’s Menzinger.

Ethiopis Tafara, Vice President and Chief Risk, Legal and Administrative Officer for the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA), highlighted that more needed to be done to educate countries about the value of adopting preventative measures to prepare for crises.

“It's a very hard argument to make to countries to pay upfront for something they think they may never need. It's very different from getting a loan,” he said. “Something happens psychologically. Human nature is such that you say, well, that's secondary, let me focus on the immediate.”

But having pre-arranged financing in place is considerably more cost-effective than ex post approaches. Research has shown that every dollar invested in pre-arranged, ex ante financing saves around four dollars in humanitarian spending.

As GIZ’s Hoven pointed out: “Preventive measures really pay off. We know the numbers and figures, but often we actually lack the energy or perhaps the commitment to start to do this in a more systematic way.”

Panellists also agreed that while multilateralism and globalisation had declined in recent years, collaborative approaches would be critical to building resilience successfully.

“Globalisation has brought so much to this planet that there is no reason to let it go,” highlighted Michel Liès, Chairman of Zurich Insurance and the Insurance Development Forum. “We need to make sure that private-sector advocacy on globalisation is still maintained.”

Hoven agreed: “What we really need is to strengthen international support and multilateral development cooperation.”

“It’s important that we embark on a comprehensive, integrated disaster risk-management response,” she said, pointing to the efforts of the G7 to create a global protection shield to provide financial and other support to manage climate risks.

Critically, collaborative approaches must include the private sector, Hoven acknowledged. ”We shouldn't forget to work better and more forcefully with the private sector, such as the insurance industry. How can we actually capitalise on the knowledge and the financial potential that is embedded in the industry?”

One of the ways to work with the sector is through public-private partnerships that take shared risk in resilience projects, Hoven explained.

But as it takes a greater role in such projects, the insurance sector needs to overcome some of its own limitations. Liès highlighted that the industry had traditionally tended to keep some of its proprietary expertise under wraps for competitive reasons. In future, he said, capabilities such as risk modelling and engineering needed to be shared more readily.

A collaborative approach was something that Tafara also championed. While three of the main institutions that comprise the World Bank Group – the World Bank, the International Finance Corporation and MIGA – had contributed $170 billion to help countries respond to the multiple ongoing crises, Tafara also discussed how MIGA has a mandate to organise foreign private sector investment to help address these development challenges.

“We are keenly aware of the need of the private sector to play a critical role, not only in providing capital, but also innovation, knowhow and efficient solutions to the toughest problems,” he said.

Bringing all players in resilience projects together and coordinating their activities will be critical – and is not always the case today. “We have to align systems to make sure that products from different actors and agencies are aligned with each other,” explained Hoven.

“We have to shape solutions from the perspective of our clients and partner countries, from the people we want to serve – and then think what kind of institutional contribution we can bring to that country.”

This also means moving away from attempts to shoehorn a country’s needs into existing frameworks that may not suit the needs of the country partner. 

“If the partner comes in second place, I think we are not going to capitalise sufficiently forcefully on what insurance solutions can bring to people and societies,” Hoven highlighted.

The big challenge for both public and private players, then, is to forge a complex network of clients, partners and other players into a strong ecosystem that can help countries efficiently build the resilience they need for future growth.