Reinsurance and ILS capital crucial to support multi-transition of global economy: S&P

As the world navigates major challenges, the transitions that are required to do this effectively are going to call on risk capital and the expertise of the global insurance and reinsurance industry, with its capacity, including ILS and alternative sources, seen as a crucial form of financing, according to S&P Global Ratings.

Speaking today in Monte Carlo at the 2024 Rendez-Vous of the reinsurance industry, Yann Le Pallec, Executive Managing Director, Head of Global Ratings Services at S&P Global, highlighted the significant need for capital and capacity to support the world and its economy as it transitions through some of the challenging issues currently faced.

“Insurance, and insurance will be a crucial capital provider and risk mitigator to the world managing what we call multi a multi-transition of the global economy,” Le Pallec explained to the audience at an S&P Global briefing held at the event.

“There are three major transition challenges facing the world economy,” he continued.

“Number one, that’s climate change, which means facing and adapting to climate physical risk and energy transition. The second major transition is the digitization of the economy, data centers, generative AI and all the capital that will be needed and the risks arising from this accelerated digitization of the world economy. And the third major challenge and opportunity will be, and is, aging societies.”

Explaining just how significant the capital need is behind these three transition challenges, Le Pallec said, “If you took those three, there’s roundabout a need of about a funding of US $37 trillion between now and 2030, that’s a lot of money.”

Adding that, “For climate alone, anything related to climate change, is going to be US $25 trillion between now 2030.”

That is perhaps the biggest opportunity for the reinsurance and insurance-linked securities (ILS) sector to support these global transition efforts, with hedging going to be as important as financing support.

As we reported last week, analysts at Citigroup have highlighted a growing financing gap in climate adaptation efforts as well.

The Citi analysts said that, as this funding gap grows and steps to mitigate climate change remain at a pace considered too slow, there will be a need for increasing amounts of capital and catastrophe bonds are a useful structure that can be used in support.

S&P’s Le Pallec further highlighted the other transition financing gaps, saying, “For everything relating to Gen AI and digitization it is going to be US $7 trillion, and ageing will be another US $5 trillion, totaling up to US $37 trillion.”

He went on to say, “Insurance and reinsurance sit absolutely right in the middle of that transition, as risk takers and capital providers.

“None of those transitions will happen without a thriving primary insurance, but even more a thriving reinsurance industry, that is critical in spreading risk and finding alternative sources of capital.”

Concluding at the event, “These are the big numbers I wanted to leave with you and tell you how important insurance and reinsurance is to the world economy managing that transition successfully.”