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How political risk insurance and the Insurance Development Forum support the UN's 2030 Agenda for Sustainable Development
January 03, 2018
More than 65 million people have been displaced from their homes in recent years, a far larger number than at the end of the Second World War; of these, 21.3 million are refugees, including the internally displaced. That’s according to Helen Clark, the former head of the United Nations Development Program and former co-chair of the Insurance Development Forum (IDF).
The causes are varied; ongoing conflicts in the Middle East, increasing desertification in the Sahel region in Africa and gang violence in Central America have all played a role.
In addition to the untold human suffering, the deepest refugee crisis the world has ever seen is creating new demands and challenges for developed and emerging market countries around the world.
This crisis – and the underlying conditions feeding it – underscores the importance of collective action to reverse the self-reinforcing cycles of economic and political instability that have taken hold in many countries, and threaten others.
While the circumstances vary, the dynamic often follows a similar pattern. A shock hits a fragile government, and it lacks the resources and resilience to respond promptly and effectively. Also, major shocks are often generated externally, and a government’s ability to anticipate the shock or lessen its impact is limited or non-existent. Individual countries, for instance, have little if any influence over global commodity prices or conflicts taking place next door. And they certainly can’t stop an earthquake, hurricane or another natural catastrophe.
When the government’s response is inept and poorly coordinated, the citizens are prone to become even more impatient and frustrated; demonstrations, strikes and vandalism are all possibilities. And in the face of pervasive inefficiency and disorder, foreign investors grow wary, and investments start to dry up. In turn, unemployment and income inequality continue to rise, further destabilizing the country. And so it goes.
We’re all impacted
For many countries caught in such a self-reinforcing vicious cycle, reversing this dynamic often seems intractable.
Moreover, as the current refugee crisis demonstrates, the downstream effects in today’s highly interconnected world can be significant when a country spins out-of-control or remains mired in disorder and dysfunction.
But we’re not powerless; interconnectedness, after all, is multi-directional. In the same way that countries, companies and people can be affected today by events in distant lands – incidents that would have registered barely a blip on our radar screens just a few years ago – they also have considerable resources and capabilities to promote political, economic and social stability within a country.
In other words, the repercussions of political instability and limited resilience ripple widely today, and the global community has the ability to help fragile countries reverse stubborn dysfunctional dynamics.
This notion of global interconnectivity – we’re all affected, and we all have a role to play – is embodied in the 17 Sustainable Development Goals (SDGs) that form the basis for the United Nations (UN) 2030 Agenda for Sustainable Development; these went into force in 2016.
In announcing the SDGs, the UN noted, “For the goals to be reached, everyone needs to do their part: governments, the private sector, civil society and people like you.”
In turn, the IDF was officially launched a few months after the SDGs were introduced; its founders include the UN, World Bank, leading re/insurers and the major global brokers. XL Catlin is proud to be part of the IDF, chaired by Stephen Catlin, as it is a truly ground-breaking public-private partnership designed to facilitate the achievement of the UN’s SDGs in the coming decades.
Progressive economic development will need financial assistance from global agencies, philanthropic organizations and private investors.
Lubricating private investment
There are no one-size-fits-all solutions when it comes to promoting political stability and building resilience in different countries; varying socio-political, geographic and historical contexts all have to be considered. Nonetheless, fostering progressive economic development is uniformly part of the equation. The SDGs explicitly recognize the critical importance of progressive economic development, especially in Goal 9: “Build resilient infrastructure, promote sustainable industrialization and foster innovation.”
Helen Clark also notes: “UNCTAD (the United Nations Conference on Trade and Development) has estimated that to achieve the SDGs in key sectors by 2030, annual investments made in developing countries would need to total USD 3.3 to 4.5 trillion per annum. They calculated that the current funding gap was USD 2.5 trillion per annum. Clearly, public funding would be far from sufficient to bridge that gap.”
Given this gap, progressive economic development will need financial assistance from global agencies, philanthropic organizations and private investors. One of the impediments, however, is the fact that international investors are often reluctant to invest in developing countries where there is a potential risk of asset expropriation, restrictions on currency conversion, or political violence that could disrupt or damage business operations.
This is where insurance, and especially political risk insurance, can help.
Political risk insurance can be used to facilitate financing for crucial infrastructure projects and associated commercial development in emerging market countries. That, in turn, can stimulate international trade and catalyse other investments by enabling developing countries to access funding from the global lending and investment community; from these seeds, self-reinforcing vicious cycles can turn virtuous.
Creating durable insurance markets within emerging market countries is also critical to advancing stability and building resilience. According to the IDF, it is estimated that the protection gap – the percentage of economic losses that are uninsured – in middle/low-income countries often exceeds 90 percent for natural catastrophes. The difficulties a nation faces following such disasters are obviously magnified when only a small proportion of its assets are protected. And in a post-disaster situation, the impacted country needs to attract foreign investment quickly to rebuild its economy.
Accordingly, the IDF’s initial focus is on reducing this protection gap, and XL Catlin is pleased to support these efforts. We’re sponsoring research, for instance, on the correlation between insurance penetration and the time it takes a country to recover from disasters. In several developing countries, we’re also helping the IDF create the regulatory frameworks and institutions that are needed to sustain viable private insurance markets.
Lastly, we are also working closely with our clients and brokers to amplify the benefits of different initiatives; a good example of the collective action the UN called for when announcing the SDGs. For instance, several financial institutions are using our Political Risk coverages to back different “positive impact finance” initiatives that are helping fund the SDGs; a win-win for all concerned.
- About The Author
- Juliette Barrë
- Senior Underwriter, Political Risk, Credit & Bond, AXA XL