While societies and governments grapple with the dynamics of regional inequalities, a number of other equally complicated demographic and financial trends are likely to exert significant fiscal pressures on nations worldwide over the next three decades. Guy Carpenter’s report, Protecting our Planet and the Public Purse, follows three of the most pressing trends: 1) population shifts and migration that are concentrating and adding to exposures in catastrophe prone areas, 2) aging populations that will reshape the global workforce in the years to come and 3) publicly-held debt that remains fixed at historically high levels.
Many factors drive human migration and it is difficult to draw a straight line of causation to any single cause. There is nevertheless increasing recognition (including from the United Nations) that economic, social, political and environmental issues will propel cross-border and internal migration for years to come. Climate change is certainly a key driver behind this trend: the World Bank says “mobility is emerging as the face of climate change.”
Indeed, the World Bank released a report in 2018 (titled Groundswell; Preparing for Internal Climate Migration) that focused on the implications of migration-related issues in Sub-Sahara Africa, South Asia and Latin America (regions that contain 55 percent of the developing world’s population). The World Bank estimates that almost 145 million people will migrate from areas stressed by climate change.
The poorest people and countries will be hardest hit by increased migration, and urban areas are likely to be stressed by an influx of people. A study funded by the European Union’s joint Research Centre, with contributions from the U.S. Department of Energy and led by scientists from Columbia University in New York, established a trend that correlates extreme weather events with increases in the number of asylum seekers. Europe, which has recorded increases in immigration and asylum requests in recent years, could see activity triple in the decades to come.
Governments are also grappling with the implications of aging populations, a trend that is only set to worsen over the next two to three decades. The number of people aged over 60 globally has tripled since 1950 and is expected to grow from 900 million (recorded in 2015) to roughly 2.1 billion by 2050 (1). At the same time, average global life expectancy will increase from 65 years to 75 years.
China, Russia, the United States, Europe and Japan (to name a few) will have to deal with the reality of aging populations. Predicting the exact financial impact on societies is challenging, as other factors such as migration and changing economic models will influence outcomes. At the very least, governments should plan for higher pension and healthcare costs, as well as provisions for other related support that citizens often turn to governments to provide.
Increased costs are likely to put government finances under further strain; a worrying prospect given current levels of debt. According to the Institute of International Finance, government debt globally will climb to USD 70 trillion in 2019 (up from USD 65 trillion in 2018), led in large part by more borrowing in the United States.
The global average debt to GDP ratio has increased by more than 225 percent (weighted by country GDP). While economists debate the appropriate levels of borrowing in the current low interest rate environment, at a fundamental level, increasing levels of government debt-to-GDP imply that borrowing is growing at a rate faster than economic growth.
Increased levels of debt mean that future generations across the globe will be forced to spend more on servicing government debt, rather than supporting central societal needs and services such as healthcare, security and education. In an already competitive environment, finding the financial resources for recovery from growing disaster losses will become more challenging in the future.
Taking the United States in isolation illustrates the extent of the problem. Debt-to-GDP in 2017 stood at 75 percent and this is projected to grow to 140 percent by 2050. Average debt over the past 50 years was 39 percent (2). This is clearly unsustainable and underlines the fact that policy changes will be required at some point.
As nations come to terms with their own circumstances, difficult choices will have to be made. All of the challenges discussed in this section carry with them immense fiscal costs. Much of these costs fall to governments to address. The opportunity for closer collaboration between the private (re)insurance market and governments to address the direct challenges of catastrophe event funding is therefore clear. Increased insurance penetration will also bring the added benefit of improving societies’ understanding of risk and their associated costs.
As the section that follows shows, this process is already underway. These “greenshoot” initiatives provide templates that can be used by other governments seeking to improve how they manage and finance catastrophe risks.
1. Forbes, 2018 and “The Impact of an Aging Population on Economic Growth: An Exploratory Review of the Main Mechanisms” (2016)
2. “Federal Budget Policy With An Aging Population and Persistent Low Interest Rates” by Douglas Elmendorf and Louise M. Sheiner, The Journal of Economic Perspectives (2017).