Systemic risk is the hidden tax on growth. Here's how insurance can help build economic resilience

In an era defined by geopolitical fragmentation, climate volatility, technological disruption and public health crises, one factor increasingly shapes the trajectory of economic growth: systemic risk.

Often invisible at first, systemic risk functions like a hidden tax on growth. It quietly raises the cost of investment, discourages innovation and weakens the resilience of economies. When it crystallizes into crisis, the consequences can be swift and severe.

The COVID-19 pandemic illustrated this starkly. In 2020, the global economy contracted by roughly 4.4% – one of the deepest peacetime recessions in modern history. What began as a public health emergency quickly cascaded across supply chains, financial systems and labour markets worldwide.

Other systemic risks are becoming equally visible. As climate-related disasters grow more frequent and severe, insurers in some regions are being forced to reduce or withdraw coverage altogether.

The resulting protection gaps can reverberate far beyond the insurance sector, affecting property markets, local investment and the stability of entire regional economies exposed to climate risk.

At the same time, geopolitical tensions and trade disruptions have increased volatility across global supply chains for critical industries and materials, contributing to persistent inflationary pressures.

Most recently, war in the Middle East has threatened key shipping routes that carry a significant share of the world's oil supply, underscoring how quickly geopolitical shocks can ripple through energy markets and the broader global economy.

These dynamics are unfolding alongside a broader structural shift toward geopolitical and economic fragmentation. Where global risk pools once enabled diversification and efficient risk sharing across borders, countries and regional blocs are increasingly being forced to develop localized solutions. For example, as access to international reinsurance markets becomes more constrained in certain geopolitical contexts, India has begun developing its own domestic reinsurance facility to cover the shipping of oil and gas through the Strait of Hormuz.

This reflects a wider trend: systemic risk is not only increasing, but also becoming more regionally concentrated, with implications for capital efficiency, pricing and resilience.

Together, these dynamics illustrate how modern systemic risks rarely remain confined to a single sector. Instead, they propagate through interconnected economic systems, amplifying uncertainty and slowing the investment needed to sustain long-term growth.

Systemic shocks like these differ from isolated economic disruptions. They threaten the stability of the entire financial ecosystem rather than individual institutions. As a result, their impact reverberates through credit markets, investment decisions and economic confidence.

When systemic risk intensifies, financial intermediation slows. Banks and financial institutions become reluctant or unable to lend, starving businesses of the capital needed for expansion and innovation. Credit freezes ripple outward, constraining economic activity and employment.

At the same time, interconnected financial systems can amplify shocks. Failures in one institution or market can trigger cascading effects across others, forcing rapid asset sales and reinforcing downward market spirals. The global financial crisis demonstrated how quickly such contagion can spread.

Increasingly, institutions also share common exposures. Banks, insurers and asset managers face similar macroeconomic risks, from prolonged low interest rates to market volatility. When these risks materialize simultaneously, multiple institutions may struggle at the same time, precisely when the economy needs them most.

The result is often a misallocation of capital. In uncertain environments, investors retreat towards safe haven assets such as gold, rather than productive sectors of the economy. Long-term investment slows, innovation stalls and economic growth loses momentum.

Beyond financial markets, new categories of systemic risk are emerging. Climate change, cyber threats and pandemics have the potential to disrupt entire economies simultaneously. These risks do not respect national borders or sectoral boundaries, and demand collective solutions.

At the same time, the rise of artificial intelligence (AI) is introducing a new layer of systemic vulnerability. As AI capabilities become increasingly concentrated in large scale models, geopolitical considerations are beginning to intersect with where these systems are developed, hosted and governed.

The physical infrastructure underpinning AI, particularly data centres, cloud capacity and semiconductor supply chains, is geographically concentrated and exposed to both geopolitical tension and physical disruption.

This creates new forms of systemic risk, where outages, restrictions or conflicts affecting key nodes in the AI ecosystem could have cascading effects across industries that are rapidly becoming dependent on these technologies.

In such an environment, uncertainty itself becomes a brake on growth. When businesses cannot quantify risk, they delay investment decisions. When households feel insecure, consumption weakens. The cumulative effect is slower and less inclusive economic development.

But risk does not have to remain an invisible tax on growth.

Insurance has a unique role to play in converting uncertainty into resilience. By quantifying, pooling and transferring risk, the insurance industry enables businesses, governments and communities to invest with greater confidence, even in uncertain times.

Historically, insurance has supported economic development by protecting assets, stabilizing financial systems and enabling entrepreneurship. Today, the industry's role is expanding as societies confront new systemic challenges.

First, insurers can help build resilience before shocks occur. Through advanced risk modelling, data analytics and early warning systems, insurers can identify emerging threats – from climate risks to cyber vulnerabilities, and help organizations prepare.

Second, insurance can mobilize capital towards resilience and adaptation. By designing products that incentivize risk reduction, such as climate-resilient infrastructure or improved cybersecurity, insurers can align financial protection with long-term sustainability.

Third, public-private partnerships will be essential to address risks that exceed the capacity of any single sector. Pandemic insurance pools, catastrophe risk-sharing mechanisms and climate resilience funds illustrate how collaboration between governments and insurers can expand protection while maintaining economic stability.

Finally, insurance can support more inclusive growth. Today, billions of people and millions of small businesses remain underinsured or uninsured, leaving them vulnerable to shocks that can erase years of progress.

Expanding insurance access through digital platforms, innovative microinsurance products and ecosystem partnerships can strengthen resilience across entire economies.

The world is entering a period of unprecedented risk complexity. But it is also a moment of opportunity.

By reimagining how risk is measured, shared and mitigated, the insurance industry can help transform systemic uncertainty into a foundation for sustainable growth. In doing so, it can play a critical role in ensuring that resilience becomes not a cost, but a catalyst for prosperity.

When risk is managed effectively, growth is no longer constrained by uncertainty. It is enabled by resilience.