Economies Slowly Recovering; Climate Change Negotiators Still Talking

By | December 20, 2009

Swiss Re’s recent Economic Forum at the reinsurer’s iconic London headquarters presented a far more encouraging picture of the world’s financial condition than a year ago. Thomas Hess, Swiss Re’s chief economist and head of global research; Clarence Wong, chief economist and head of economic research for Asia, and Matt Weber, who heads Swiss Re’s property and specialty activities, presented their views.

Hess described a “U-shaped” recovery with both primary insurance and reinsurance continuing recoveries that are already underway into 2010 and beyond. He based his opinion on strengthening balance sheets and some slow, but real, growth in premiums. “The global economy grew in the second half of 2009, but the recovery is fragile,” he said. “Growth will generally be below trend in the major economies in 2010, but will accelerate modestly in 2011. Monetary policy will shift to tightening in late 2010 at the earliest, and reductions in fiscal stimulus will follow shortly afterwards.”

He forecast that by 2011 real GDP growth in OECD countries is expected to be close to its trend of about 2 percent to 2.5 percent, while emerging market growth will be higher at 6 percent. He said oil prices are expected to remain fairly close stable, rising slightly in 2011 and 2012 when economic activity accelerates.

Asked what the chances are of the recovery being “W-shaped,” i.e. going down again before a full recovery sets in, he replied, “I’d say the chances are around 15 percent.”

Hess also expressed concern on another front. Although the economic crisis affected AIG, monoline insurers and life insurers, the insurance industry weathered the storm in remarkably good shape. However, it is now being swept up in the push, on both sides of the Atlantic, for stricter banking regulations.

According to Hess, the industry has so far not done a very good job of convincing regulators that its business model differs greatly from the banks, and therefore poses little, if any, systemic risk to the global economy. “Regulatory initiatives in the insurance sector need to address the problems that are distinct for the insurance industry,” he said.

As of this report, the Copenhagen Conference on Climate Change had yet to reach an agreement. There are three barriers: 1.) the emerging nations are not happy. The African delegation walked out. They will not adopt, much less enforce, more rigid rules to reduce carbon emissions unless they are paid for it; 2.) the industrialized world will not agree to reduce emissions by very much, unless emerging nations do so as well, as they fear it would harm their economies; 3.) China, which has its feet in both worlds, has said it will adopt restrictions, but has remained vague as to how much, and how exactly it will do so.

The EU promised €7.2 billion ($10.5 billion) to the emerging countries to help them enact and enforce the necessary regulations. Their response has been that it’s not enough. Moreover, many people in Europe are overtly cynical about turning over the money, only to see it recycled into Swiss bank accounts by the corrupt elites who rule a number of the countries involved.

Most protestors in Copenhagen demonstrated their support for tougher actions to reduce carbon emissions. However, a small, but equally vocal group, also protested that the whole climate change discussion is a hoax.

The insurance industry is squarely in the middle. Among all the agitated blogs, demonstrations and political hype, it stands out as a voice of reason. Big reinsurers, notably Munich Re and Swiss Re, have been studying climate change for more than 20 years. Their experts have concluded, as has the Intergovernmental Panel on Climate Change, that the world is getting warmer, and that greenhouse gasses produced by human activity are a principal cause.

Lloyd’s CEO Richard Ward, speaking at an ancillary meeting, explained why and what the insurance industry feels is important (the full text is available at – www.lloyds.com). Ward said speeches aren’t enough, that the time has arrived for more “meaningful” action. Talks have been going on since the early 1990s but during that time, “the world’s climate has not paused politely, waiting for the right convention or treaty. The ice caps continue to melt, weather systems continue to change. The world is a hotter, thirstier place.”

The insurance industry has “dealt with the impact of extreme weather for centuries,” he continued. But a time will soon come when the industry’s capacity to deal with claims from weather related events will have been reached. That’s why the debate over climate change for the industry is a matter of survival.

Ward called for more help from policymakers. He said the industry can offer products that lead to sustainable rebuilding and can invest to encourage other companies to mitigate climate change. It can share its research and extend insurance to the developing world.

However, the industry needs “policymakers to set clear goals,” he stressed. “There must be no wriggle room for governments or businesses. We need the international community to, finally, act in complete unison. Regulation must be one level playing field across the globe. The insurance industry is beginning to come together, across different nations and different fields. The international community must do the same.”

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