Swiss Re Analysts See Economic Recovery, Hard Market Continuing

June 27, 2002

Wednesday’s teleconference, featuring Swiss Re’s economic experts, concluded that a modest economic recovery will continue, the insurance industry will see higher rates and a “flight to quality, ” while the stock market experiences an “irrational period” on the downside.

Midyear Economic and Insurance Industry Teleconference participants exchanged views on the state of the U.S. and global economy in general, and the U.S. property/casualty insurance industry in particular.

Kurt Karl, Swiss Re’s Chief Economist for North America indicated that, “The United States is in a recovery and we expect robust growth in 2003. The markets are expected to respond to the improving economy in the second half of this year, with yields on long-term treasury notes rising. The Fed will raise interest rates late this year, although it could be next year if market conditions continue to weaken.”

Thomas Holzheu, Swiss Re Senior Economist noted in his midyear review that pricing momentum from the first quarter is continuing, with a shift of pace towards casualty lines. On average, Holzheu reported commercial lines rates are up 10 percent to 30 percent, while personal lines rates are up anywhere from 6 percent to 9 percent.

He also stressed that the “flight to quality” seems to be increasing, because “the worldwide capital position of the industry has dramatically declined.” He noted that, “Since 2000, we have seen an excess capital base turn into a tight capital base, a decline in equity outweighing the inflow of new capital and a new emphasis on the quality of capital. The hard market shows every sign of continuing and we anticipate further shakeout in the industry.”

Chris Weihs, Swiss Re Asset Management VP, indicated that investors seemed to be in a very negative mood, and that risk avoidance is the current mantra. He also had the best line of the day, when he stated that, “There is the increasing likelihood that the stock market may be entering a period of symmetrical idiocy, i.e. a period where the market becomes as irrational on the downside as it did on the upside in 2000.”

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