Swiss Re’s Economic Forum, held today at the reinsurer’s iconic London headquarters, presented a far more encouraging picture of the world’s financial condition than a year ago. However, there may be light at the end of the tunnel, but the exit remains a long way off, and there are some potential roadblocks along the way.
The Forum featured 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, an executive board member, who heads Swiss Re’s property and specialty activities.
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. Emerging market growth will be substantially higher at 6 percent. Oil prices are expected to remain fairly close to current levels, rising slightly in 2011 and 2012 when economic activity accelerates. A reduction in monetary easing will push up yields on government bonds, particularly in 2011.”
Asked after the conclusion of the formal session what the chances were 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.” The economists also indicated that they don’t believe the current loan crisis in the United Arab Emirates poses any real threat to the global economy, as it was mainly “a local event.”
However, Hess expressed his concern on another front. Despite the fact that the insurance industry, with the exception of AIG and some monoline and bancassurers, came through the worst economic crisis since the depression of the 1930’s in remarkably good shape, pressure is building on both sides of the Atlantic to impose additional regulations.
He pointed out several times that the industry has so far not done a very good job of convincing regulators that its business model differs greatly from that of 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.
Hess also explained that ther “banking system’s excessive leverage and capital reserves,” which were too low for the risks assumed, “were not insurance industry problems. Accordingly, the regulatory response should clearly differentiate between the two industries.” While it is agreed that banking needs higher capital requirements, it may prove to be counterproductive for insurance, particularly for life insurers.
The threat of additional, and to most insurance experts unnecessary, regulations being applied by politicians eager to reign in the banks’ excesses, is more pronounced in Europe than the U.S. There are actual proposals to include higher capital requirements in the impending Solvency II regulations, which are scheduled to go into force in 2012. In Hess’ opinion the industry needs to work a lot harder to convince the politicians to separate regulations for insurers from the banks.
In his analysis of emerging markets, Clarence Wong explained that, although they were certainly affected by the financial crisis, most of them had “weathered its effects fairly well, with the exception of Eastern Europe. As a result, “insurance lines in emerging markets are expected to grow much more robustly than in the developed economies.”
He also noted that “the regulatory response to the crisis in emerging markets has been very encouraging. Authorities are continuing to liberalize regulation and move towards a risk-based capital regime.”
As expected, the “BRIC” countries – Brazil, Russia, China and India – have been leading the way, with Russia being somewhat more adversely affected than the others.
Asian growth will continue to accelerate, Wong continued, with China’s GDP rising by around 8.8 percent and India’s by around 7 percent in 2010.
Both developed and developing countries, however, continue to face the same threats from natural catastrophes, despite a rather benign hurricane season this year. “Overall natural catastrophe losses have increased significantly over the past decades and are expected to grow further,” said Matt Weber. “Europe has seen above-average losses in 2009, and the impact of climate change is likely to cause more frequent and more severe storms and floods around the globe in the future.”
He explained that worldwide average insured natural catastrophe losses between 1970 and 1989 were $5.1 billion per annum, but increased to $27.1billion per annum between1990 and 2009. “As a result, we see increasing demand for natural catastrophe cover.” He also stressed the importance of establishing strong public-private partnerships, which “will be essential in tackling the substantially increasing risk posed by natural catastrophes.”
full résumé of the forum, along with the charts and other materials presented by the speakers, are available on Swiss Re’s web site at – www.swissre.com.
Source: Swiss Re
Topics Legislation Europe Market Swiss Re
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