Swiss Re’s Economic Forum Sees Continued Growth, Pressure and Risks

December 8, 2010

Swiss Re’s Economic Forum singled out three main factors that will continue to affect the re/insurance market in 2011. The Forum’s economists forecast “continued global economic expansion in 2011, led by emerging markets; insurers’ profitability will remain under pressure amid weak investment returns, and risks for insurers include financial market turmoil and over-regulation in wake of crisis.”

They also indicated that growth in the insurance and reinsurance industry will continue to accelerate in 2011; however they warned that the financial turmoil could derail the global economic recovery.

As far as the overall industry picture is concerned, Swiss Re’s economists pointed out that ‘industry capitalization has returned to elevated pre-crisis levels; premiums are growing in most segments and most countries; and many emerging market countries are performing very well.

“Profitability is set to remain under pressure, however, since investment returns are dampened by low interest rates. (Re)insurers will need therefore to maintain underwriting discipline. Looking ahead, a key problem is that regulatory factors are forcing insurers into low yielding government bonds, increasing the risk that they miss out on a market upturn.”

Kurt Karl, Swiss Re’s US Chief Economist, added: “the global economy expanded modestly in 2010 and is expected to show moderate growth through 2011. Developed and emerging markets have parted ways on growth, with emerging markets booming while developed economies are growing at a more modest pace – a situation that is set to continue in 2011 and 2012. Monetary policy in the major economies is not expected to tighten substantially next year, because inflationary pressures remain subdued and certain EU economies face fiscal crises.”

Swiss Re also said that “growth in developed economies is expected to accelerate slightly in 2011 and 2012, but will remain close to its long-run averages of 2.5 to 3 percent in the US, 1.5 percent in Japan, and approximately 2 percent in Europe.

“Emerging markets are forecast to grow rapidly next year, leading to increasing inflationary pressure in several markets. Benchmark interest rates in developed economies are expected to remain low through the end of 2011 but long-term interest rates will rise gradually as the world economy improves.”

In addition to continued concerns over the strength and duration of the global financial recovery, Swiss Re’s economists also expressed worries about the risk of over-regulation in the insurance industry, which “remains high.” Although the European Union’s Solvency II regulatory overhaul is “generally welcome, it is likely to lead to higher capital requirements for many insurers if the implementing measures stray too far from the original economic-based principles.”

Karl added: “Regulators’ overly conservative view of the insurance sector is not justified: insurers emerged from the crisis largely unscathed and banks were found to be the source of the problem. While the insurance industry does not object to being part of systemic risk monitoring efforts as a means of averting future crises, it opposes the systemic risk supervision of insurance groups because its core insurance activities are not a source of systemic risk. Efforts should be dedicated instead to enhancing group supervision.”

Source: Swiss Re

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