Swiss Re presented its latest analysis of the global economic outlook and its potential impact on the insurance industry at an economic forum in London yesterday, December 1.
Chief Economist Kurt Karl began the discussion with an admonition that the “global economic outlook is currently extremely uncertain,” which is perhaps somewhat of an understatement.
Economists rely on certain factual assumptions and past figures in formulating their calculations of what may happen in the future. However, they can predict neither what governments might ultimately do, nor what the impact might be. As a result, what may happen “depends greatly on the actions of policymakers, particularly in Europe, but also in the U.S.,” Karl said. There are some really scary scenarios that can’t be ruled out.
In a pre-conference press release Karl stated: “The insurance industry faces three main challenges from the current economic and political environment – low government bond yields; the euro debt crisis; and slowing growth with elevated inflation in the emerging markets.”
In an interview with the IJ, following the conference he said: “We do expect the policymakers, however to be able to sort things out, both in Europe as well as the U.S. Although, this will not happen overnight; it will probably take eighteen months, and we’ll have market volatility through that time.”
Despite the crisis in the capital markets and the economic problems the global insurance industry is in relatively good condition. Karl described it as “well capitalized,” and “able to weather this storm,” as shown by its ability to handle the string of catastrophe losses in the first half of 2011. While insurers and reinsurers earnings were hit by the losses, and their combined ratios rose, very few, if any, companies’ capital was seriously threatened.
The insurance industry, however, continues to be adversely affected by the extremely low interest rates. “We’re going to see the central banks with extremely low interest rates right through 2013, and perhaps longer,” Karl said. “This provides – unfortunately for the insurance industry – a low yield environment, which has been quite stressful.” In addition any premium growth in “stagnant economies” is unlikely to be very substantial.
If no dire economic meltdown occurs, the insurance industry should actually experience some growth. Swiss Re’s report noted that auto rates in Europe have been rising – even in Italy and the UK. Property catastrophe coverage has become more expensive in areas – Japan Australia and New Zealand, as well as areas of the U.S. – that have experienced large loss events. Commercial rates in the U.S. are “on the cusp of hardening,” and insurers in Europe are trying to raise rates in the sector as well.
However, as Karl pointed, the “greatest risk to the economic outlook stems from political developments in Europe, which could result in disorderly sovereign defaults or even exits from the European Monetary Union. This is followed closely by risks associated with the political stalemate in the US, which is preventing the implementation of sensible fiscal adjustments that could support growth while reducing the deficit. The situation in these two major regions has increased the risk that they will both experience a prolonged period of low growth, low inflation and low interest rates.”
He added that “inflation risk is still a few years down the road in developed markets. But, as weak growth makes fiscal consolidation difficult, the incentive to deliberately allow inflation in order to reduce sovereign debt levels is strengthening.”
In his presentation, which focused on Europe, senior Economist Darren Pain said: “The impact of the euro sovereign debt crisis on the insurance sector – both life and non-life – depends on the scenario and the set of insurers you look at. But a rough calculation indicates that a 50 percent haircut on Greek, Irish and Portuguese sovereign bonds could be readily absorbed in insurers’ existing capital resources.
“More challenging would be a haircut of that size also covering Spanish and Italian debt. In that case, write-downs could lie anywhere between 25 percent and 35 percent of shareholders’ equity.”
The situation in the developed countries has also begun to have an impact on emerging markets, slowing their growth. However, Karl said “they are still expected to perform well in 2012 and 2013, with both P&C and Life and health growing between seven and nine percent, after inflation.”
The complete report and the materials presented at the forum is available on Swiss Re’s web site.
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