Swiss Re Economists Forecast ‘Modest’ Global Growth

By | November 26, 2014

Swiss Re’s Chief economist, Kurt Karl and his colleague, Senior Economist Roman Lechner, presented a somewhat cautious scenario for the global economy over the next two years. As detailed in Swiss Re’s “Global insurance review 2014 and outlook 2015/16,” the “global economy is expected to strengthen modestly next year.”

As far as the re/insurance industry is concerned Swiss Re said it expects non-life insurance premiums to grow by “2.8 percent in 2015, supported by strong economic activity in emerging markets. The life insurance sector will be notably stronger in both the advanced and emerging markets, and global in-force premiums are forecast to increase by 4.8 percent this year and by around 4 percent in 2015 and 2016. The low yield environment remains a profitability challenge, in particular for life insurers.”

Karl reviewed the economic situation over the last few years in a series of graphs and charts, which mirrored the highs and lows that the global economy has experienced. It has rebounded significantly from the lows reached in 2008-9. The U.S. economy continues its growth at around 2 percent, while most of Europe with the exception of the UK, continues to stagnate, to the point that “Europe, is worried about deflation.” He doesn’t think, however, that it will become a real problem.

Other points highlighted in the briefing included the following:
• Global economy to strengthen moderately in 2015 but prospects for different regions are mixed
• Long-term investments will continue to be a challenge despite growth and rising interest rates
• Real non-life premiums forecast to rise by 1.4 percent in the advanced markets in 2015; growth in emerging markets to recover to 8 percent
• Global life premium growth expected at 4 percent in 2015
• Property catastrophe reinsurance rates will likely remain under pressure at the 2015 renewals; thereafter decreases are expected to slow
• Aviation rates are increasing; in other segments, differences by market exist

The factors governing the global economy are complex. While developed economies are growing slowly, if at all, emerging markets are somewhat mixed. China and Japan are experiencing slowdowns in their economies, but other emerging markets are expected to improve.

The trends will be affected by outside factors, mainly the decline in oil prices from over $100 per barrel to around $60-$70, which should encourage growth. Interest rates, however, are expected to remain at their current low levels in most developed countries, as the debate continues over whether central banks, particularly the European Central Bank (ECB), should pump more money into EU countries, or whether the financial rectitude, demanded by Germany, will continue to be observed.

Swiss Re forecasts continued growth, however in emerging markets, particularly in Asia, where a rising middle class will stimulate growth, and, not coincidentally drive premium growth for insurers. Swiss Re expects growth in Asian non-life premiums to increase by around 10 percent a year through 2016, with somewhat lesser growth in the Middle East and North Africa (MENA), Latin America and Africa.

Further non-life premium growth is expected to come from increases in casualty rates, as more coverage is placed in emerging markets. Health costs are also expected to rise in markets with aging populations, which could seem increases in the number of claims filed.

In his review of the P&C sector Lechner noted that the recent, relatively benign, experience with natural catastrophe losses has resulted in a fairly consistent combined ratio for insurers and reinsurers of around 95 percent with “liability lines doing better than property lines.”

Without significant catastrophes and with the abundant capacity in the market premium rates are expected to decline. In the long term this will affect the reserves companies hold and will probably end the recent trend in reserve releases, which have raised profits.

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