Swiss Re Institute sigma 2022, No.6

Despite relatively resilient growth this year, Swiss Re Institute expects the world economy to grow by just 1.7 per cent in real terms next year as inflationary recessions approach major economies.

Upside risk

Having last year flagged inflation as the number one immediate macro concern, Swiss Re Institute continues to see upside risk in the next two years and expect it to prove sticky.

With it, the reinsurer downside risks to see growth from higher central bank interest rates. In advanced markets it forecasts real GDP growth of just 0.4 per cent in 2023, the lowest since the 1980s, outside the global financial crisis and COVID-19.

In emerging markets, Swiss Re anticipates substantially lower growth rates than pre-pandemic that will likely feel akin to recession.

The higher interest rate environment is repricing risk in financial markets and the group see this continuing.

'We anticipate significant insurance market rate hardening in 2023 and potentially some years after,' Swiss Re Institute says in its latest sigma report.

'This should ease pressure on the global insurance industry from inflation, natural catastrophe losses and weaker investment results this year.

Debt is added to the list of risks

This year, Swiss Re Institute has added a fourth dimension, debt and its related risks, to the “3D” set of long-term economic drivers, the structural trends of divergence, digitalisation and decarbonisation, that were identified last year.

The withdrawal of market liquidity as central banks unwind unconventional monetary policies is exposing financial vulnerabilities that have built up over the past decade.

'Debt is a key concern, specifically whether governments can sustain public spending commitments in the face of higher interest rates. 'We see a risk that market shocks accumulate and fuse into financial instability.' the report says.

Central banks face competing priorities of price stability, financial stability and enabling governments to pursue looser fiscal policy.

This creates a risk of real interest rates being repressed in the longer term, either through higher inflation or eventually lower nominal interest rates, to manage debt sustainability or financial stability concerns.

'If so, inflation is likely to be higher and more volatile. Addressing demand side drivers of inflation with supply side or productivity enhancing policies and investments would help ease this tension,' the report says.

Inflation is a concern

The global insurance industry faces multiple pressures this year but Swiss Re Institute expects rate hardening to regain momentum in response.

Higher interest rates should be a silver lining as inflation pressure abates in 2023 and 2024, supporting investment and profitability. Inflation remains the number one industry concern.

The reinsurer forecasts high inflation in cost components relevant for insurers, such as construction and healthcare. This suggests insurers’ claims and costs could rise markedly in 2022 and 2023, even without considering changes in claims frequency and natural catastrophe activity.

'We expect total global insurance premiums to decline slightly in 2022, with a gradual recovery but still below-trend real premium growth for the next two years,' the report predicts.

'In non-life insurance, slowing global growth and inflation will likely cut real premium growth to below 1 per cent this year, with a recovery as inflation eases and the hard market goes on.

'Global non-life insurance return on equity (ROE) is expected to halve to just 3.4 per cent 2022 as underwriting performance and investment results are weaker.

They will rebound to a 10-year high in 2024 as the interest rate tailwind and potential rate hardening take effect.

Life insurance market

In life insurance, we forecast a 1.9 per cent contraction in global premiums in real terms in 2022 as consumers face cost-of-living pressure, but a return to trend growth in 2023 and 2024, carried by emerging markets.

'Life profitability is improving due to rising interest rates and normalising COVID-19 mortality claims.'

To prepare as new risks emerge, Swiss Re Institute monitors three alternative scenarios to its baseline outlook.

Two of these scenarios are pessimistic: '1970s-style structural stagflation' and 'severe global recession', with the former envisaged to be worse for insurers than the latter due to the impact of prolonged severe inflation on balance sheets.

A severe global recession would reduce premiums, investment performance and underwriting results in most lines of business in the near term.

With inflation anticipated to be persistent and volatile and macroeconomic risks overall skewed towards downside scenarios, Swiss Re Institute sees strong capital and risk management as essential to mitigate risks, alongside underwriting rigour, portfolio steering, reinsurance, asset allocation and hedging.

Download the latest Swiss Re Institute sigma report