INTERVIEW: JÉRÔME JEAN HAEGELI, SWISS RE
Asset prices on steroids, but interest rates will stay low: a chief economist looks ahead
The world’s economy, much like its climate, is changing rapidly. What is in store for the re/insurance sector? Intelligent Insurer heard from Swiss Re’s Jérôme Jean Haegeli.
The last 18 months have been tumultuous, possibly more so than any other in living memory, with lockdowns, travels bans, furlough schemes, and entire sectors shutting down more or less overnight.
To talk about this and look forward, Jérôme Jean Haegeli, group chief economist at Swiss Re, sat down with the Re/insurance Lounge, Intelligent Insurer’s on-demand platform for interviews and panel discussions with industry leaders, to talk about the large trends and shifts that he foresees not just in the insurance markets, but across the whole world.
Recovery on the horizon
“When we consider the economic outlook, the one thing to remember is that an economic recovery is not a sprint, but a marathon. What’s more, a rebound is not the same as a recovery,” Haegeli said at the end of August, around the time that the European Central Bank reported that inflation across the continent had topped 3.4 percent, much higher than the institution’s ongoing target of 2 percent.
“The biggest risk out there is that our economies are overheating, and that we’re getting higher inflation pressure for a longer than expected time period. It would not be good for insurance markets and certainly not good for society.”
When Haegeli spoke in the Re/insurance Lounge, he expressed surprise at the strength of the economy, but cautioned about whether the momentum would be maintained expressing below consensus forecasts.
“There’s been this extraordinary cocktail of economies reopening, together with the stimulus and pent-up demand. That’s really driving growth across the regions.
“We forecast growth of about 6 percent for the US, which is much higher than normal—it’s about triple the normal speed level,” he said.
“I’m a big believer in separating out structural economic factors from cyclical ones.”
Jérôme Jean Haegeli, Swiss Re
That may sound good, but Haegeli warns against such optimism. “It’s very much still a cyclical recovery,” he said. “It’s a rebound and we have to see where the momentum continues. Risks are tilted to the downside for next year.”
The industry obviously looks closely at what happens in the world economy. Haegeli said that there are three things that he would pick out as particular themes: growth, inflation, and the interest rate.
The rise in premiums, said Haegeli, had been strong, the result of which would be positive for growth. “If you look at our latest sigma world insurance report, we forecast that global insurance market premiums for direct insurance will break $7 trillion for the first time next year. That is extremely significant and positive.”
Inflation and interest rates
The second point Haegeli raised was inflation. As mentioned above, inflation topped 3 percent in Europe at the end of August. The same week, Germany said that inflation within its borders had hit 3.9 percent year on year, the highest in nearly three decades.
“There’s high inflation in the US of above 5 percent,” said Haegeli. “Even in Europe, it’s above 3 percent, so we’re already in a high-inflation environment. The question is, how long will it last?
“My take on it is that there will be no runaway inflation, but inflation will be higher after COVID-19 than it was before. That will be important when it comes to pricing.”
Interest rates were third on his list. “It’s super-interesting,” Haegeli said. “Even though we’re seeing a cyclical global economic rebound and asset prices on steroids, interest rates are not going up. I’m a big believer in separating out structural economic factors from cyclical ones, and I think that interest rates will remain low.
“For a sustainable economic recovery, we need it to be green.”
“If that happens, let’s not forget that insurers are long-term investors. We get the yield from the assets under management and if interest rates are lower for longer, we get lower running yields and thus less income. If you get that situation, you need to earn more on the underwriting side.”
Haegeli offered his prediction on interest rates. “Ten-year interest rates in the US today are around 1.3 percent. I don’t think they’re going to increase much by the year end. Our forecast is 1.4 percent for the end of the year. For next year, it’s 1.6 percent.”
When it comes to opportunities for the insurance industry, Haegeli pointed to those brought about by the efforts to combat climate change. This is not surprising, given that ethical investing with environmental, social and corporate governance factors has been the success story of 2020 and 2021.
“There’s a sea-change in the minds of people,” he said. “For a sustainable economic recovery, we need it to be green. And you can only do that with the insurance sector at the forefront, because it’s a provider of long-term funds, and what it chooses to underwrite or not makes a big difference for the real economy.
“Tackling climate change has become part of economic policy-making and not taking immediate further action is in my view not an option. The most costly course of action for economic growth and society’s wellbeing is not doing more.
“If we don’t fulfil the Paris Climate Agreement to keep the temperature increase well below 2°C, the global economy risks shrinking substantially.”
To view the full Re/insurance Lounge session click here
Main image: Shutterstock / musicman
