The challenging macro environment is not necessarily bad

Speaking in a Re/insurance Lounge webinar, Jérôme Jean Haegeli, group chief economist for Swiss Re, highlighted opportunities for key developments in areas such as digital transformation and supply chains.

The global economic environment is chilly, with a double-dip recession likely in Europe, according to Jérôme Jean Haegeli, group chief economist for Swiss Re. However, the prospect of a COVID-19 vaccine promises better times ahead in 2021, for the economy and for insurance markets.

Haegeli predicts rate-hardening will continue and the insurance market will continue to benefit from the digital transformation that was accelerated by COVID-19.

He said that to support sustainable economic recovery, a policy reset is needed, with public policy focusing on areas such as infrastructure, technology and climate.

When it comes to the global recovery, Swiss Re expects China to lead the way. “China will be stronger than the US and the US will be stronger than Europe,” said Haegeli.

However, he added, it was important not to reach the wrong conclusions for the financial markets based on observations of the macroeconomic picture.

“Over the last 10 years the financial markets have been doing quite well,” he said. “The insurance sector is very large and important and if anything, the market environment is quite good for risk taking. I continue to expect a constructive outlook for financial markets.”

Looking to the future, Swiss Re’s most optimistic scenario is that there will be timely deployment of vaccines along with economic recovery, with important lessons being learned from the crisis.

“It’s possible that this crisis will not be wasted and we will build back better,” Haegeli said.

Swiss Re has also considered downside scenarios, including a stagflation scenario where there is low growth but higher inflation. Swiss Re has attached a likelihood of 10 percent to this.

Another possible scenario, with a likelihood of 5 percent, is that there will be an even more severe and protracted recession. Both negative scenarios would be bad for the insurance sector.

“The stagflation scenario is definitely the one to watch but at 10 percent it is not our baseline,” he said. “We don’t see today, on the short-term horizon, inflation pressure about which we should be concerned but we should always be mindful of policy framework changes.”

He noted that during unfavourable economic conditions demand for insurance is more muted.

“If you have the expectation of interest rates remaining low for longer, you need to price accordingly.”

Jérôme Jean Haegeli, Swiss Re

“Low economic growth means less growth and less exposure that needs to be insured,” he said. “COVID-19 has caused the worst global recession of our lifetimes. It’s crystal clear that the current crisis is leading to a rise in risk awareness and, together with the crisis being an earnings but not a capital event, and with the underwriting profitability gap having been pretty large already coming into COVID-19, we have all the elements in place for the hardening of insurance market prices to continue.

“If you have the expectation of interest rates remaining low for longer, you need to price accordingly and that’s again an upside factor for insurance market pricing. Demand has come down and demand has come up again since this was also one of the shortest recessions in our lifetimes, and together with the low interest rate environment, this speaks to continuing insurance market hardening.”

Supply chains

Looking to the future, Haegeli explained that the supply chain changes that were emerging globally before COVID-19 will create opportunities of around $1 trillion for additional investments globally over the next five years, and this will have an effect on the insurance market premiums side.

“Rebuilding supply chains over the next five years is positive for global growth,” he added. “Supply chain changes will make our system more resilient.”

He predicted that a move to parallel supply chains will create resilience. “It’s a bit like kidneys—you need only one but you’re happy to have two in case one fails. We are now moving to this phase of having parallel supply chains,” he said.

He noted that digital transformation continues, with Asia leading the way.

“In the COVID-19 crisis Asia worked very well with digital distribution channels,” he said, adding that there is a clear opportunity for insurance players to continue to embrace digitisation.

Haegeli noted that it is important to consider systemic risks that are even larger and more important than COVID-19—namely climate change.

“There are lots of opportunities for the insurance markets, when you think about new technologies and digitisation being pushed, and you see the opportunities for more innovative insurance solutions. I think parametric insurance solutions are a big word for the insurance sector.”

To see the whole interview visit the Re/insurance Lounge here:

Image: Shutterstock / DCrane

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