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Advanced & emerging markets pose unique inflation challenges: Swiss Re

14th January 2022 - Author: Matt Sheehan

With inflation rates diverging significantly between advanced and emerging markets in recent months, analysts at Swiss Re warn that insurers and reinsurers will face diverse challenges in responding to this trend.

Swiss Re notes that the rise in inflation since mid-2020 has been twice as steep in advanced than emerging markets.

The reinsurer believes higher tolerance for inflation and greater fiscal support will fuel relatively stronger economic growth in advanced markets in the short to medium term.

This has myriad implications for re/insurers, who are likely to face greater claims costs in advanced markets (AMs), but also the potential for headwinds to insurance take-up rates in emerging markets (Ems).

“Our anticipated monetary tightening in EMs would points to higher real yields/returns on invested assets, but it could also restrain insurance take-up rates as economic activity slows,” Swiss Re analysts explained.

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“Overall, we believe those EMs with fiscal prudence and central bank policy independence will likely prove more economically resilient to ongoing pandemic risks and other macro uncertainties.”

“In AMs, hedging inflation risk is gaining importance as structurally higher inflation is expected to make claims more costly. On the flipside, while deglobalisation and decarbonisation could worsen the insurance outlook by slowing growth and raising inflation in both AMs and EMs over the longer term, they may also diminish the tail risk of future crisis events, pandemic or other.”

Swiss Re notes that the global economy has endured unprecedented supply and demand shocks over the course of the COVID-19 pandemic, including severe disruption to global supply chains and unprecedented levels of government stimulus.

The higher levels of inflation in advanced markets can be attributed to the more inflationary-tolerant frameworks adopted by central banks in these areas, as well as the correlation between fiscal stimulus as a share of GDP and income per capita

However, analysts also pointed out that emerging markets are generally ahead in the tightening process, and have maintained a money supply growth rate below that of advanced markets, thereby ensuring currency strength in the face of looming monetary tightening in advanced markets

“We expect these circumstances to temporarily yield diverging growth trajectories in favour of AMs,” Swiss Re said. “This will slow the pace of poorer countries’ catch-up with the wealthier.”

But going forward, the reinsurer goes expect to see more tightening in emerging markets in 2022, both as a means to rein in inflation pressures to keep relative yields attractive, and in order to mitigate currency depreciation that will result once AMs begin to raise rates.

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