Despite the recent turmoil in the US and European banking sectors, Asia’s re/insurance sector has managed to avoid being affected, helped in part by the swift responses of the authorities in the countries where the issues originated and lower inflation rates in the region, said the Swiss Re Institute.
These lower inflation rates, which were due to slower and delayed reopenings from pandemic restrictions, also allowed for a more gradual increase in interest rates, the report noted.
US regulators Federal Reserve (Fed) and Federal Deposit Insurance Corporation’s (FDIC) actions to expand deposit insurance and remove bank run risk have prevented contagion from the US and Europe’s banking sector turmoil to Emerging Asia.
A new note from the Swiss Re Institute says, despite the measures taken to prevent spillover effects, it is difficult to entirely avoid the impacts of weaker growth and stricter credit tightening. As a result, risk mitigation strategies, such as reinsurance, are becoming increasingly valuable.
The note was authored by John Zhu, chief economist for Asia.
“Policymakers prevented a global crisis, but advanced market credit tightening still implies weaker export demand and tighter global financial conditions for emerging markets,” Zhu noted.
“Insurers could stress test larger shocks and reevaluate their risk mitigation facilities including reinsurance.”
According to Swiss Re Institute’s forecast, inflation and interest rates in all Asian markets are expected to have reached their peak in Q1 2023. Economic growth in Asia can be supported by less strict interest rates, which is crucial for financial stability since debt servicing must continue regardless of the economic conditions, Zhu said.
“Asia has a strong foundation to deliver sustainable growth in earnings and wages needed to service debt. We expect the US to enter recession later this year, which would imply weaker external demand for Asian exporters, but China’s economic reopening is a welcome offset,” the report said.
In 2023, Swiss Re Institute forecasts that emerging Asian economies will experience much faster growth, at a rate of 5.5%, compared to the US and euro area, which are expected to grow at rates of 0.9% and 0.4%, respectively.
