The UK’s decision to leave the European Union and withdraw from the Single Market may represent part of a global political trend towards ‘closed societies’ that is likely to negatively impact re/insurers in the long-term, according to Michael Menhart, Chief Economist at Munich Re.
Speaking during a presentation at Lloyd’s last week, Menhart said that the drivers behind Brexit are part of a typical reaction following a financial crisis, which often results in a move towards populist parties that support ideas like protectionism and nationalism.
In his view, this will negatively impact the long-term growth of the world economy, which “depends on openness and free trade,” and will negatively impact re/insurers because “in the very long-term, economic growth is very much equal to insurance market growth.”
“In the past, the big economic policy struggle was between the economic left (big government, centralised government) and the economic right (small government),” Menhart explained. “And in the course of the last 10 years I believe that this is at least complemented – if not overthrown – by our political discussion about ‘closed societies’ versus ‘open societies.’”
“Why is this important? This is important for the global economy, but this is also important for the insurers, because protectionism – even if the short-term impact on the USA or the UK might not be that massive – in the long term it is of course bad for economic growth,” he continued.
“It means disruption of the international supply chain and it means substantially weaker GDP growth, and once again in the long-term GDP growth is almost one-to-one related to insurance market growth.”
This political trend towards closed markets may also put downward pressure on interest rates, which would hurt the long-term profitability of global re/insurance companies, Menhart said.
Additionally, it could result in stock price declines or even a currency war if you were to escalate the potential, he suggested.
“I still believe that politics are major drivers for the risk scenarios. Brexit is only one of them, and in my view it might not be the biggest one,” said Menhart, adding that it might even “be rather distracting from other scenarios which, in the long term, are much more important for the UK and for Europe.”
The other danger with protectionist, closed society policies is that the true extent of the negative impact on the domestic economy and re/insurance market may only emerge in the long-term, Menhart warned.
This is particularly true for very large economies with low reliance on exports, such as the U.S, where exports only account for 15% of GDP.
“When it comes to who will suffer first, to be honest if the USA is cancelling all trade agreements and is negotiating everything bilaterally, then my guess would be if there’s a bilateral negotiation the small partner will suffer first,” said Menhart.
“That means if there’s protectionism all over the world, if there’s trade wars all over the world, the victims will not be firstly the USA, and I don’t think it’s going to be the advanced economies in Europe,” he continued. “It will be the weakest economies in Asia, in Africa, and in Latin America. In the long-term though, it will be all economies.”
