Slowing global economic growth, in combination with a persistent low to negative interest rate environment, is likely to impact insurance demand and industry profitability over the coming two years, according to the latest sigma report by Swiss Re.
However, Swiss Re noted that this stability will be maintained against a background of complex global financial challenges, as well as worsening trade and geopolitical developments.
For example, analysts forecast that gross domestic product (GDP) growth in the US will slow to 1.6% in 2020 from 2.3% this year, as the effects of fiscal stimulus fade and trade tensions with China continue.
“Global growth is slowing from an already low base,” the sigma report stated, highlighting the “negative impact of increased uncertainty emanating from trade and geopolitical tensions, and Brexit.”
With economic slowdown, demand for insurance typically falls, Swiss Re said, with marine trade credit insurance likely to be the hardest hit given the compounding influence of trade conflict.
Industry profitability could also be impacted by recession, resulting from a further drop in the yield curve, which is a plausible scenario in current low market yield levels.
Additionally, the low interest rate environment means investment returns will remain weak, another variable that will continue to undermine profitability, and a concern for life insurers in particular.
But despite these challenges, Swiss Re believes the global services sector has help up well so far, with tight labour markets and solid wage growth supporting consumption.
Moreover, central banks have reacted with further fiscal easing, which should help to avoid a global recession.
“In the short-term, the low growth environment does not necessarily mean financial markets will perform badly, not while central banks remain in accommodative mode,” said Jerome Jean Haegeli, Group Chief Economist at Swiss Re. “Long-term loose monetary policy, however, raises the spectre of financial instability.”
With low interest rates set to stay, however, improvements in non-life re/insurance profitability will depend on underwriting performance, where pricing improvements are being offset by increasing claims, mainly in US liability.
Overall, Swiss Re expects global economic growth to moderate only gradually in the coming two years, as the contribution from emerging markets helps to offset the deteriorating outlook of advanced economies.
Asia in particular is likely to remain the main driver of growth over the next two years, with China forecast to show a 9% increase in non-life premiums and an 11% increase in life premiums in 2020.
Pricing in non-life insurance has also strengthened recently, the report acknowledged, driven by rising loss costs in property catastrophe and US casualty in a trend that Swiss Re expects to continue.