The world is coming to the end of another tumultuous year and the question on everyone’s mind is: what is next for the global economy and the insurance industry? From Swiss Re Corporate Solutions’ vantage point right now, while the firm still sees short-term pain over the next year, there are also glimpses of a silver lining, CEO Andreas Berger states.
Broadly speaking, there are three key themes likely to dominate.
Heading into recession – but it’s not like 1970s-style stagflation
My colleagues at the Swiss Re Institute (SRI) expect inflationary recessions to approach major economies like Europe and the US in the next 12 to 18 months. They forecast full-year real GDP growth of just 0.4% in 2023 in advanced economies, which is the lowest prediction since the 1980s outside of the global financial and COVID-19 crises(1). While the outlook in emerging markets is slightly better (2.8% growth in 2023, excluding China), the situation will likely feel akin to recession.
Meanwhile, the expectation is that central banks will continue to raise interest rates in the near term to tame inflation. It is likely that the global consumer price index (CPI) inflation rate will still average above historic trends at 5.4% next year and then decelerate to 3.5% in 2024, with upside risks to our forecasts.
While it’s easy to fall into the trap of conjuring up the spectre of the 1970s, I think it’s important to stress that today’s situation is not fully comparable. The world is in a different economic environment – it is unlikely we will see the same wage-price spiral and interest rates are unlikely to go into double digits in advanced economies like then.
The global economy has so far remained resilient in spite of rising interest rates, although monetary policy typically has longer and variable lags on the real economy. SRI is more constructive on the medium term: by 2024, global growth is expected to pick up again to around 2.8% and that we will see global inflation rates easing to more manageable levels, albeit still above historical trends.
Insurance market hardening as corporates still face recession
In the near term, businesses will still face a number of headwinds from persistent and volatile inflation, higher wages, a disrupted global supply chain and lower growth. For some lines of business, it is key to look at the most relevant sub-inflation metric, not only general CPI. For example, property commercial insurance, including coverage of natural catastrophes (Nat Cat), is more exposed to changes in construction cost inflation, which has been higher this year than general CPI.
All of this means claims costs have gone up per unit of claim. And then there are the high and rising Nat Cat losses: Hurricane Ian – as well as a high number of winter storms, severe convective storms and devastating floods globally – are adding to the severity of claims.
So, insurance premiums will also need to reprice these risks.
Given that premiums fell by an estimated 0.2% in real terms this year, it is likely the insurance industry will return to average annual premium growth of 2.1% in 2023/24(2). This is driven by inflationary pressures, Nat Cat losses and partially offset by the benefit from higher interest rates driving up investment returns.
Commercial lines will benefit most from rate hardening and expand more than personal lines (excluding health) in the coming years. Businesses should expect 3.4% growth in commercial premiums in 2022 (vs. 1.2% real premium growth in the P&C sector) and a stable 3.4% increase over 2023/24 (vs. 2.7% for overall P&C).
How data and scenario planning helps corporates take control of their risk
There are a number of options for corporates to adequately insure their various risks, even in a hardening market. It’s important to start the conversation early when it comes to budgeting and business continuity planning. This should be based on stress-testing early on rather than as a reaction to events as they happen.
The power of data can be harnessed by utilising technology which can create a digital twin of a business and then model a number of “what if” scenarios to understand how potential risks might affect the business. Such technology can simulate the impact of different economic scenarios, natural disasters, supply chain constraints and even previously uninsurable risks like cybercrime.
For its part, SRI has developed three alternative economic scenarios on top of a baseline outlook for the world economy: two pessimistic, with a combined 30% likelihood of occurring in the next 12–18 months, and one optimistic scenario, with a 10% probability, which gives insight into new risks as they emerge.
The year ahead will certainly be another challenging one, with inflation not yet conquered even if year-over-year rates do decelerate. Having the appropriate tools and planning approach in place is vital to keeping businesses protected during the turmoil.
Article by: Andreas Berger, Chief Executive Officer, Swiss Re Corporate Solutions.
