Insurance may be part of the solution to the world’s current economic woes, according to a new note from Swiss Re.
The firm said that expanded insurance reach is a more fiscally and environmentally sustainable solution to smooth real incomes and consumption.
It came to this conclusion after determining that price controls, currently in the dialogue on how to tackle increased inflation, have been mooted as one solution.
Swiss Re wrote: “Headline CPI inflation was 2.6% in March, still at the lower end of the central bank’s target range of 2-4%. Governments often impose price controls to protect the spending power of the poorest, especially where demand is price inelastic (eg, for staple foods and fuel). And for risk-averse producers, less volatile prices smooth incomes and encourage long-term investment.”
It added: “However, in advanced economies, where markets function better and consumers spend proportionally less on necessities, the case for price controls is weak. At best they should be used as a temporary solution to manage the current cost-of-living crisis. Artificially depressed prices increase demand but also reduce supply, creating shortages (and sometimes black markets). Fixed prices also reduce or distort competition and harm productivity growth. In addition, subsidies on fuel will delay transition to net zero.”
The authors of the note—John Zhu, chief economist for Asia, and Jérôme Haegeli, group chief economist, both at Swiss Re—also said that price controls will do little to temper the current geopolitical tensions. However, they said the insurance industry may have a part to play.
They wrote: “The cost-of-living crisis is also a crisis of underinsurance, and a stronger insurance market is part of the solution. Insurance provides exactly the kind of income smoothing needed to mitigate the impact of price shocks. Increasing insurance penetration and closing protection gaps – especially in emerging markets – help consumers maintain real consumption levels and reduces the need for costly and distortionary price controls. Insurers themselves also have a profit incentive to control costs. Price controls can work in the short-run but they are second-best to disinflation driven by free market forces.”
Inflation has been an ongoing topic in recent months, with Gallagher Re recently saying that talk of it has dominated the renewal season. The company has also said that pricing needs to remain favourable in order to outstrip its effects.
