Analysts at Swiss Re Institute say that their baseline outlook for the global economy is now a ‘stagflation-like’ scenario, although they assured that these conditions should be temporary, and may even benefit re/insurers in the long-term, despite representing a short-term threat to profitability.
Reflecting on recent global events, Swiss Re notes that the mix of multi-decade-high-inflation and slowing economic growth after the initial strong rebound from the COVID-19 crisis had already provide challenging for major economies worldwide.
And with the outbreak of conflict between Russia and Ukraine, and resulting economic sanctions, global inflation is now expected to be pushed even higher and to put a further brake on growth momentum.
To exacerbate the challenge, high inflation is forcing central banks to tighten monetary policy into an economic slowdown, which carries further risks of recession.
According, fears of stagflation similar to what was seen throughout the 1970s have returned, but Swiss Re says the situation today is not nearly as dire.
“Our baseline outlook can be characterised as ‘stagflation-like’. However, we see this as temporary and driven by cyclical factors, rather than the structural stagflation seen in the 1970s,” analysts wrote in a new report.
“Today’s economic conditions are very different, and we believe the expected growth slowdown will ultimately bring inflation down.”
2022 is therefore seen by Swiss Re as a year of transition for the insurance industry globally as it seeks to manage the inflation surge and rising interest rates, as lower equity markets and widening credit spreads will likely lead to mark-to-market valuation losses on assets and capital.
Property & Casualty (P&C) insurers are seen as most exposed to the inflation shock, which will increase claims severity, but Swiss Re also predicts some tailwinds from further rate hardening in 2023.
For Life & Health (L&H) insurers, the impact is mainly positive with benefits from higher interest rates on investment income. However, lower disposable incomes and a slower economy may eventually increase lapse rates and dampen demand for life insurance products.
Swiss Re advised that re/insurers can mitigate the downside risks of the economic situation through strong capital and risk management, repricing insurance risks to account for higher claims costs, reinsurance transactions, asset reallocation in investment portfolios and hedging against inflation.
And it added there may be “a silver lining to this crisis” in the form of an acceleration to the exit from extreme monetary policy, which is seen as a long-term positive for insurance companies.
“After a 50-year absence, stagflation is fully back on the radar and we now need to be particularly disciplined. 2022 will be a challenging year for insurers with both sides of the balance sheet under pressure.,” said Swiss Re Group Chief Economist Jerome Haegeli.
“The silver lining for insurers is that we are exiting the ‘low-for-longer’ and negative interest rate environment and this regime shift will benefit insurance companies over the medium and longer term. ‘Risk-free’ rates are finally not return-free anymore,” he continued.
“Fortunately, history is unlikely to repeat itself – today’s economic reality looks very different to the 1970s. Central banks are acting very forcefully to keep the downside risk of 1970s-style stagflation at bay. Consequently, and with aggressive Fed rate hiking ahead, a soft landing in the US looks to be wishful thinking.”
