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Underwriting discipline key when financial conditions tighten: Swiss Re

23rd September 2022 - Author: Pete Carvill

A new note from global reinsurer Swiss Re says that tighter financial conditions will reinforce underwriting discipline.

Swiss ReThe firm’s latest Economic Insights says that current conditions mean central banks are inhibited from pivoting towards more accommodative policies.

The work refers to what it calls the ‘central bank put’, or the implicit insurance to mitigate market and economic volatility. This, authors Jérôme Haegeli, group chief economist for Swiss Re, and Patrick Saner, head of macro strategy argue, is far from being activated.

The pair write: “Relative to prior episodes of monetary tightening, today’s inflation level and momentum inhibits a significant central bank pivot towards more accommodative policies. We believe the central bank “put” does still exist in case of severe financial market malfunctioning, but volatility and tighter financial conditions are currently the central bank objective and not a reason to cave in. For insurers, tighter financial conditions reinforce the need for underwriting discipline.”

The authors give a further definition of the ‘put’, which it says has gained in notoriety in the last decade

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They declare it to be ‘[…] loosely defined as financial markets’ or an economy’s reliance on a central bank as a lender of last resort in providing insurance against very adverse financial market and/or economic outcomes’.

However, they say that the rising notoriety of the ‘put’ is understandable.

They write: “[…] in many instances where economic growth was decelerating or financial fragilities became visible, central banks came to the rescue, by changing course from interest rate tightening to rate cuts and other market interventions, usually in the form of quantitative easing/large asset purchase programs. But times are changing, and investors need to understand what influences the inherent nature of a central bank put.”

However, Swiss Re says that not all ‘puts’ are created equal.

They write: “In the US for example, the Fed put has evolved substantially over time. The “Bernanke put” was primarily focused on curtailing systemic risk as a result of the global financial crisis. The “Yellen put” was to ensure a robust economic and labour market recovery. And the “Powell put” before 2020 was often perceived as a de facto financial market volatility targeting approach. Depending on what risk the central bank put tries to mitigate, it is closer or further away from market intervention.”

They added: “In our view, today’s Fed put probably resembles the Bernanke put. Said differently, we believe the Fed put still exists and the Fed will be the lender of last resort if the US economy faces systemic risk or severe financial market malfunctioning, but it does not exist for financial market volatility or labour market strength reasons alone.

“Inflation IS currently the binding constraint. By extension, in our view expectations of rate cuts or more liquidity injections next year are premature. For insurers, tighter financial conditions and a weaker central bank reinforce the need for underwriting discipline.”

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