Resilience required as insurers urged to lead the way

Swiss Re’s group chief economist has said the current economic trends will provide the global (re)insurance industry to prove its worth.

Jérôme Jean Haegeli (above) spoke to Emerging Risks as Swiss Re launched  its global economic and insurance outlook in London.

The outlook warned after a resilient 2023 powered by strong US economic growth, the world economy is expected to slow by 0.4 ppts. to 2.2% real GDP growth in 2024. Major economies are diverging with the US continuing to grow, Europe stagnating and China grappling with structural domestic growth challenges. The conflict in the Middle East is heightening risks to the macroeconomic outlook.

The according to the sigma report,  “Risk on the rise as headwinds blow stronger”, launched yesterday the global insurance industry’s strengthening financial position offers welcome reinforcement against elevated macroeconomic and geopolitical risks.

It was a view backed by Haegeli, who said “Fading economic tailwinds and geopolitical uncertainties reinforce the primary insurance industry’s essential role in risk transfer. While the sector will continue to strengthen its profitability, mainly driven by improved risk-adjusted pricing as well as higher investment returns, it is not yet expected to earn its cost of capital in 2024 or 2025 in most markets as economic inflation will continue to have a negative impact on claims costs.”

According to the Swiss Re Institute, labour market strength has been the main driver of resilience this year, with unemployment rates historically low in the US (3.9% as of October) and euro area (6.5% as of September) despite an increasing labour force. This has strongly supported consumer demand, especially in the US where consumer spending is expected to grow by 2.4% in real terms in 2023. However, according to the sigma report, labour market resilience is not a sign of re-acceleration, but a reminder of the uneven lags of monetary policy, which often takes longer to impact on labour markets than other parts of the economy.

Haegeli told Emerging Risks: “The world is getting ever riskier  and there is a need for greater resilience. The reduction in the inflation rate will benefit the insurance industry and we now have the opportunity to play a real role in efforts towards resilience and closing the  protection gap.”

He added: “Economically it is chilly out there, we see risks on the rise. It is cold, we expect an economic slowdown to start soon, with Europe and Germany already in recession.”

He added the key letter for the market was R.

“R for resilience,” Haegeli explained. “we need more resilience. R is also for risks, there is no question that risks have increased.”

Swiss Re added the outbreak of war between Israel and Hamas in October 2023 has added risks to the global economy.

Haegeli said: “As an economist if we see and escalation to see more countries involved, we would run the risk of a commodity price shock. If it occurs, we might see oil at $150 per barrel or higher  which would increase the risk of a global  recession, which in turn would drive higher inflation.

Charlotte Mueller, Swiss Re’s chief economist Europe, said: “The full impact of higher interest rates on the real economy is still to filter through. For corporates, a higher cost of capital and labour input costs will increasingly erode profit margins and could induce layoffs. Europe’s economy will be the key underperformer over the next two years, with some large economies like Germany already in contraction.”

According to the Swiss Re Institute, labour market strength has been the main driver of resilience this year, with unemployment rates historically low in the US (3.9% as of October) and euro area (6.5% as of September) despite an increasing labour force.

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