Sigma 7/2020: Global economic and insurance outlook - Dr. Jérôme Haegeli, Group Chief Economist 11 November 2020 - Swiss Re
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sigma 7/2020:
Global economic and insurance outlook
Dr. Jérôme Haegeli, Group Chief Economist
11 November 2020
1
It’s all about…
Dr. Jérôme Haegeli | November 2020 2
Global macro outlook
“We need a policy re-set. Today's
crisis is an opportunity to build
back better, including targeted
fiscal spending“
Dr. Jérôme Haegeli, Group Chief Economist of Swiss Re
3
Economic Outlook: Fragile and protracted recovery
Swiss Re Institute Consensus
Protracted,
2019 2020e 2021F 2022F 2020e 2021F
fragile and Real GDP (% change)
stimulus- US 2.3 -4.1 3.5 2.3 -4.0 3.7
dependent Eurozone 1.3 -7.3 4.0 3.0 -7.5 5.3
recovery UK 1.5 -11.0 5.6 2.3 -10.1 5.7
China 6.1 2.3 7.4 5.3 2.1 8.0
CPI (% change)
Stagflation US 1.8 1.1 1.7 2.0 1.2 2.0
risk in the Eurozone 1.2 0.2 0.8 0.8 0.3 0.9
spotlight UK 1.8 0.7 1.5 2.0 0.9 1.5
Interest rates China 2.9 2.6 2.4 2.5 2.8 2.2
will remain
very low with 10y Gov. Bond Yield (%)
US 1.9 1.0 1.0 1.0 0.8 1.1
“financial
Eurozone -0.2 -0.4 -0.4 -0.4 -0.5 -0.3
repression” on UK 0.9 0.2 0.2 0.4 0.2 0.4
the rise China 3.2 2.8 2.7 2.6 3.1 3.1
Source: Swiss Re Institute (consensus numbers as of 12 October)
Note: No Consensus projections available for China, numbers refer to Bloomberg (2 November)
Dr. Jérôme Haegeli | November 2020 4
The pandemic macro clock: Not looking good but no return to spring extremes
SRI Pandemic Macro Clock SRI GDP shortfall index
2.0 5
(4) (1)
0
-5
1.5
Germany -10
G7
US -15
Rt
Rt > 1 UK
China
-20
1.0
-25
Rt < 1
-30
Easing Tightening (2)
(3) Feb Mar Apr May Jun Jul Aug Sep Oct
0.5 China G7 Germany UK US
-15 -5 5 15 25
Change in mobility
Note: 7-day moving-averages; Values available with a lag only.
First value: 6 March. Last value: 31 October. Note: SRI GDP shortfall index is calculated multiplying the estimated GDP sensitivity
Sources: Google; Apple, Wind, EpiForecast, Swiss Re Institute to mobility by the Google mobility index, which represents the average change in
frequency of visits to workplaces, public transportation, and retail centers.
Dr. Jérôme Haegeli | November 2020 5
The cyclical and long-term macro picture
Long-term economic consequences for now overshadowed by massive public policy stimulus
Cyclical Structural
picture picture
Short-term Longer-term
Latest* Drivers
outlook outlook
• Higher debt levels
Real GDP growth, More • Looming risk of “zombification” of firms
33%
qoq saar subdued • Productivity increase through digital
transformation
• Hardest-hit sectors struggling
Likely • Increasing automation/digitalisation
Unemployment 6.9%
higher • Lagging speed of skill adaptation
• Increasing “financial repression”
Real yield -1.0% Lower • Change in monetary frameworks
• Material risk of higher inflation
Notes: Colour-coding goes from green = benign, to red = challenging territory of the level of a given macro indicator
“zombification” refers to an increase in the number of highly leveraged and unproductive firms, the so called “zombie” companies
saar is the seasonally adjusted annual rate Dr. Jérôme Haegeli | November 2020 6
* Data as of Q3 2020. Values for the US but qualitatively applicable to many other economies
Theme 1: Debt bazookas are not improving structural trend growth
Evolution of general government debt, in % Higher debt levels in advanced economies are
140
not associated with stronger growth
WWI WWII Global COVID-
Financial 19 crisis
120 Crisis 160
Advanced 140
100
economies 120
Govt debt % GDP
80 100
80
60
60
40 40
Emerging market 20
20
economies 0
0 0 2 4 6
2010 GDP growth
2015
1880
1885
1890
1895
1900
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2020
Source: IMF, Swiss Re Institute
Note: the right chart compares 30y average government debt levels to 30y average real GDP growth
outcomes based on annual data for the 20 largest advanced economies. The dashed line
corresponds to the linear fitted line of observable data.
Dr. Jérôme Haegeli | November 2020 7Theme 2: Global economic resilience is weaker, pointing to 1.6%pts lower
growth over five years
Higher economic resilience is associated with
Global resilience set to drop by ~20% due to COVID-19 better growth outcomes in advanced economies
1.0
Best Mon. pol. space 0
0.8
Subsequent 5y growth deviation from
Fiscal space -1
Low carbon econ. -2
0.6
Ins. penetration -3
trend, in %
Fin. market dev. -4
0.4
Human capital -5
Economic complexity -6
0.2
Labor market eff. -7
Banking industry backdrop -8
0.0 0 0.2 0.4 0.6 0.8 1
2007 2018 2019 2020 2007 2018 2019 2020 World Swiss Re Institute economic resilience index levels in 2007
Worst Advanced Economies Emerging Economies
Source: Swiss Re Institute Macroeconomic Resilience Index. Data is available on Sigma Explorer: https://sigma-explorer.com/ Dr. Jérôme Haegeli | November 2020 8Theme 3: Low interest rates will stay low with financial repression contributing
to the >USD16trn negative yielding govt’ bonds
Majority of the Euro area and Japanese sovereign
bonds are trading at negative yields
Equivalent to a
90%
3.5% p.a “tax”
Euro area Japan Globally
80%
in the US on
household
70% disposable
income
60%
>USD 16trn of
sovereign
50%
bonds globally
40%
trade at
negative Yield income loss
30% interest rates equivalent to
~1.5% of total
20% fixed income
holdings for long-
10% term investors*
0%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
* Long-term investors are represented by US and European insurers and pension funds
Source: Datastream, Swiss Re Institute. Financial Repression Index publication available here:
https://www.swissre.com/institute/research/topics-and-risk-dialogues/economy-and-insurance-outlook/expertise-publication-financial- Dr. Jérôme Haegeli | November 2020 9
repression-here-to-stay.htmlCall for action: we need to “Build Back Better” focusing on macro resilience to
improve long-term growth and societal outcomes
Targeted investments into: Strengthen policy frameworks to:
Sustainable infrastructure Limit rises in inequality
Increase fiscal transparency &
Digital economy & human capital
independence
Low carbon transition Avoid company “zombification”
Source: Swiss Re Institute Dr. Jérôme Haegeli | November 2020 10Global insurance outlook
“COVID-19 is causing the worst
recession of our lifetimes. Yet in the
face of adversity, insurance markets
are holding up well as premiums
see a V-shaped recovery”
Dr. Jérôme Haegeli, Group Chief Economist of Swiss Re
11We forecast a strong V-shaped premium outlook
Insurance premium real growth compared Insurance premium forecasts
with GFC COVID 19 2019 2020e 2021F 2022F
World (non-life) 3.5 1.3 3.5 3.6
8%
Advance market 2.7 0.9 2.8 2.7
6% Emerging market 7.6 3.3 7.3 8.0
4% World (life) 2.2 -4.5 3.2 2.8
Advanced market 1.3 -5.7 2.2 1.8
2%
Emerging market 5.6 -0.2 6.9 6.4
0%
-2% Global Financial Crisis 2007 2008 2009 2010
-4% World (non-life) 2.1 -0.1 1.2 1.4
Advanced market 1.4 -0.8 1.1 0.4
-6%
Emerging market 10.9 6.9 2.2 9.7
-8%
World (life) 6.2 -6.7 -0.3 2.7
t-2 t-1 t t+1 t+2
Advanced market 5.5 -8.8 -1.3 1.6
World (non-life) GFC World (non-life) COVID-19
Emerging market 14.0 14.2 7.4 10.4
World (life) GFC World (life) COVID-19
Note: t = 0 represents the outbreak of each crisis period, GFC: Global Financial Crisis
Source: Swiss Re Institute Dr. Jérôme Haegeli | November 2020 12Non-life insurers needs to offset low interest rates impacts
Long-term relationship between interest Non-life profitability gap and interest rate sensitivity
rates and combined ratio
120 16 USA Canada UK Germany France Italy Japan
0%
14
115
12 -2%
110 -6% -6%
10 -7%
-4% -8%
-9% -9% -9%
105 8
-6%
6 -1%
100
4 -8% -3%
95
2 -2% -1%
-10% -2% -3%
90 0
1919 1929 1939 1949 1959 1969 1979 1989 1999 2009 2019 -12%
Combined ratio 10-year gov bond
Note: Estimated 2019 non-life profitability gap (light blue), and sensitivity to lower interest
Note: US stock non-life insurers' combined ratio and 10-year government bond yield
rates through 2021 (dark blue). Underwriting profitability gaps in major markets (as % of
net premiums). RoE targets are set to approximate long-term average returns, adjusted for
outliers from extreme cat events and the financial crisis
Source: AM Best, Datastream, Swiss Re Institute
Dr. Jérôme Haegeli | November 2020 13Keep macro scenarios in mind and make contingency plans
Change in premium growth vs baseline (percentage points)
Optimistic scenario Severe & protracted recession Stagflation
15% 5% 10%
• Stronger premium growth and investment • A double-blow to premium and investment • Weaker premium recovery in 2021 and
returns returns 2022
• Life and commercial lines would benefit • Higher credit risk from bond defaults and • Casualty lines would face rising claims due
most rating migration to inflation overshooting
5 0 0
-2
4 -1
-4
3 -6 -2
-8
2 -3
-10
1 -4
-12
0 -14 -5
2020 2021 2022 2020 2021 2022 2020 2021 2022
US Europe China US Europe China US Europe China
Note: assumes 5-year average premium income elasticity (2015-2019), analysis based on non-life and traditional life business
Source: Swiss Re Institute Dr. Jérôme Haegeli | November 2020 14Emerging markets, greening the economy & digitalisation are the biggest
opportunities while the interest rate environment is the biggest challenge
Challenges Opportunities
Low to negative interest Digitalisation
rates giving rise to
balance sheet stress
Expansion of
emerging markets
continues
Slump in demand
COVID-19 claims Greening the
economy
Rising risk awareness
Stagflation?
Parallel supply chains
Source: Swiss Re Institute
Dr. Jérôme Haegeli | November 2020 15Key takeaways
Macro Recovery remains fragile
•Monitoring scenarios are key with evolving paradigm shifts
•Stagflation risk and financial repression environment in the spotlight
Public policies Policy re-set needed
•“More of the same” public policies won’t improve the economic environment
•Policies need to focus on macro resilience, long-term growth and societal outcomes
Insurance markets Even more resilient than expected
•Emerging Markets, greening the economy and digitalization provide biggest growth opportunities
•Insurance prices to continue hardening amid challenging UW margins given low interest rates
Dr. Jérôme Haegeli | November 2020 16Latest Swiss Re Institute publications
Dr. Jérôme Haegeli | November 2020 17Any questions?
Dr. Jérôme Haegeli | November 2020 18Appendix
Dr. Jérôme Haegeli | November 2020 19Scenarios matter amid elevated uncertainty
Narrative Key assumptions Signposts
'20 '21 '22
V-shaped • Structural reform drive and increase Real GDP US (%) -3.6 6.8 3.8
recovery cooperation growth EZ (%) -6.8 8.0 4.5 • Quick labour market recovery
15% • Growth boost from green investments CN (%) 3.7 9.0 5.8 • Sustainable rebound of
Inflation US (%) 1.1 1.8 2.2
• Moderate rise in inflation towards CB targets corporate earnings
EZ (%) 0.2 0.9 1.0
• High ability/willingness of governments and CN (%) 2.3 2.7 2.7 • Positive sentiment indicators
CBs to provide additional support 10y yield US (%) 1.0 1.3 2.4
Severe & • Two consecutive years of recession, evolving Real GDP US (%) -6.6 -1.9 1.1
• Persistent unemployment
protracted into a credit crisis growth EZ (%) -10.8 -0.7 2.5
• Systemic market stress
recession* • Severe social unrest, potentially regional war(s) CN (%) 0.7 1.3 4.1
5% Inflation US (%) 0.6 0.8 1.4 • Bankruptcies and
• Severely constrained ability of governments and EZ (%) -0.4 0.4 0.6 zombification
CBs to do more CN (%) 1.9 1.7 2.2 • House price collapse
• Little policy effectiveness 10y yield US (%) 0.1 0.2 0.1
Real GDP US (%) -4.6 1.6 1.1
Stagflation* • Higher inflation from supply-chain disruptions, growth EZ (%) -7.8 2.7 2.5
• Persistent unemployment
10% reversal in globalisation and fiscal/monetary CN (%) 2.7 5.0 4.1 • Systemic market stress,
easing; muted growth environment Inflation US (%) 1.3 2.1 3.3 reversal in stock bond
• Escalation of trade war and social unrest EZ (%) 0.4 1.1 2.0 correlation
CN (%) 4.1 4.6 6.4 • Protracted risk asset sell-off
• Loss of central bank independence 10y yield US (%) 1.0 1.5 3.7
* Downside scenarios, namely the severe & protracted recession and the Stagflation scenarios risk being triggered by on-and-off
regional/broad-based lockdowns and vaccine setbacks Dr. Jérôme Haegeli | November 2020 20Global insurance premium outlook by region
World Advanced markets Emerging markets
North America EMEA Asia-Pacific
2020 2021-22 2020 2021-22 2020 2021-22 2020 2021-22 2020 2021-22
Non-life, direct
Premium growth (real) CAGR l l l l l l l l l l
Profitability ROE Average l l l l l l l l
Underwriting results* Average l l l l l l l l
Investment results* Average l l l l l l l l
Life, direct
Premium growth (real) CAGR l l l l l l l l l l
Profitability ROE Average l l l l
*Remarks:
as a % ofNon-life
net premiums earned
insurance encompasses property, casualty and also health insurance. Past trend (2015-2019); Current (2020); Outlook (2021-2022). CAGR = compound
average growth rate. Colouring based on deviation from long term trend for each region. Regional stock market indicators contain advanced and emerging countries in each of
the region.
Sources: Swiss Re Institute, Bloomberg
Dr. Jérôme Haegeli | November 2020 21Commercial lines: stronger pricing to continue
Note: up green arrow: accelerating rate increase, flat green arrow: stable rate increase in high level
Source: Marsh, Global insurance rate index, Swiss Re Institute
Dr. Jérôme Haegeli | November 2020 22Overall premium impacts will be more negative for Life than health and P&C (2020)
Property & Casualty Premiums Claims In-force New Claims &
Life & Health business business benefits
Personal Personal auto
lines Protection Mortality
Personal property business
Commercial Commercial auto Disability
insurance
Commercial property
Critical illness
Liability
Medical professional Long-term care
liability
Workers compensation Medical expense
(Predominantly US)
Engineering Savings Traditional with
Credit business guarantees
Unit-linked, with
Marine profits
Aviation
Source: Swiss Re Institute
Dr. Jérôme Haegeli | November 2020 232021 Outlook: most P&C lines and L&H premiums will achieve trend growth
Property & Casualty Premiums Claims New Claims &
Life & Health business benefits
Personal Personal auto
lines Protection Mortality
Personal property business
Commercial Commercial auto Disability
insurance
Commercial property
Critical illness
Liability
Medical professional Long-term care
liability
Workers compensation Medical expense
(Predominantly US)
Engineering Savings Traditional with
Credit business guarantees
Unit-linked
Marine
Aviation
Source: Swiss Re Institute
Dr. Jérôme Haegeli | November 2020 24Dr. Jérôme Haegeli | November 2020 25
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Dr. Jérôme Haegeli | November 2020 26You can also read
