Despite causing ‘the worst recession of our lifetime’, reinsurance economist says the insurance sector should expect ‘a strong V-shaped recovery for 2021’
Although the Covid-19 pandemic “is causing the worst recession of our lifetime”, the insurance sector should expect “a strong V-shaped recovery for 2021”, said Jérôme Haegeli, group chief economist at (re)insurance business Swiss Re.
Speaking at a media briefing following the publication of Swiss Re’s Sigma 7/2020: Global economic and insurance outlook report on 11 November, Haegeli explained: “Covid-19 is causing the worst recession of our lifetime, yet in face of adversity, insurance markets are holding up extremely well.
“We forecast a strong V-shaped premium recovery; it’s actually better than expected premium growth for 2020 and a strong V-shaped recovery for 2021. The emerging markets continue to outperform.”
Haegeli added that the global economic recession linked to the pandemic is “short-lived”, therefore there should be quicker economic returns. In particular, he noted that China is still on track to be the largest insurance market by mid-2030.
The main challenge for insurers, however, will be the interest rate, Haegeli said. “There’s a strong, long-term relationship between non-life combined ratio and nominal interest rate over a long period of time. So, interest rates, they matter,” he continued.
Regarding the profitability gap in the property and casualty (P&C) market, Haegeli added that “underwriting margins would need to improve by seven to 11 percentage points in 2021 to achieve a 10% [return on equity] target on average”.
“This is really not a reason why price hardening in the insurance market is expected to continue.
”As long as interest rates are not increasing noticeably any time soon, you will continue to see strong prices. Underwriting gaps here are too large and they will be closing.”
Covid-19 is no black swan
For Haegeli, the Covid-19 pandemic and association financial downturn is “not a black swan event” – he cited the 2008 economic recession and the more recent 2011 Greek recession as examples.
“We should not kid ourselves; Covid-19 was not a black swan event. Pandemics have happened in the past and they will continue to happen in the future,” he said.
“This crisis was a reminder that one has to be prepared for the unprepared, even though a pandemic is not a black swan event. That’s why you also do a lot of scenario analysis.”
Furthermore, the pandemic presents more opportunities than challenges, Haegeli added, especially around the digital new normal. For him, the mantra of ‘build back better’ is also hugely important.
“Covid-19 has no expiry date. We shouldn’t forget about the other systemic risk events, like climate change.
”That’s why I think 2021 will also be very much, from a policymaker’s perspective, attention in terms of building back better. What we really need is a reset in economic and public policies. This crisis will always be an opportunity to build back better.”
Economy perspective
In terms of an economic outlook, Haegeli identified three prominent themes: debt, global economic resilience and low interest rates.
On debt, Haegeli said: “When debt goes up, GDP growth doesn’t go up sustainably and that’s why it’s also continues to be really important to build back better and spend well and have smart spending.
”The higher government debt is, the lower GDP growth. This is also somewhat of a warning that the spending is fine in terms of emergency spending, but it’s not a recipe for more sustainable growth.”
With this in mind, Haegeli told online attendees that the economy needs to be rebuilt in order to combat the next upcoming crisis.
“The global economy has shrunk by one fifth of its absorption capacity. That’s really big. This means long-term growth is impacted by around 1.6% over the next five years. That’s really, really meaningful,” he said.
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