Swiss Re On The US/China Trade War And Brexit

At the recent Swiss Re Institute (SRI) Global Economic and Insurance Market Outlook 2020/2021 event, Swiss Re’s group chief economist, Dr. Jerome Haegeli, and chief economist Americas, Dr. Thomas Holzheu, discussed a review of major trends in the sector from 2019 and the outlook for the next two years.

Among the key takeaways from this discussion, it emerged that the SRI expects that global economic growth will weaken in 2020 and 2021, and that interest rates are likely to remain low and negative for longer while the risk of recession remains elevated. In the insurance sector, however, premiums continue to grow as a trend, with the recommendation being that insurers should continue to carefully realign their product mix and investment activities.

According to the SRI, the main risk to the growth outlook is the escalation of US/China trade tensions.

“Uncertainty is the enemy of the business cycle,” said Haegeli.

“We don’t know what phase one of the trade war will look like. The elephant in the room remains knowledge transfer and intellectual property rights.”

While the question over enforcement rules is unresolved, there is no easy resolution to the trade war and Haegeli detailed how, without resolution, this threat remains hanging over the global economy.

“It’s really interesting,” he said, “if you look at the effect so far, we have taken a 1% hit for global growth…but the direct effect is maybe one quarter [of the overall impact].”

It is the indirect effect of uncertainty on global sentiment that is, therefore, having the greatest impact and until the trade war is resolved and an end game established, this risk remains uncertain and its potential impact remains firmly in place.

With the SRI indicating a 35% probability for a US or global recession within the next year, the big question for insurers and brokers remains “what does this mean for the insurance industry?”

Holzheu outlined two key transmission mechanisms to detail the key impacts that a potential recession would likely have on this sector.

“On the investment side, all insurance companies would lose from… lower investment rates going forward,” he said. “Then there is the demand – premium growth would be more moderate due to slower exposure growth and lower incomes due to the weak labor market.”

There are, Holzheu said, certain lines of business more likely to be negatively impacted than others - particularly sectors such as trade credit or marine transport lines that are more tied into the economy.

A recession would be particularly relevant to export-related lines of business, according to Holzheu, if it is triggered by a trade war scenario.

There are, however, some interesting positive side effects of a potential recession for some lines of insurance.

Holzheu detailed how, in some sectors, particularly casualty lines, a recession “will result in an easing of claims escalation and so the disinflation that follows as a result of slack in an economy during a recession will actually benefit these lines of business through a lower claims severity going forward.”

No talk of global risk or growth would be complete, of course, without the question of Brexit entering the mix - but Haegeli expressed a fascinating take on how, from an economic point of view at least, Brexit is less of a global concern than expected.

“[Brexit] has dragged on for a long time, meaning you can see the negative effects already on the UK economy,” he said.

“If you think about the timeline, it’s so well flagged… and it’s so drawn out as a process that… Swiss Re and many other insurance companies have taken action already.”

Haegeli detailed how an examination of Swiss Re’s own policy positioning reveals that the business has taken action to ensure it is well-positioned, even in the event of a worst-case scenario resolution to the Brexit question. According to Haegeli, this has been necessitated by the strategic importance of the UK market.

“There’s no luxury for inaction on that front,” he said.

Haegeli confirmed that this does not mean that the likelihood of a hard Brexit is nil or even very low, but rather that, due to the length of the Brexit timeline, policymakers have had time to prepare for any outcome. According to Haegeli, Brexit is simply no longer the global systemic risk that it was considered to be.