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 (%) “financial US 1.9 1.0 1.0 1.0 0.8 1.1 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
Rt -15 Rt > 1 UK China -20 1.0 -25 Rt < 1 -30 (3) Easing Tightening (2) 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 Unemployment 6.9% • Increasing automation/digitalisation 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 160 140 100 Advanced economies 120 80 100 80 60 60
40 debt GDP % Govt 40 20 20 Emerging market economies 0 0 0 2 4 6
GDP growth
2010 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 Dr. Jérôme Haegeli | November 2020 7 corresponds to the linear fitted line of observable data. Theme 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 Fiscal space -1
Low carbon econ. -2 0.6 Ins. penetration -3
Fin. market dev. -4 0.4 Human capital trend, in% -5
Economic complexity -6 0.2
Labor market eff. -7 Subsequent 5y growth deviation from 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 8 Theme 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 in the US on 80% household 70% disposable income 60% >USD 16trn of sovereign 50% bonds globally trade at 40% 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.html Call 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 10 Global 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
11 We 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 12 Non-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 -1% -10% -2% -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 13 Keep 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 14 Emerging 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 15 Key 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 16 Latest Swiss Re Institute publications
Dr. Jérôme Haegeli | November 2020 17 Any questions?
Dr. Jérôme Haegeli | November 2020 18 Appendix
Dr. Jérôme Haegeli | November 2020 19 Scenarios 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 • Moderate rise in inflation towards CB targets US (%) 1.1 1.8 2.2 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 Inflation US (%) 0.6 0.8 1.4 • Bankruptcies and 5% • 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 • Loss of central bank independence CN (%) 4.1 4.6 6.4 • Protracted risk asset sell-off 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 20 Global 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 % of Non-life net premiums insurance earned 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 21 Commercial 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 22 Overall 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 23 2021 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 24 Dr. Jérôme Haegeli | November 2020 25 Legal notice
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