Silver lining forecast A return to rising inflation and interest rates will have repercussions for claims and investments, Swiss Re says By Wendy Pugh
Economic impact: inflation is expected to feed further P&C rate hardening, says Swiss Re’s John Zhu
38 insuranceNEWS
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he war in Ukraine and the pandemic have caused such head-spinning swings in economic expectations that even the Reserve Bank of Australia (RBA) has been embarrassed by guidance that missed the mark. The RBA last month raised interest rates for the first time in more than a decade, after saying when vaccines were unavailable and dire covid scenarios possible that any increase may not happen until 2024. Instead, surging inflation and positive indicators have prompted a backflip. “Australians have been resilient, they’ve adapted and interest rates are normalising much quicker than we thought was going to be the case, so from a forecasting perspective that’s embarrassing,” Governor Philip Lowe told a briefing. “But what we did do in 2020 was make sure that we took every possible step that we could take to help the country in the full knowledge that if things turned out better, we’d have to reverse the policy stimulus more quickly.” After years of inflation in the doldrums and falling interest rates reducing insurer investment earnings on premium income, the environment is changing in a hurry. The rate hike came after the annual inflation rate hit a two-decade high of 5.1%, reflecting a shift in global economic trends examined in a Swiss Re Institute Sigma report. In the US, the consumer price index rose 8.5% in March, the most since 1981, and the Federal Reserve is also moving on rates. “[This year] will be a challenging year for insurers with both sides of the balance sheet under pressure,” Swiss Re Group Chief Economist Jerome Haegeli says.
June/July 2022
“The silver lining for insurers is that we are exiting the ‘low-for-longer’ and negative interest rate environment and this regime shift will benefit insurance companies over the medium and longer term. ‘Risk-free’ rates are finally not return-free anymore.” For property and casualty (P&C) insurers, the changed scenario is a case of bad news and good news, with underwriters to see the impact of high inflation in claims and investments. Swiss Re’s Sigma report, titled “Stagflation: the risk is back, but not 1970s style”, references a decade when economies were hit by the unexpected combination of high inflation on the one hand and weak growth on the other. Drivers this time are shocks from the war in Ukraine and the reopening after covid, compounded by ongoing lockdowns in China. Swiss Re has adjusted inflation forecasts higher and growth lower, reflecting rising fuel and other costs and supply chain pressures. The headwinds are blowing around the globe while differing by region, with Europe most exposed to the evolving repercussions from the Ukraine conflict. For Australia, Swiss Re forecasts real gross domestic product growth will slow from 4.7% last year to 3.9% this year and then to 3% in 2023. Inflation may rise from 2.9% last year to 4.4% this year. The Sigma report says P&C insurers are most exposed to an inflation shock, which will increase claims severity. Property and motor will likely be hit hardest, as construction and car part price rises outstrip those in the wider economy, while further ahead, longer tail business lines will be most exposed to sustained elevated inflation.
