sigma 7/2020: global economic and insurance outlookcf432dbb-2272-4795-b519...2020/11/10 · sigma...

sigma 7/2020:Global economic and insurance outlookDr. Jérôme Haegeli, Group Chief Economist11 November 2020

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It’s all about…

2Dr. Jérôme Haegeli | November 2020

Global macro outlook

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“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

Dr. Jérôme Haegeli | November 2020 4

Source: Swiss Re Institute (consensus numbers as of 12 October)Note: No Consensus projections available for China, numbers refer to Bloomberg (2 November)

Economic Outlook: Fragile and protracted recovery

Protracted, fragile and stimulus-

dependent recovery

Interest rates will remain

very low with “financial

repression” on the rise

Stagflation risk in the spotlight

Swiss Re Institute Consensus

2019 2020e 2021F 2022F 2020e 2021F

Real GDP (% change)

US 2.3 -4.1 3.5 2.3 -4.0 3.7

Eurozone 1.3 -7.3 4.0 3.0 -7.5 5.3

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)

US 1.8 1.1 1.7 2.0 1.2 2.0

Eurozone 1.2 0.2 0.8 0.8 0.3 0.9

UK 1.8 0.7 1.5 2.0 0.9 1.5

China 2.9 2.6 2.4 2.5 2.8 2.2

10y Gov. Bond Yield (%)

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

UK 0.9 0.2 0.2 0.4 0.2 0.4

China 3.2 2.8 2.7 2.6 3.1 3.1


The pandemic macro clock: Not looking good but no return to spring extremes

Sources: Google; Apple, Wind, EpiForecast, Swiss Re Institute

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

to mobility by the Google mobility index, which represents the average change in frequency of visits to workplaces, public transportation, and retail centers.

SRI Pandemic Macro Clock SRI GDP shortfall index

-30

-25

-20

-15

-10

-5

0

5

Feb Mar Apr May Jun Jul Aug Sep Oct

China G7 Germany UK US

China

G7

Germany

UKUS

-15 -5 5 15 250.5

1.0

1.5

2.0

Rt

Change in mobility

TighteningEasing

Rt > 1

Rt < 1

(4) (1)

(2)(3)

Dr. Jérôme Haegeli | November 2020

The cyclical and long-term macro pictureLong-term economic consequences for now overshadowed by massive public policy stimulus

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Latest*Short-term

outlookLonger-term

outlookDrivers

Real GDP growth,qoq saar

33%More

subdued

• Higher debt levels• Looming risk of “zombification” of firms• Productivity increase through digital

transformation

Unemployment 6.9%Likely higher

• Hardest-hit sectors struggling• Increasing automation/digitalisation• Lagging speed of skill adaptation

Real yield -1.0% Lower

• Increasing “financial repression”• Change in monetary frameworks• Material risk of higher inflation

Cyclical picture

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” companiessaar is the seasonally adjusted annual rate

* Data as of Q3 2020. Values for the US but qualitatively applicable to many other economies

Structural picture


Theme 1: Debt bazookas are not improving structural trend growth

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Higher debt levels in advanced economies are not associated with stronger growth

0

20

40

60

80

100

120

140

18

80

18

85

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95

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00

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Advanced economies

Emerging market economies

WWI WWII Global Financial

Crisis

COVID-19 crisis

Evolution of general government debt, in %

Source: IMF, Swiss Re InstituteNote: 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.

0

20

40

60

80

100

120

140

160

0 2 4 6

Go

vt d

eb

t %

GD

P

GDP growth


Theme 2: Global economic resilience is weaker, pointing to 1.6%pts lower growth over five years

8Source: Swiss Re Institute Macroeconomic Resilience Index. Data is available on Sigma Explorer: https://sigma-explorer.com/

-8

-7

-6

-5

-4

-3

-2

-1

0

0 0.2 0.4 0.6 0.8 1

Su

bse

qu

en

t 5

y g

row

th d

evi

ati

on

fro

m

tre

nd

, in

%

Swiss Re Institute economic resilience index levels in 2007

Higher economic resilience is associated with better growth outcomes in advanced economies

0.0

0.2

0.4

0.6

0.8

1.0

2007 2018 2019 2020 2007 2018 2019 2020

Advanced Economies Emerging Economies

Mon. pol. space

Fiscal space

Low carbon econ.

Ins. penetration

Fin. market dev.

Human capital

Economic complexity

Labor market eff.

Banking industry backdrop

World

Global resilience set to drop by ~20% due to COVID-19

Best

Worst

https://sigma-explorer.com/


Theme 3: Low interest rates will stay low with financial repression contributing to the >USD16trn negative yielding govt’ bonds

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* Long-term investors are represented by US and European insurers and pension fundsSource: 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-repression-here-to-stay.html

Majority of the Euro area and Japanese sovereign bonds are trading at negative yields

Equivalent to a 3.5% p.a “tax” in the US on household disposable

income

Yield income loss equivalent to

~1.5% of total fixed income

holdings for long-term investors*

>USD 16trn of sovereign

bonds globally trade at negative

interest rates

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Euro area Japan Globally

https://www.swissre.com/institute/research/topics-and-risk-dialogues/economy-and-insurance-outlook/expertise-publication-financial-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:

Sustainable infrastructure

Strengthen policy frameworks to:

Digital economy & human capital

Low carbon transition

Limit rises in inequality

Increase fiscal transparency & independence

Avoid company “zombification”

Source: Swiss Re Institute

Global insurance outlook

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“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

We forecast a strong V-shaped premium outlook

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Insurance premium real growth compared with GFC

Insurance premium forecasts

Note: t = 0 represents the outbreak of each crisis period, GFC: Global Financial CrisisSource: Swiss Re Institute

COVID 19 2019 2020e 2021F 2022F

World (non-life) 3.5 1.3 3.5 3.6

Advance market 2.7 0.9 2.8 2.7

Emerging market 7.6 3.3 7.3 8.0

World (life) 2.2 -4.5 3.2 2.8

Advanced market 1.3 -5.7 2.2 1.8

Emerging market 5.6 -0.2 6.9 6.4

Global Financial Crisis 2007 2008 2009 2010

World (non-life) 2.1 -0.1 1.2 1.4

Advanced market 1.4 -0.8 1.1 0.4


World (life) 6.2 -6.7 -0.3 2.7

Advanced market 5.5 -8.8 -1.3 1.6


-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

t-2 t-1 t t+1 t+2

World (non-life) GFC World (non-life) COVID-19

World (life) GFC World (life) COVID-19



Non-life insurers needs to offset low interest rates impacts

0

2

4

6

8

10

12

14

16

90

95

100

105

110

115

120

1919 1929 1939 1949 1959 1969 1979 1989 1999 2009 2019

Combined ratio 10-year gov bond

-6%

-9% -9% -9%

-6%

-8%

-7%

-3%

-2% -2%-1%

-1%

-3%

-12%

-10%

-8%

-6%

-4%

-2%

0%

USA Canada UK Germany France Italy Japan

Source: AM Best, Datastream, Swiss Re Institute

Long-term relationship between interest rates and combined ratio

Note: US stock non-life insurers' combined ratio and 10-year government bond yield

Non-life profitability gap and interest rate sensitivity

Note: Estimated 2019 non-life profitability gap (light blue), and sensitivity to lower interest 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

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Keep macro scenarios in mind and make contingency plans

Note: assumes 5-year average premium income elasticity (2015-2019), analysis based on non-life and traditional life business Source: Swiss Re Institute

Change in premium growth vs baseline (percentage points)


0

1

2

3

4

5

2020 2021 2022

US Europe China

-14

-12

-10

-8

-6

-4

-2

0

2020 2021 2022

US Europe China

-5

-4

-3

-2

-1

0

2020 2021 2022

US Europe China

Optimistic scenario15%

Severe & protracted recession5%

Stagflation10%

• Stronger premium growth and investment returns

• Life and commercial lines would benefit most

• A double-blow to premium and investment returns

• Higher credit risk from bond defaults and rating migration

• Weaker premium recovery in 2021 and 2022

• Casualty lines would face rising claims due to inflation overshooting

Emerging markets, greening the economy & digitalisation are the biggest opportunities while the interest rate environment is the biggest challenge

15Source: Swiss Re Institute

Parallel supply chains

Rising risk awareness

Digitalisation

Slump in demandCOVID-19 claims

Low to negative interest rates giving rise to balance sheet stress

Stagflation?

Challenges Opportunities

Expansion of emerging markets continues

Greening the economy



Key takeaways

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Recovery remains fragileMacro•Monitoring scenarios are key with evolving paradigm shifts

•Stagflation risk and financial repression environment in the spotlight

Policy re-set neededPublic policies•“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

Even more resilient than expectedInsurance markets•Emerging Markets, greening the economy and digitalization provide biggest growth opportunities

•Insurance prices to continue hardening amid challenging UW margins given low interest rates


Latest Swiss Re Institute publications

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Any questions?



Appendix

19Dr. Jérôme Haegeli | November 2020 19


Stagflation*10%

Severe & protracted recession*

5%

Scenarios matter amid elevated uncertainty

20

V-shaped recovery

15%

• Structural reform drive and increase cooperation

•Growth boost from green investments

•Moderate rise in inflation towards CB targets

•High ability/willingness of governments and CBs to provide additional support

• Two consecutive years of recession, evolving into a credit crisis

• Severe social unrest, potentially regional war(s)

• Severely constrained ability of governments and CBs to do more

• Little policy effectiveness

•Higher inflation from supply-chain disruptions, reversal in globalisation and fiscal/monetary easing; muted growth environment

• Escalation of trade war and social unrest

• Loss of central bank independence

* 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

Narrative

'20 '21 '22Real GDP growth

US (%) -3.6 6.8 3.8

EZ (%) -6.8 8.0 4.5

CN (%) 3.7 9.0 5.8Inflation US (%) 1.1 1.8 2.2

EZ (%) 0.2 0.9 1.0

CN (%) 2.3 2.7 2.710y yield US (%) 1.0 1.3 2.4

Key assumptions

Real GDP growth

US (%) -6.6 -1.9 1.1

EZ (%) -10.8 -0.7 2.5

CN (%) 0.7 1.3 4.1Inflation US (%) 0.6 0.8 1.4

EZ (%) -0.4 0.4 0.6

CN (%) 1.9 1.7 2.210y yield US (%) 0.1 0.2 0.1

Real GDP growth

US (%) -4.6 1.6 1.1

EZ (%) -7.8 2.7 2.5

CN (%) 2.7 5.0 4.1Inflation US (%) 1.3 2.1 3.3

EZ (%) 0.4 1.1 2.0

CN (%) 4.1 4.6 6.410y yield US (%) 1.0 1.5 3.7

Signposts

•Quick labour market recovery

• Sustainable rebound of corporate earnings

• Positive sentiment indicators

• Persistent unemployment

• Systemic market stress

• Bankruptcies and zombification

•House price collapse

• Persistent unemployment

• Systemic market stress, reversal in stock bond correlation

• Protracted risk asset sell-off


World 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

* as a % of net premiums earned

Sources: Swiss Re Institute, Bloomberg

Advanced markets

Remarks: Non-life 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.

Global insurance premium outlook by region

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Commercial lines: stronger pricing to continue

22

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


Personal lines

Personal auto

Personal property

Commercial insurance

Commercial auto

Commercial property

Liability

Medical professional liability

Workers compensation (Predominantly US)Engineering

Credit

Marine

Aviation

Premiums ClaimsProperty & Casualty

Overall premium impacts will be more negative for Life than health and P&C (2020)

Protection business

Mortality

Disability

Critical illness

Long-term care

Medical expense

Savings business

Traditional with guarantees

Unit-linked, with profits

New business

Claims & benefitsLife & Health


In-force business


Personal lines

Personal auto

Personal property

Commercial insurance

Commercial auto

Commercial property

Liability

Medical professional liability

Workers compensation (Predominantly US)Engineering

Credit

Marine

Aviation

Premiums ClaimsProperty & Casualty

2021 Outlook: most P&C lines and L&H premiums will achieve trend growth

Protection business

Mortality

Disability

Critical illness

Long-term care

Medical expense

Savings business

Traditional with guarantees

Unit-linked

New business

Claims & benefitsLife & Health



Legal notice

©2020 Swiss Re. All rights reserved. You may use this presentation for private or internal purposes but note that any copyright or other proprietary notices must not be removed. You are not permitted to create any modifications or derivative works of this presentation, or to use it for commercial or other public purposes, without the prior written permission of Swiss Re.

The information and opinions contained in the presentation are provided as at the date of the presentation and may change. Although the information used was taken from reliable sources, Swiss Re does not accept any responsibility for its accuracy or comprehensiveness or its updating. All liability for the accuracy and completeness of the information or for any damage or loss resulting from its use is expressly excluded.

sigma 7/2020: global economic and insurance outlookcf432dbb-2272-4795-b519...2020/11/10 · sigma...

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