The world economy is making a strong cyclical recovery from the COVID-19 pandemic, but it is not a smooth one
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Our latest sigma research forecasts real economic growth of 5.6% this year, but growth will slow to 4.1% in 2022 and 3.0% in 2023 as global supply chain issues, labour shortages and high energy prices persist. Our number one near-term macro risk is inflation, which stems from these same factors.
What is needed is policy support to enable a structural recovery, and we identify three "Ds" – structural trends of divergence, digitalisation and decarbonisation – that will shape the long-term outlook.
The growing divergence within and between countries in economic recovery, wealth, income and socio-economic opportunity is a cause for concern. These divergences make the recovery fragile. Digitalisation is likely to be key to higher productivity growth and we believe swift progress is vital. Finally, rapid progress on decarbonisation is imperative as extreme weather events worldwide this year indicate that climate risks are materialising.
"We have a unique opportunity to build a better market system. For this, all stakeholders will need to accept and internalise the costs of climate change, and policymakers take into account the distributional effects of their economic policies. This will help to create the transition we need for a sustainable path to a net-zero economy by 2050," Jerome Haegeli said.
We are positive on the outlook for global insurance premiums, expecting above-trend growth of 3.3% in 2022 and 3.1% in 2023. We see rising risk awareness in both life and non-life insurance, among consumers and businesses, following the shock of COVID-19. The ongoing rate hardening in non-life insurance commercial lines will provide further support. The global market is expected to exceed USD 7 trillion in premium terms for the first time by mid-2022, sooner than we last estimated in July.
"Market conditions suggest that positive pricing momentum will continue across all lines and regions. Inflation-driven higher claims development in all lines of business, continued social inflation in the US and persistently low interest rates will be the main factors for market hardening," said Jerome Haegeli.
The past year has also taught us important lessons. The crisis has once again demonstrated the utility of the re/insurance industry as a vital risk absorber; awareness of climate risk has been heightened by extreme weather events, adding urgency to the race to "net-zero". We have learned how much consumers welcome digital insurance, and to be aware of how rising inequality may worsen social inflation.
The key takeaways of this sigma are
- The cyclical recovery in global economic growth will slow as supply-side shocks persist, and monetary policy becomes less accommodative. Our GDP growth forecasts are below-consensus.
- We forecast above-consensus average annual inflation globally in 2022, including 5.0% in the US, 2.6% in the euro area and 3.8% in the UK, above central banks’ targets of 2%. Cost pressures are starting to feed into harder to reverse prices such as rent and wages.
- We estimate global real insurance premiums to grow by 3.4% in 2021, taking total global direct premiums written to 8% above the 2019 level.
- Insurance profitability should improve in 2022 after a challenging 2021 as the industry absorbs COVID-19-related claims, above-average catastrophe losses and high inflation.
- Non-life underwriting profitability should recover from 2022 as insurers internalise expectations of higher inflation, and rates in commercial lines rise again.
- For life insurers, advances in COVID-19 vaccinations should also strengthen profitability from 2022, after a year of high mortality in 2021. In Brazil for instance, the life insurance benefit ratio in April 2021 was more than double that of April 2020.
- Investment returns will likely be challenged by ongoing low interest rates that do not fully compensate for inflation, making underwriting discipline crucial.