Swiss Re has cautioned about potential economic risks despite a positive macroeconomic and industry outlook. According to the insurer, escalating geopolitical tensions or a disruptive trade war could trigger stagflationary shocks globally, impacting the re/insurance sector differently across various scenarios.
The company anticipates a normalization of global GDP growth with progressive disinflation. However, Swiss Re emphasizes the need for preparedness in the face of evolving risks. The insurer has outlined three alternative economic scenarios: “renewed supply shocks,” “global recession,” and “productivity revival,” each influencing economic conditions differently, including a potential contraction in the US economy by 2025 in downside scenarios.
Under the “renewed supply shocks” scenario, stagflation could occur, with US inflation potentially soaring to 6% amid sluggish growth. This could strain underwriting performance, depress real premium growth, and increase claims severity, particularly in non-life insurance. Supply disruptions might also heighten claims for business interruption, while life insurers may face greater lapse risks due to elevated interest rates.
In the “global recession” scenario driven by excessively high interest rates, insurance demand might decrease, especially in economically sensitive commercial lines. Historical data from the 2020 recession shows a slowdown in global nominal premium growth to 1%, contrasting with an annual average of 3.3% from 2010 to 2019. Increased insolvencies and defaults could affect trade credit insurance, and life insurance products with guarantees might lose appeal. While falling asset prices and wider credit spreads could weaken investment results, lower inflation might mitigate increases in claims.
Conversely, under the “productivity revival” scenario, transformative gains from AI and emerging technologies are expected, with global AI investment forecasted to approach $200 billion by 2025. Early adoption of AI could potentially boost productivity growth by up to 1 percentage point annually in advanced economies. This scenario would likely enhance life and non-life premiums and investment returns, benefiting from stronger revenues and robust capital markets. However, the adoption of new technologies could also increase the risk of severe, albeit rare, claims related to cyber threats, product liability, or business interruptions.
Swiss Re’s analysis underscores the critical importance of agility and readiness within the re/insurance industry amid a complex and evolving economic landscape.
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