Is the worst over? Chief economist on recession’s impact on insurance

Is the worst over? Chief economist on recession’s impact on insurance | Insurance Business

Is the worst over? Chief economist on recession’s impact on insurance

As Australia moves forward in its COVID-19 recovery by easing restrictions, many are asking – is the worst over? How severe will the recession be and is Australia poised to make a recovery? What does it all mean for insurers?

According to Jerome Haegeli (pictured), group chief economist at Swiss Re, the pandemic has thrown the global economy into its deepest recession since the depression. However, the deployment of fiscal and monetary policy could also make it the shortest.

“It’s really an economic crash without airbags,” he said. “But now we’re recovering with fiscal policy and monetary policy being deployed, which helps limit some of the downside risk of managing the market. This is the deepest recession but could also be one of the shortest.”

High levels of unemployment and bankruptcies will still be observed at record levels for long periods of times, he says, because global recessions don’t act like “tape recorders”.

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“While this [monetary policy] helps limit some of the downside risk of managing the market, it doesn’t take away that the recovery will be extremely retracted,” Haegeli continued.

“The economy is not a tape recorder, you can’t just shut it down and press ‘play’ again and hope you can start where you had stopped… if you measure how much output we are losing in terms of this COVID-19 shock, I think it’s costing about 12 trillion dollars – that’s 17 times the size of Switzerland in the amount of global economic output lost.”

The “unprecedented” global recession, as Haegeli references it, will have both long- and short-term impacts for the insurance industry, impacting premiums and balance sheets. It will also force insurers to reconsider their risk appetites.

“The insurance sector is a key pillar for strengthening economic resilience and improves societies’ well-being,” he said.

“Over the short-term, the insurance sector will be impacted by the contracting economic activity through the decline in insurance premium growth besides the immediate impact on both sides of the balance sheets,” Haegeli added. “Over the long-term, the COVID-19 led recession is a ‘wake-up’ call for more risk awareness as well as accelerating digitalisation. The longer-term outlook suggests positive drivers for the insurance sector - and digitalisation will improve the insurability of risk.”

The need for economic resilience must be emphasised, he says, because of the significant portion of long-term investments the global insurance sector holds.

“Insurance companies hold one third of the global long-term investment in asset management on their balance sheets. Globally, long-term investments amount to about $80 trillion in insurance companies’ pension funds,” Haegeli continued. “Insurance companies have had one third of that, which is a huge amount of money, and have taken that to underwriting to provide possibilities, for households and for corporations, to take on risk.”

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Despite the global recession, the economic impact and financial burden it places on the insurance sector, Haegeli says he believes Australia will make a faster recovery in comparison to other countries.

“I would expect Australia’s economic recovery to happen sooner than others globally. China was the first to recover and, if I look at the latest data, Australian April retail sales reveal they’re exceeding expectations,” he added.

“Australia is placed as the strongest OECD country to recover from the COVID-19 recession, with a very low vulnerability score globally. Australia has the highest fiscal stimulus, which is helping, alongside ample fiscal and monetary policy.”