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Outlook for the global economy and insurance marketsOlga Tschekassin, Lisbon, 24 September 2019
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Table of Contents / Agenda
• Economic Outlook
• Risk landscape
• Implications for insurance markets
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Economic Outlook
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Global growth is slowing
Note: Data callouts show the real GDP growth rate in 2019 and the change with respect to 2018 (in brackets).Source: IMF, Swiss Re Institute
Real GDP growth in 2019 (in %)
<-2.5% 1%-2.5% 2% 4% 6% >6%0%
United States:2.3% (-0.6pp)
Latin America: 0.7% (-0.3pp)
China: 6.2% (-0.4pp)
Euro area:1.1% (-0.8pp)
EM Asia ex. China: 5.6% (-0.3pp)
<-2.5% 1%-2.5% 2% 4% 6% >6%0%
Spain: 2.2% (-0.4pp)
Poland: 3.8% (-1.4pp)
Italy: 0.1% (-0.6pp)
Switzerland: 0.8% (-1.8pp)
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• Economic sentiment indicators have weakened considerably since the start of the year• Manufacturing sector remains weak with downside risk of spill-overs to services increasing• Trade remains the key risk to global growth
Industrial sector woes point to cyclical slowdownMacroeconomic environment
Purchasing managers indices point to contraction
Sources: Datastream, Consensus Economics, Swiss Re Institute; Note: Manufacturing PMIs
Economic forecast overview and changes
Note: Arrows refer to changes since August 2019
Source: Refinitiv Datastream
2016 2017 2018 201946
48
50
52
54
56
58
60
62Start of trade conflict
USA: 49.1Euro area: 47UK: 47.4China: 49.5
Latest values:
2018 2019 2020
Real GDP (% change)
US 2.9 2.3 ↓ 1.6
Eurozone 1.9 1.1 0.9 ↓
China 6.6 6.2 ↓ 6.1
Swiss Re Institute
Source: Refinitiv Datastream
2013 2014 2015 2016 2017 2018 2019-1
0
1
2
3
4 US 1.76%Eurozone 1.01%UK 1.72%
Moderate growth comes with moderate inflation
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Macroeconomic environment
Sources: Datastream, Swiss Re Institute; Note: Headline CPI
Headline inflation below 2% target
2018 2019 2020
Swiss Re Institute
CPI (% change)
US 2.4 1.8 ↓ 2.3Eurozone 1.8 1.2 ↓ 1.2 ↓
China 2.1 2.5 ↑ 2.6 ↑
10y Gov. Bond Yield (%)
US 2.7 1.4 ↓ 1.4 ↓
Eurozone 0.2 -0.6 ↓ -0.6 ↓
China 3.3 2.9 ↓ 2.7 ↓
• Inflation trending below target in major economies and likely to remain moderate• The reversal in central banks’ monetary policies has led to a sharp repricing in interest rates across the globe
2018 2019 2020
Swiss Re Institute
CPI (% change)
US 2.4 1.8 ↓ 2.3Eurozone 1.8 1.2 ↓ 1.2 ↓
China 2.1 2.5 ↑ 2.6 ↑
10y Gov. Bond Yield (%)
US 2.7 1.4 ↓ 1.4 ↓
Eurozone 0.2 -0.6 ↓ -0.6 ↓
China 3.3 2.9 ↓ 2.7 ↓
Economic forecast overview and changes
Low interest rates for longer
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Source: Datastream, Swiss Re Institute
Monetary policy U-turn by the major central banks:
US Fed likely to cut rates further. We expect twomore cuts by January 2020
ECB to restart QE from November, after depositrate cut and interest rate tiering
People‘s Bank of China easing again in a targetedmanner
BOE to remain on the sidelines
ECB deposit rate at a new record low
Macroeconomic environment
Source: Refinitiv Datastream
10 11 12 13 14 15 16 17 18 19
-0.5
0.0
0.5
1.0
1.5
-20
0
20
40
60
80
100
ECB monthly asset purchases (lhs)ECB repo rate (rhs)ECB deposit rate (rhs)
Risk Landscape
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9
Trade war remains risk #1 with 35% likelihood of US recession
• Escalating trade tensions between US/China are expected to have a significant impact on global growth• “Currency war” as the next escalation step?
Sources: Swiss Re Institute
Top risks for 2019 (likelihood)
Trade war
35% US
recession
35% =
Central Bank policy error
20% =-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
2007 2009 2011 2013 2015 2017 2019
3 m
ma,
yoy
cha
nge
in %
US imports from China US exports to China
US exports to China contract more than imports from China
Risk Landscape
US: The Yield Curve Remains Inverted
10
Sources: Swiss Re Institute, Bloomberg
• Both, the US 10y-3m and 10y-2y yield curves remain inverted • Historically, a yield curve inversion has been a reliable recession indicator in the US
Source: Refinitiv Datastream
90 95 00 05 10 15-1
0
1
2
3
4
10y-2y 10y-3mRecession
Expectations for US Fed funds target rate (%) US yield curve, 10y-2y and 10y-3m
Risk Landscape
1.00
1.25
1.50
1.75
2.00
2.25
2.50
Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20
Fed fund futures (23 September 2019)
Consensus
SRI forecast
Fed dot plot (median)
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• The risk of a sharp US slowdown is elevated• Recession models remain above historical averages, but key historical recession triggers are not flashing red
Recession risk but no obvious trigger in 2019
Cycle indicators still below average pre- recession peaks
Note: The average pre-recession peak is the average of the data point prior to the official start of the last 5 recessions. Coloring shows how the current data relates to its history (z-scores)Sources: Swiss Re Institute, Bloomberg. Data back to 1980 Source: JP Morgan
Probability of recession over next 12 months
Indicator Probability
Historical average 17%
High-frequency indicators 27%
Slow-moving indicators 50%
Composite from high-frequency and slow-moving indicators
40%
Category Indicator Latest dataAvg pre-recession
peak (trough)
Real economic activity
Industrial Production (y/y) 0.9 6.4Capacity Utilization (% of total) 77.9 84.4Unemployment Rate (%) 3.6 5.2Nominal Output Gap (% of GDP) 0.4 1.0Personal Consumption (real, y/y) 2.7 5.0
Business and Consumer Sentiment
CB Consumer Confidence 129.2 114.9
Michigan Consumer Sentiment 102.4 93.0
ISM Manufacturing PMI 52.8 60.0
Credit supply
Consumer Credit (y/y) 4.9 10.7M2 Money Supply (y/y) 3.9 5.2Lending Standards (SLOS) -4.2 -15.6
Financial Markets
US Financial Conditions 100 98.6TSY 2s10s Spread (bp) 16 -91BBB Credit OAS (bp) 148 88HY Credit OAS (bp) 398 234S&P 500 P/E 18 20
Late cycle signaling: = Low signal = Medium signal = Strong signal
Risk Landscape
The global economy is slowing – elevated risk of recession
Inflation likely to remain moderate
Interest rates to remain low (even negative in many places)
Not much room for monetary policy to stimulate growth in next recession
Global economic outlook: key takeaways
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1313
Insurance Markets
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The global insurance market in 2018: a new milestone
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5 Next 5y 5% growth*
Note:* Nominal growth
USD 5 trillion direct premiums written
Source: Swiss Re Institute
0%
0%
0%
1%
1%
1%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Total Life Non-life
Real direct premium growth, 1.2% in 2018
US and Canada; 1.6
Advanced EMEA; 1.6
Advanced Asia-Pacific; 0.9
China; 0.6
Emerging markets, excl China; 0.5
Total premiums written 2018:USD 5.2 trillion
Global growth of direct premiums written slowed due to life business
The pivot east continues: China contributed almost 70% of total real additional premiums between 2008 and 2018
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Real premiums, in USD billion at 2018 prices and exchange rates
Source: Swiss Re Institute
432
65
64
34
10
130
-39
-72
4’568
5’193
3’600 3’800 4’000 4’200 4’400 4’600 4’800 5’000 5’200 5’400
World 2008
China
Advanced Asia-Pacific
Latin America and the Caribbean
Emerging Asia excl China
Middle East and Africa
Emerging Europe and Central Asia
US and Canada
Advanced EMEA
World 2018
Emerging markets Advanced markets
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SRI Insurance Resilience Indices: Comparing protection in place with protection needed
Nat CatExpected annual loss from storms, earthquakes and
floods
Estimated insurance coverage for primary nat
cat perilsUSD 222bn 24%
Mortality Income needed to maintain survivors’ living standards
Life insurance, financial assets, social security USD 386bn 45%
Health Total healthcare expenditure (funded)
Total healthcare expenditures minus
households’ stressful out-of-pocket expenses
USD 616bn 93%
Composite -- -- USD 1.2trn 54%
Source: Swiss Re Institute
Note: All figures for 2018 and global; Protection gap is in premium equivalent terms
Need (N) Available (A) Protection Gap (N – A)
Insurance Resilience Index (A ÷ N)
Global gap of USD 1.2 trillion
The resilience gap remains huge, even as it improved in many regions, and is particularly large in emerging markets
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SRI Insurance Resilience Index: Advanced economies
SRI Insurance Resilience Index: Emerging economies
0%
20%
40%
60%
80%
100%
Nat cat Mortality Health Composite
2000 2007 2018
0%
20%
40%
60%
80%
100%
Nat cat Mortality Health Composite
2000 2007 2018
Source: Swiss Re Institute
65% 42% 3% 37% 94% 75% 23% 64%
Current economic momentum has become less supportive for the insurance industry’s performance
Key drivers Changelast 12 m
Impact on profitability
Comments
Growth slowedGDP growth drives demand for insurance and capital gains on investments
Falling interest rates
Average portfolio yields falling
Benign inflationGeneral inflation moderate, increase in wage inflation
Industry capitalization
Traditional capital managed to stay stable; AC declined due to losses and investor reluctance to replenish funds
Source: Swiss Re Institute
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Premium volume exceeds USD 5 trillion for the first time in 2018
We expect growth of direct premiums written to improve in coming years
“Low for longer” interest rates are a main challenge for life insurers
Insurance protection gaps remain huge, particularly in emerging markets
Insurance markets outlook: key takeaways
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Thank you!
Legal notice
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