‘Recession coming faster than expected’ – reinsurer economist

Two weeks ago, the Bank of Canada raised its benchmark interest rate by one percentage point to 2.5% to rein in inflation, the biggest increase in 24 years. Canadian inflation hit 8.1% in the year to June, its highest rate in nearly years. thirty. Meanwhile, the number of consumers in the US rose to 9.1% in June, a rise of 41 years which will make the policy of the same kind of tightening from the US Federal Reserve.

Swiss Re has cut its annual GDP forecast for the US to 2.0% this year, from 2.8% in June. It also forecast 1% GDP growth in the US in 2023 amid a tough economy and low spending.

The reinsurance giant also expects the Fed to raise interest rates by 3.50-3.75% as the central bank battles inflation. A gradual rise in interest rates will bring benefits to insurers, but the short-term effects are dire.

“Over time, there is a gradual increase in the yield of the investment, so that is a positive incentive. [for the insurance industry]. But the immediate effect is that bond portfolios are losing value in market valuations, so there is pressure on insurance companies with equity indices down and interest rates up,” said Holzheu.

Complaints

The most interesting aspect of the insurance industry comes from premiums. Rising commodity prices will continue to pressure record profits. In its July outlook, Swiss Re predicted a compounding ratio of more than 100% in 2022 for the US Property and Casualty (P&C) segment due to inflation.

Auto insurance remains among the most affected lines. The problems that started during the pandemic will continue to drive up the price of used cars and other equipment. Holzheu explained: “The cost of repairing cars, and therefore the cost of car insurance, will continue to rise due to rising product prices and disruptions to services.

“Another area that is affected is the infrastructure. Some of them also have to do with rising costs and issues of supply. But there’s also a huge need to renovate homes and buildings — an added need during the COVID era [lockdowns] that was unusual. It is very difficult in 2022 but this is expected to continue until next year. “

Among the risk factors, Holzheu pointed to rising wages, health care costs, and a tight labor market as price drivers. The price hike seems to be continuing as insurers play with higher rates.

“We expect that the increase we have seen in commercial machinery over the past few years will continue. In the personal lines, where the price increase was the most recent, we are also seeing an increase in US prices,” said Holzheu. Swiss Re projected premium growth at 8.0% for the year but said growth could slow to 6.3% in 2023 as the US plunges into crisis.

M&A transactions

Mergers and acquisitions of insurance companies have increased dramatically amid the pandemic. The forecast for this year’s performance was positive after 2021: total revenue increased by 40% per year according to Deloitte’s research, while insurance companies did well in the midst of the pandemic and wanted to disrupt their operations.

While it’s hard to predict how the looming recession will affect M&A activity, Holzheu said periods of economic instability often plant the seeds for mergers.

“Periods of financial crisis are not very helpful in meeting the agreements. But further, if there is stress on the pages caused by the disruption of the market or payments, that often leads to mergers and restructuring,” he said.