The Global Slowdown
As 2012 progresses, the global economy is in a worse state than previously thought, with growth expectations revised lower in many advanced and developing countries. In the United States, gross domestic product (GDP) growth estimates for 2012 have been revised downward from approximately 3 percent at the end of last year to 2 percent at present (1). This has contributed to stubbornly high U.S. unemployment, adding to fears of a “fiscal cliff” with tax increases and spending cuts set to kick in early next year.
In Europe, the future of monetary union continues to be under discussion with Spanish and Italian borrowing costs reaching Euro-era highs at various points in 2011 and 2012. Along with record Eurozone unemployment of 11.2 percent (2), this has prompted fears of bailouts and contagion. Even relatively strong growth in developing economies has been affected by the global slowdown. Indeed, it has become clear that some emerging markets have domestic economic issues that must be addressed in order to prevent the fallout from becoming more severe.
Slowing economic growth has important implications for the sector: as business volumes and discretionary spending fall, demand for insurance cover is more likely to decrease in commercial and personal lines.
Figure 1 shows the clear correlation between global economic output and global premium growth in the property and casualty (P&C) insurance sector. The most obvious dip in premiums came in 2009 when the global economy contracted. While few expect the global economy to contract again in the near future, low near-term economic growth will lead to slower top-line growth, other things being equal. Weak economic growth will also make it more challenging for companies to generate profit from rate increases on new business, which is called for in some business plans. In this environment, there is potential for companies to engage in “cash flow underwriting” and to set less conservative reserving estimates. The sector as a whole has not reached this phase yet, and this kind of behavior must be avoided.
1 Bloomberg consensus estimates.