Peter Zaffino, President and CEO
The global (re)insurance marketplace is confronted with challenges as the world continues to be challenged with the after-effects of the 2008 financial crisis. As risk-bearers sort through the aftermath and navigate the significant complexity and uncertainty that persists, we expect three broad macro trends to have a profound influence on global economic growth and on our industry: the volatility of economic growth, global tension between inflation and deflation and finding opportunities for (re)insurers to maximize returns during periods of volatility.
The volatility of economic growth, or economic change in general, is on the rise. This is a significant shift following three decades of declining interest rates, above-normal economic growth and lessening volatility from one cycle to the next.
Over the past 24 months, however, we have seen increased volatility with economic growth expectations varying widely for different geographies and sectors around the world. In the first half of this year, some were predicting the collapse of the euro, for example, and for the second half, so far, the focus has been on the forecast of a double-dip recession in the United States.
There has been a “deleveraging” across the United States – for both consumers and businesses – not to mention a general transfer of debt obligations from private sector to public sector. While this is only a temporary solution, governments remain involved in stimulating economic growth to avoid a deepening crisis. We’ve also witnessed fiscal and budgetary risks at sovereign levels in Europe (e.g., Greece and Spain), as well as at more local levels in the United States (i.e. city and state).
Overall, economists remain concerned about several key factors that continue to hinder growth, including deteriorating fiscal balances, high unemployment and disinflationary headwinds caused by a debt deflation cycle. And the (re)insurance industry is greatly affected by the lack of confidence with which the “experts” can predict the trends in economic conditions.
It is difficult to interpret global trends given the mixed signals markets generate. We’ve seen sub-par growth in developed economies and higher growth in emerging markets. We see a de-synchronization of central banks in the United States, Europe and Japan – all with easing policies – with those in Canada, Australia, Israel, Norway and others with tightening policies. There is a real dichotomy between falling economic inflation (as measured by CPI) and rising inflation for healthcare and litigation costs.
A debate has emerged between those who believe we are about to enter a period of inflation and others who predict the opposite. Several factors lead to equally robust arguments on both sides of the debate.
Debt deflation, which is the interconnected, downward spiral of asset prices, debt levels, economic output and consumer confidence, leads to the hoarding of cash and significant dislocations in interest rates. What we have seen is a global economy currently in a deflationary period, while the policies being set continue to look quite inflationary.
While the world struggles with deflationary trends, evidence of inflation exists in certain geographies, such as the UK and India, and in specific sectors, such as healthcare and litigation.
Given these structural impediments, global economic growth and reinsurance pricing will likely remain weaker for a longer period than normal.
As a result of stringent risk and capital management strategies, many (re)insurers find themselves in a unique position, even as the world struggles with the effects of financial instability: figuring out just what to do with excess capital in an unfavorable market.
For some, giving capital back to investors in the form of dividends or share buy-backs appears to be the prudent alternative, though others are looking for new ways to grow profitable revenue and increase market share. For the latter, emerging risks and emerging markets provide considerable opportunity, and early movers into these areas will certainly have a distinct advantage. Some of these emerging markets and risks – such as microinsurance – have the potential to redefine the industry.
The volatility of economic growth and uncertainty over how inflation and deflation will affect a still tenuous economic climate has created a substantial challenge for (re)insurers. Market and economic conditions that differ widely worldwide – and are sometimes even in conflict – frustrate traditional approaches to growth in our industry. Excess capital across the (re)insurance space now needs to be put to work or returned to investors, with the latter providing no net gain. Active investment in new markets and business opportunities that will diversify the current portfolio will be the key to future success: business as usual will not be enough to drive growth in the near future.
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Peter Zaffino, President and CEO