A Bright Forecast

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“Climate change is probably also the biggest investment opportunity in our lifetime”

We expect the US economy to rebound this year by 6%, and Europe by almost 5%. It’s important to note that this is a rebound, not a structural recovery. We’re coming out of the worst financial crisis in our lifetime. A real recovery would also take care of the legacies and the weaknesses created by 2008’s financial crisis, which have grown over the past 10 years. So, while the overall environment is positive, there are also large downside risks that need to be considered.

The first risk is that we declare victory too early in the battle against Covid-19. The good news is that we now have vaccines. But vaccination rates could be much higher. So, the crisis could drag on for longer, creating further uncertainty, which could hurt the global economy. This uncertainty is already reflected in US consumer confidence levels, for example.

The second risk for societies and the insurance sector is stagflation — a high inflation low growth environment.

We’re seeing a lot of supply chain bottlenecks emerging, meaning there's much higher inflation than expected. In Germany, the Consumer Price Index is north of 3%, and in the US it’s above 5%. Government fiscal stimulus is impacting price levels and together with supply chain issues, those aren’t positive developments. I do not expect run-away prices by any means, but the inflation post-Covid will remain higher for longer and risks being more persistent than had been expected.

I think overall it's an excellent environment for insurance and reinsurance. We have seen the longest, most consistent series of quarterly price increases in the US commercial market since data has been collected. This is not the hardest cycle by any means but there is momentum.

In the reinsurance market there's a lack of appetite rather than of capital, which is why prices will remain higher than normal. Risk awareness is higher now as well than it was before COVID-19.

Lastly, the accelerated digitalisation of all parts of life is positive for the insurance market, in that it will help the insurability of risk. All of this tells me it’s a very good environment for underwriting risk at the right price.

We looked at the drivers of the key lines of businesses: economic development, the impact of urbanization and climate change on property, and the effect technology will have on motor.

What we see behind the big figure is that there will be a fundamental shift in the P&C market’s mix. We expect that both property and liability will more than triple in size by 2040, while the proportion of motor will decline.

Over the next 20 years, two megatrends — the take-up of technology and climate change — will shape the insurance market.

Moving away from lower-risk motor to higher-risk, more complex lines, like property and liability, will mean that the insurance sector’s expertise will become even more important.

We forecast that climate risk will increase the property risk pool by 30% to 40%, and for certain advanced markets the increase in weather related insured cat losses could be from 30% to 63%. In some key economies, such as China, UK, France and Germany, the increase could even be as high as 90% to 120%.

First, in a riskier and more complex business and economic landscape, the insurance and reinsurance sector will be more important as facilitators of sustained long-term economic growth.

Second, I truly believe that climate change is the number one long-term risk to the global economy. Recent research we did shows that by the middle of this century, the global economy could shrink by 18% because of global warming. If you recognize that climate change is an existential threat, and that insurance is central to solving that, then there are endless opportunities.

Climate change is probably the biggest investment opportunity in our lifetime. By deciding what we do — and don’t — underwrite, we are promoting the transition to a net-zero economy. The industry also has between $25 trillion and $30 trillion in investments, which is 25-30% of all long-term assets under management. So, what we invest in will also determine how quickly we can adapt to a net-zero economy.

Our industry is built on its knowledge of pricing, quantifying and underwriting risks, so we have the best opportunity here to do our job.

With the insurance industry being a risk absorber, higher earnings volatility shouldn't be surprising. Looking ahead, we should avoid wishful thinking and not expect structurally much higher running yields on the investment portfolio. The good news is there will be more growth and profits coming from underwriting, for the reasons I’ve already outlined. Hopefully there will be fewer systemic risk shocks in the future, which would also mean less earnings volatility, not more.