AIRROC kicked off its 2023 Legacy Transactions & Networking Forum with keynote speaker Dr. Robert Hartwig, Director of the Risk Management and Uncertainty Center at the University of South Carolina. Dr. Hartwig took us on a whirlwind tour of the global economic and geopolitical forces shaping the outlook for the property casualty insurance market and helped us understand the broader trends in the years ahead. A video replay of this presentation is available on the AIRROC On Demand platform.
Here are the top takeaways from Dr. Robert Hartwig’s presentation.
Global economic growth is sluggish, not stellar but not negative. Global growth prospects vary widely by region but by 2023 are universally stronger outside the “advanced economies.” This is good news for everyone, including the insurance sector. Reinsurance is one of the most globalized industries on the planet. The World is a threatening place today—economic threats, geopolitics, technology all impact (re)insurers.
Recession probability in the US is below 50%. The dream of a soft landing may be realized. The economic decline anticipated for the second half of 2023, looks increasingly less likely and is being projected into next year. There is still a possibility that we could have a recession but the consensus is that it will be materially milder, with the most likely scenario, a relatively shallow recession in the US beginning in mid-2024.
The inflation threat is still with us. Inflationary pressures will persist in through 2023 and into 2024, but are moderating. Dr. Hartwig emphasized that media coverage of the economy is heavily politicized. Media pundits in 2022 were quick to assert that the scourge of the 1970s—stagflation—was upon us; however, that turned out not to be the case. No question that inflation is a global phenomenon. For some countries, the cure (high interest rates) may be worse than the disease.
The impact of inflation on the insurance industry is significant. While a decline in inflation is expected for the second quarter of 2024, inflationary pressures have had significant impact. Insurers and reinsurers felt the impact immediately but relief will take years to run inflation through the system and reflect it in the rates and other adjustments. Inflation will drive the need for tens of billions in additional (re)insurance capacity just to keep up with insurance-to-value ratio. Surging severity of claims across property, auto and other lines, high medical costs and risks remain. The rapid increase in and still elevated cost of building materials has immediate and long-er-term implications for property insurers and reinsurers. And if inflation persists, reserve adequacy could become a problem for the industry.
Deglobalization is a major threat to many industries, including (re)insurance. Globalization has benefitted billions of people, yet its future is in jeopardy. Globalization has brought hundreds of millions of people out of extreme poverty; it has had a beneficial effect of reducing income equality, given consumers more choice, increase life spans plus many other benefits. Nevertheless, there has been a recent trend towards nationalism, protectionism and populist movements fueling national insular policies and a return to industrial policy around the world. There has been a proliferation of harmful trade restrictions that began increasing in the aftermath of the global financial crisis and accelerated in the wake of COVID. The recent rise in geopolitical tensions have intensified and transforming global power dynamics. Issues such as climate change are much more difficult to address. Diminished economic integration results in a greater propensity for (armed) conflict. Deglobalization, while politically popular, is economically damaging. Reinsurance itself is among the most global of all industries, so a “decoupling” of global economic activity is difficult to construe as a net positive. It is unambiguously bad for (re)insurance.
In summing up his presentation, Dr. Hartwig lamented that the P&C insurance industry remains strong, stable, sound and secure, but not without geopolitical concerns that remain high. This is an industry that is interconnected to the overall economy and affected by everything that goes on so challenges remain high.
