‘Stagflation’ is back, warns sigma

In its new sigma report, Swiss Re Institute forecasts a stagflation-like economic environment for 2022 and 2023, characterised by higher inflation and lower real GDP growth.

Unlike the structural stagflation of the 1970s, this stagflation will be cyclical, with the slowdown in economic growth leading to lower but still very high inflation in 2023. 

For the insurance industry, claims inflation is expected to affect non-life insurers’ profitability in 2022, leading to further market hardening in 2023.

Swiss Re Group Chief Economist Jerome Haegeli said: “After a 50-year absence, stagflation is fully back on the radar and we now need to be particularly disciplined. 2022 will be a challenging year for insurers with both sides of the balance sheet under pressure.”

“The silver lining for insurers is that we are exiting the ‘low-for-longer’ and negative interest rate environment and this regime shift will benefit insurance companies over the medium and longer term. ‘Risk-free’ rates are finally not return-free anymore.”

“Fortunately, history is unlikely to repeat itself – today’s economic reality looks very different to the 1970s. Central banks are acting very forcefully to keep the downside risk of 1970s-style stagflation at bay.

”Consequently, and with aggressive Fed rate hiking ahead, a soft landing in the US looks to be wishful thinking.”

Key findings of the report:

• Key factors driving a stagflation-like scenario include supply-side shocks from the war in Ukraine, which are already being felt in global commodity prices. This comes amid high inflation driven by policy stimulus and reopening after COVID-19. More aggressive monetary policy tightening in response to higher inflation will further weigh on growth.
• In a stagflation-like environment, Swiss Re Institute forecasts an inflation surge, peaking in 2022, and slower but still positive real GDP growth in the US, UK, Euro area, Japan and China for both 2022 and 2023.
• As the economic situation has become more uncertain, it will be difficult for the US Federal Reserve to engineer a soft landing. The estimated likelihood of a global recession over the next 12–18 months has risen to between 20–30%. This compares with a 55–70% likelihood of a stagflation-like baseline scenario.
• The impact of a stagflation-like scenario will be felt in property and casualty insurance, which is subject to inflationary impacts. Property insurance is exposed to higher construction prices while motor lines are affected by higher car-part prices and wage increases. Casualty lines, however, are less impacted by general inflation.
• For life and health insurance, the impact is mainly positive with benefits from higher interest rates on investment income. However, lower disposable incomes and a slower economy may eventually increase lapse rates and dampen demand for life insurance products.
• Insurers can mitigate the downside risks of the economic situation through strong capital and risk management, repricing insurance risks to account for higher claims costs, reinsurance transactions, asset reallocation in investment portfolios and hedging against inflation.