How inflation can become a “silver lining” for the insurance industry



Interest rates will continue to rise. But that won’t be entirely negative for the insurance industry, or the longer-term fundamentals of the wider economy, a new Sigma report from Swiss Re has suggested.

Its authors called for two fundamental changes to the financial side of the global economy. The first, driven by central bank efforts to fight inflation, is an end to the ultra-low, even negative, interest rates that have characterized much of the past three decades.

And, they predicted, this shift should shift investment from companies that derive value from intellectual property and brand perception to companies that make real goods.

“This shift is likely to help shift private sector investment from intangibles to tangibles, bringing financial and real savings closer together,” Swiss Re said in a statement. Maintaining Resilience: The Role of P&C Insurers in a New World Order.

This is positive, as it means that private investment will increase in a way that complements existing public spending on infrastructure, the transition to a green economy and national defense.

“This will improve investment momentum and foster capital-intensive growth and increased productivity,” the Swiss Re report says. “The private sector, including the insurance industry, will play a particularly important role in the increased investment in green infrastructure projects that contribute to a sustainable future.”

And, he cited a World Bank estimate that every US$1 investment in infrastructure that contributes to the green transition has the potential to unlock US$4 of economic opportunity and jobs.

This transition will not be inflation-free, but it will be driven by more traditional and understandable price-raising factors, such as higher input costs to switch to green energy (and growing consumer demand for energy from green sources) as well as rising costs for fossil fuels.

For these reasons, Swiss Re estimates that overall increases in the consumer price index (CPI) in the United States will average 0.6% between 2024 and 2033. Although not synchronized, the Canada’s CPI tends to follow the same way as that of the United States.

Additionally, an “ultra-loose monetary policy unwind” in response to inflation is expected to push 10-year US Treasury yields to 3.5%, from the current 3.2%, by the end of the year. of 2023.

And these higher returns will create a “silver lining” for the insurance industry.

“Insurers will, over time, enjoy better investment returns as their bond portfolios gradually transition to higher yields,” the Sigma report says.

Swiss Re noted that the low interest rate environment of the past decade has put underwriting results under pressure, “although the sector benefited from mark-to-market valuation gains in risky assets and fixed income investments. .

“For 2023, the anticipated rise in interest rates could help ease the pressure on underwriting results.”

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