Insurance industry at risk from renewed supply shocks

It potentially puts pressure on underwriting performance.

Despite a generally positive macroeconomic and industry outlook, risks remain. Escalating geopolitical tensions or a disruptive trade war could trigger stagflationary shocks globally. Each scenario impacts the re/insurance industry differently, highlighting the need for agility and preparedness, warned Swiss Re.

Swiss Re’s also projects a normalising and resilient global gross domestic product (GDP) growth with progressive disinflation. 

However, evolving risks may disrupt this outlook, prompting us to update our three alternative economic scenarios: "renewed supply shocks," "global recession," and "productivity revival." Both downside scenarios suggest a potential contraction in the US economy in 2025.

The "renewed supply shocks" scenario anticipates stagflation, with inflation in the US potentially reaching 6% amidst weak growth. 

This would stress underwriting performance, depress real premium growth, and exacerbate claims severity, particularly in non-life insurance. Supply disruptions might increase claims for business interruption, while life insurers could face higher lapse risks due to elevated interest rates.

The "global recession" scenario, driven by excessively high interest rates, could reduce insurance demand, especially in economically sensitive commercial lines. 

Historical data shows that during the 2020 recession, global nominal premium growth slowed to 1%, compared to an annual average of 3.3% from 2010 to 2019. 

Increased insolvencies and defaults could impact trade credit insurance, and life insurance products with guarantees might become less attractive. 

Falling asset prices and widening credit spreads could weaken investment results, though lower inflation might mitigate claims increases.

Conversely, the "productivity revival" scenario envisions transformative gains from AI and emerging technologies, with global AI investment projected to reach nearly $200b by 2025. 

Optimistically, early AI adoption could add up to 1 percentage point to productivity growth annually in advanced economies. 

This scenario would boost life and non-life premiums and investment returns, benefiting from higher revenues and strong capital markets. 

AI solutions could also offer new opportunities for the industry, although new technologies might increase the risk of severe, albeit infrequent, claims related to cyber threats, product liability, or business interruptions.