Evolving risks could upend growth, disinflation trends – Swiss Re

Swiss Re‘s latest economic forecasts anticipate steady global GDP growth and a gradual easing of inflation. The projections for 2025 include a 2.1% growth rate for the United States, with an average inflation rate of 2.5%.

However, Swiss Re notes that the global risk landscape is constantly changing, prompting an update to their three alternative economic scenarios. These scenarios focus on potential outcomes involving “renewed supply shocks,” a “global recession,” and a more optimistic “productivity revival.”

In its baseline forecast for 2025 and 2026, Swiss Re predicts stable economic growth, robust labor markets, rising real incomes as inflation decreases, and higher interest rates supporting insurance demand and profitability. However, Swiss Re acknowledges the evolving risk landscape, reflected in the updated scenarios for the global economy.

The “renewed supply shocks” scenario considers the impact of geopolitical tensions, such as potential disruptions related to the US presidential election or conflicts in the Middle East. This scenario could lead to stagflation in major economies, with US inflation potentially reaching 6%.

Such conditions, the reinsurer emphasized, would strain underwriting performance and suppress real premium growth, particularly in non-life insurance, due to price shocks. Supply disruptions could also increase claims in certain lines, like business interruption, and heighten lapse risks for life insurers.

The “global recession” scenario outlines the risk of central banks maintaining high interest rates for an extended period, potentially triggering a recession. Swiss Re highlights the possibility of a stock market correction, with stock prices having risen faster than earnings expectations.

This scenario could lead to a decline in insurance demand, particularly in economically sensitive commercial lines. Historical data indicates that during the 2020 recession, global nominal premium growth slowed to 1%, compared to an average of 3.3% from 2010 to 2019. Higher insolvencies and bankruptcies could also impact the profitability of lines like trade credit insurance.

On the upside, Swiss Re considers the potential benefits of integrating artificial intelligence and other emerging technologies into the economy. The “productivity revival” scenario suggests that significant investments in AI, projected to reach nearly $200 billion globally by 2025, could boost productivity growth by up to 1 percentage point annually in advanced economies.

This could lead to stronger economic activity, higher premiums, and improved investment returns for life and non-life insurance sectors. However, Swiss Re cautions that new technologies might also increase the frequency and severity of claims related to cyber risks, product liability, or business interruption.

Swiss Re emphasizes the importance of considering these shock scenarios, whether positive or negative, as a way for the insurance industry to navigate uncertainty and prepare for unexpected developments.

What are your thoughts on this story? Please feel free to share your comments below.