SwissRe-Issues Warning Of Inflationary Risks To Re/insurers

Swiss Re-Issues Warning Of Inflationary Risks To Re/insurers

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Swiss Re-Issues Warning Of Inflationary Risks To Re/insurers

The risk that inflationary recessions and financial instability represent to insurance and reinsurance companies was highlighted in a recent Swiss Re Institute research.

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Analysts observe that after a market reliance on extremely low and negative interest rates for a decade, which revealed dangers to financial stability, both banks and insurers are having a hard time readjusting to the new economic reality.

Despite anticipating potential longer-term advantages for the business, they noted, “Insurers will need to watch for inflation being stickier, even if it is peaking, and the rise in systemic risk in the economy.”

The current outlook poses risks both to insurers’ assets and liabilities, with more persistent inflation risks imply higher claims costs.

Swiss Re-Issues Warning Of Inflationary Risks To Re/insurers

At the same time, financial market volatility and potentially higher defaults linked to rising interest rates could hurt both insurers’ assets and specific lines of business, for example, credit & surety, Swiss Re says.

However, looking ahead, the reinsurer believes that higher interest rates are expected to eventually be a silver lining for the industry, as insurers reinvest maturing bonds into higher-yielding bonds.

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Swiss Re’s inflation forecasts expect CPI inflation to stay above central bank targets next year, with risks of upward revisions to the forecasts, particularly in Europe.

Against this backdrop, central bankers have vowed to remain resolute in raising policy interest rates in the near term and hold them high for longer, prioritizing the return of price stability over growth.

But there are currently concerns about a lack of global policy cooperation, with countries each pursuing different policy objectives.

Swiss Re Issues Warning Of Inflationary Risks To Re/insurers

“More targeted and tailored fiscal measures are needed to address the energy crisis without inflaming inflation, but governments do not have the instruments ready to deploy so are facing a deja-vu of the inflationary blanket cheques sent to all households in the US during the pandemic,” analysts explained.

Another growing concern over Europe is that monetary and fiscal responses are addressing the demand side of the economy when the continent is facing a supply-side shock, with Swiss Re recommending more supply-side structural reforms such as energy infrastructure investments to deliver secure, long-term supplies.

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Furthermore, there are concerns that current policy approaches could also amplify financial instability risks, as the unwinding of the past’s low-interest rate, and the low-volatility regime is leaving little cushioning of risk available to the world economy.

“We are also watching for interest rate tightening spillover effects on countries such as in emerging markets or the EU periphery, where sovereign debt concerns could reawaken if bond yields climb too far and too quickly,” Swiss Re said. “If market dysfunction leads to systemic concerns, we would expect central banks to address financial stability, but this in turn could slow the fight against inflation.”

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