outlook for european economy and implications for insurers

Outlook for the European economy and implications for insurers

Astrid Frey, 27 September 2018, Lisbon

Astrid Frey | 27 September 2018 | Lisbon

The European economies in 2018: “as good as it gets”

Source: Swiss Re Institute

Real GDP growth

Astrid Frey | 27 September 2018 | Lisbon 3

Table of Contents / Agenda

• Outlook for the European economy

• Risks

• Implications for the insurance industry

• Conclusions


Outlook for the European economy

4


Global growth remains solid, but the best is behind us

Sources: Datastream, Swiss Re Institute

Purchasing Managers Indices have softened outside the US, but still point to solid growth

• Global growth is expected to slow down from 2018, but to remain above potential

• The US economy gets a boost from fiscal stimulus

• Within Europe, the UK is underperforming due to uncertainty around Brexit whereas parts of CEE

show signs of overheating


The cyclical recovery has also led to a sharp decline in unemployment

Unemployment rates of select European economies


Inflationary pressures remain moderate in Western Europe – higher inflation risks in CEE

Consumer price

inflation, 2018



ECB monetary policy normalisation will be very gradual

ECB monetary policy interest rates and asset purchases

Source: Thomson Reuters Datastream, Swiss Re Institute

• ECB to stop its asset purchases by the end of 2018 and start hiking interest rates in 2H 2019

• Any interest rate increases are expected to be very gradual

• Long-term bond yields are likely to increase only moderately


Risks

9


Risks affecting European growth outlook:mostly external, some from within

China hard

landing

Euro area

destabilisation


Trade war

�

�

Emerging market

contagion

Upside Risk

(US fiscal stimulus, Europe, China)

Central bank

policy error

15%

10%

30%

= 20%

Inflation15%

��=Trend over

recent months

x% Probability

�<5%

15%

�

=

�Disorderly

Brexit25% �


A long way back to normality

11

Source Datastream, Swiss Re Institute

• Financial fragmentation persists within the Euro area

• ECB unlikely to step back from its intermediation role anytime soon

• Imbalances are no sign of immediate crisis, but reflect structural challenges of the Euro area

Net claims on the Eurosystem (“TARGET2 balances”), select Euro area countries, EURbn


The odds of a “cliff-edge” Brexit scenario have risen

12

“No deal” Brexit scenario vs. baseline growth forecasts

-1,0

0,0

1,0

2,0

3,0

2018 2019 2020 2021

UK (Baseline) UK (Adverse)

EA (Baseline) EA (Adverse)

Source: Swiss Re Institute.

• A «no deal» (or «cliff-edge») scenario may result from political resistance in the UK, in the EU

parliament or simply because time runs out

• «No deal» would cause fundamental economic disruption in the short term, sparking UK recession

and a significant downturn in the rest of Europe


Europe remains dependent on favourable financing conditions

Yields on 10y government bonds, select Euro area economies (%)

Source: Thomson Reuters Datastream, Swiss Re Institute

• ECB will be careful not to tighten monetary policy too rapidly

•Because many governments (and companies) remain dependent on favourable

financing conditions

•A spike in US inflation and bond yields, spilling over to Europe, is a key risk


Implications for the insurance industry

14


Current economic momentum will be supportive for the

insurance industry’s performance

Key driversChange

last 12 m

Impact on

profitabilityComments

Robust growth

Growth is expected to peak in 2018, drives

demand for insurance and capital gains on

investments

Rising interest

ratesSlow (!) increases in average portfolio yields

Higher inflationGradual acceleration of general and

healthcare inflation

Industry

capitalization

Traditional capital managed to stay stable;

AC drives competition in global property cat


15


Conclusions

16


• 2018 is “as good as it gets”:

– strong growth

– moderate inflation

– moderately increasing interest rates

• The outlook remains benign for now, but there are many downside risks,

including “trade war”, a disorderly Brexit and rising US inflation

• Strong growth and rising interest rates will support insurers’ profitability, but

the impact is likely to be modest and offset by rising inflation and abundant

industry capital

Conclusions

17


Legal notice

20

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