Ben Telfer: 

Hello, everyone. I hope you all are well, and welcome to today’s ICMIF webinar on the impact of COVID-19 on the insurance industry and economy. Great to have so many of you participate in today’s webinar, which is part of our week of MORO series of reinsurance webinars.  

I’m pleased to introduce Astrid Frey. Astrid’s chief macroeconomics for the EMEA at the Swiss Re Institute. Astrid, thank you for joining us and sharing some Swiss Re insights on a topic that we’re all very interested in. Over to you, Astrid. 

Astrid Frey Kaufmann: 

Perfect. Thanks a lot for the nice introduction. Good afternoon. Good morning. Good evening, ladies and gentlemen. It is my pleasure to present to such a distinguished audience. I’m trying to move the slides, which seems to be working very well. So I’ll start with a confession. I am a child of the global financial crisis. I joined Swiss Re back in 2007, that’s when the global financial crisis started. It wasn’t my first job as an economist, I had worked in the banking sector before, but the global financial crisis definitely shaped my economic thinking. As such Neil Shearing, the group chief economist of Capital Economics, arouse my interests when he said in late March that we should resist the temptation to view new economic shocks through the prism of previous shocks. It is all too easy to do comparisons with the global financial crisis and previous crisis. 

I will do so a few times over the next 30 minutes or so, but we should be well aware that’s the crisis we’re currently living through does have different origins. It feels very different, and I would venture to say that we’ll also have rather different consequences. Let me start with an attempt to characterize the nature of this crisis. It is a very unusual type of recession. We’ve seen an extremely sharp growth contraction. On average this year, we expect global growth to contract by almost 4%. That is about twice as much the contraction seen during the global financial crisis. It’s been an extremely fast development with GDP, literally falling off a cliff. Now, just to put things a bit into perspective, it took the US economy 10 years between 2009 and 2019 to create 22 million jobs. 

Then 30 million jobs were gone within two months. So just to highlight the speed, and I think that’s the defining characteristic of this recession, the speed of the contraction that we’ve seen. At the same time, this recession will perhaps also be one of the shortest that we’ve experienced. Actually, there are already signs of improvement that are starting to show. This recession is also unusual because the recession hits the service sector very hard. The service sector is typically a stabilizing force in any downturn. Usually, it’s more the manufacturing production, the investments, the capital goods that suffer most during any downturn. 

Finally, I don’t want to start this talk without highlighting the tremendous uncertainty that we’re currently facing. What I’m showing here on this slide are current projections for GDP growth, inflation, yields, but I’d also like to highlight the tremendous uncertainties that still surround these numbers specifically when it comes to the GDP projections. These numbers may well be several percentage points higher or lower in the end. The new flow of economic data has taken a more positive direction again recently. So the worst actually is likely already behind us when it comes at least to economic developments. In the US the labour market report for May, for example, has surprised many, including ourselves very positively. Two and a half million jobs were already added back in May in the United States. 

These kinds of data surprises are captured by the economic surprise indices that I’ve plotted here with the US index, the red line already back to positive territory, and that has come after one to two and a half months of negative surprises. China has been leading that trend while the Euro area is still lagging behind somewhat, but there has been some positive news coming out of Europe, too. Not so much on the data front yet, but on the fiscal policy front, and that is extremely important for the economic outlook. Let’s have a closer look at the fiscal response we have seen so far, and that’s what’s plotted here on the vertical axis, the fiscal stimulus as a percent of GDP. I have to say, this is only capturing the direct fiscal stimulus measures and not all the guarantees that we’re seeing all around. 

So on the vertical axis, you have to fiscal stimulus with the US, Australia, Japan, Canada at the top, but I mentioned some of the positive news coming out of Europe too. The first very significant positive news has been the announcement of an additional 130 billion Euro fiscal stimulus in Germany. That takes the German fiscal response up to the top of the league, so that’s a very significant announcement. That’s been a very significant announcement for the European economy as a whole. What you can see from the chart also, however, is that the country’s most vulnerable to the COVID-19 shock are not the ones that will get most fiscal stimulus. Quite to the contrary, those most in need tend to enjoy the least fiscal stimulus. Let me explain, what we show here on the horizontal axis is the country’s vulnerability to a stylized sectoral shock. 

What we assume under that shock is that for example, the hospitality sector is taking the biggest debt followed by other consumer facing services, which are also heavily affected. So on the chart, those countries with large tourism sectors and relatively small public sectors appear as most vulnerable here on this chart, so that’s plotted against the horizontal axis. So it is the countries on the upper left chart that are in a stronger position to weather the crisis well, and those on the lower right are highly vulnerable and don’t receive much fiscal stimulus at the same time. That’s where the second piece of positive news from Europe comes in the recently announced plan for EU recovery fund. It will be funded by jointly issued bonds, as well as potentially some common taxes. 

I’m personally rather sceptical that new direct taxes will fly at least in the near term. But I think funding via jointly issued bonds is realistic. I would expect this recovery funds to be passed in one form or the other fairly soon, and that should provide significant relief for countries, including Italy and Spain that sits towards the lower right here on the chart. That fund will not help immediately. I wouldn’t expect any funds to be deployed as soon as this year, but over the next few years, it will be a relief for those countries that sits towards the lower right here on this chart. It will be in my view, an extremely important signal of solidarity to these countries, and fiscal stimulus in general will be one of the most important factors to watch for the economic outlook over the next few years. 

Now, it is beyond any doubt that these fiscal programs will lead to ballooning government debt. The question really is how governments will ever be able to pay back those debts, and for this, I’m eager to hear your views. So how will those debt burdens that are inevitably going to balloon be paid back in the end? I’m talking about the long run, right? Not over the next two, three years. So do you think governments will pay back debtors in a conventional sense or they will repay their debts, their bonds? Do you think second major governments will be defaulting on their debt eventually? Again, here I’m not talking just about Argentina. Do you think the debt burdens will be inflated away in real terms? So adjusted for inflation, and that will be the third answer, or do you think central banks will monetize big chunks of government debt? 

So by monetization, what we mean is that central banks will purchase big amounts of government debt and essentially never sell them back to the markets. So I’ll appear for a few seconds to see all the answers coming in. Alright, so I’ll take a quick note. So most of you think that they will be either inflated away or will be monetized. Some optimists think that they will be predominantly paid back in a conventional sense while some of you think that there will be some defaults as well. Alright, so I’ll keep that in mind and I’ll take it out again at a later stage, but first of all, before we get to that, the longer term considerations, I would like to briefly go back to the very near term first, because in the near term economic performance will be mostly determined by the lockdowns and how quickly we get out of those lockdowns. 

To monitor economic activity levels across countries, we have created a bunch of lockdown indices. Those basically consists of two things. First of all, an index from Oxford University tracking the stringency of the lockdown measures in different countries, and second data from Google and Apple, which help us track mobility. These two components allow us to estimate how far along countries are on their path back to normal, for example, Italy, which is the blue line here on the chart. Italy had implemented one of the strictest lockdowns across countries, but has ease restriction significantly since early May and people have started to go out more again, be it for work or for leisure. By contrast in Brazil, which is the green line, new infections continue to grow and the green line here has been rather on changed over the last two months, and in Sweden and other example which is the purple line, the lockdown has been less severe than elsewhere throughout. 

The GDP performance in the first quarter of this year correlated quite strongly with these lockdown indices and we expect the same to hold in Q2. So these help us monitor the very near term economic developments. Now beyond the immediate GDP impact, the lockdown indices also help us monitor the development of the pandemic across different countries. For this purpose, we are looking at the lockdown indices, in combination with the so called R-factor or R0. The R-factor is the reproduction number of the virus. So if the R-factor is above one, new infections increase. That’s the case in the upper parts of these panels shown here on the slide, and if the R-factor is below one, the new infections die down gradually, and that is the case in the lower parts of the panels. The pandemic clocks here, they combine the R factor with the change in the lockdown severity. 

So on the right side of the clock, lockdowns are tightening and on the left side, lockdowns are easing. Now most countries move through more or less four phases in the pandemic. First of all, at the start of the outbreak infections rise exponentially, so R is above one and lockdowns are imposed, so we are on the upper right square. Then in the second phase, as we move down, our declines below one, as new infections are contained and in that phase, lockdowns may still be tightened further. Then when we moved to the left in the third phase, governments start easing lockdown measures while new infections drop. Now, the goal obviously is to avoid a move up to phase four, where new infections pick up again and eventually move back even to phase one where lockdowns need to be tightened again. 

I think the sweet spot on the clock is close to the access between phases two and three, and we’ll all need to find a balance between normalization of our lives and avoiding another outbreak. Now, having said that, many people do expect second outbreaks, and I think it’s reasonable to expect second waves here and there. But what I do hope is that we’ve learned a few things over the last few months and that we will not need to go back as far to the right, so to impose as strict lockdowns as we have done over the last few weeks. What you see here on the chart is the experience of different countries. So for example, Germany managed to stabilize R below one while easing gradually. That’s the situation it is in right now. 

In the United States, R is also just back to one, but new infections remain relatively elevated and we’ll have to see over the next few weeks, whether they’ll drop substantially amid gradual lockdown easing too. China has been quite successful at bringing down new infections, but you can also see that there was some easing and tightening back and forth in lockdown involved. Now, South Korea is an example where new infections increased again in a second wave, and lockdown easing had to be stopped and even tightened against somewhat. So these examples, they show that remaining in that sweet spot with R below one will be a challenge. It will be a constant challenge and it isn’t quite a normal situation yet. We think that this semi-normality will likely last until vaccine is broadly available. 

In this, what I call semi-normal state, we estimate that most countries will be able to return to about 90 to 95 of pre COVID economic activity. Now whether that number is closer to 90% or to 95%, depends predominantly on the sectoral split of an economy. The consumer facing services sector will be disproportionately affected because many people will still avoid crowded places such as bars, restaurants, shopping centers, and also because of limitations to the number of customers allowed per square meter and so on. So the sectors that will likely suffer a lot are the hospitality sector, wholesale, retail trade, air travel, entertainment and other consumer facing services. So it is not only the economic shock that is very different from previous crisis. The recovery is also likely very different given the constraints that will continue to face. 

So the insurance industry in our view is also in quite a different situation today compared to 2008. We expect the contraction in insurance premiums to be less severe and the recovery to be much swifter than during the global financial crisis. On the P&C site, we expect premium growth to be supported by strong rates hardening in most commercial lines. On the life side, improving financial markets should support the recovery there. This is because we do not expect prolonged financial turmoil like after the global financial crisis, which weighed on life premium business. Also, risk awareness in general, should also be supportive for protection business. When it comes to emerging markets, we actually expect premium growth to remain positive and in our view, also China will come out of this crisis fairly strong. When it comes to insurance, it remains on course to become the largest insurance market by the mid-2030s. 

But as I mentioned initially, uncertainty remains very high and there are some scenarios that are very feasible, which could be less favourable for the insurance industry. So let’s now look beyond the baseline and beyond the immediate outlook. We attach a likelihood of around 10% to a more optimistic scenario where growth bounces back more quickly than we currently expect. I’ve mentioned before, we have seen some positive economic surprises, so that’s quite a feasible scenario. At the same time, the expected rebound next year could falter in a severe and protracted recession scenario. That could happen, for example, if there are significant second waves that trigger quite significant lockdowns again, if financial conditions tighten or if unemployment increases more than expected.

Interest rates would probably be even lower than in the baseline scenario in such a severe and protracted recession scenario. Now the worst outcome for insurers in our view would be a stagflation scenario, where economic stagnation is accompanied by an unexpected increase in inflation. Such a scenario would not only affect insurance profitability via bad financial market performance. It would also lead to higher claims inflation, which would harm liability lines of business in particular. Now let’s finish with a look beyond the immediate crisis. We think that the COVID-19 crisis will likely accelerate some of the trends that were already in the making before the crisis started. But before I focus on some of them, I would like to hear your views again, about a topic that is particularly relevant for reinsurance, the topic of inflation. 

Now, what is your view about long-term inflation development and by long-term, I mean, roughly say seven to 10 years out. Do you think the effect of this current crisis will be deflationary? So we’ll see negative or at least lower inflation than before the crisis? Do you think it will be inflationary or do you think there will be no material impact on inflation? All right, 20% deflationary, roughly 60% inflationary, roughly 15%, no impact. So I do see some inflation worries also from the previous question in the audience. The inflation question also brings us back to the question about governments, how governments will ever be able to pay back their debts. In our view, we will see increasing coordination between fiscal and monetary policies. In fact, you could argue that, that is already happening with central banks buying large chunks of government debt and central banks keeping interest rates very low at the same time. 

We call this a financial repression environment, and we think that this financial repression environment will continue for some time. Actually, it may continue for a very long time, still to come. Now, if all goes to plan and our baseline scenario is roughly correct, that may just be enough to keep government debt on a sustainable path. So central banks keeping the funding costs at a manageable level, and governments not really able to reduce their debt burdens, but to keep them just about stable. In a more adverse scenario, however, more extreme forms of fiscal and monetary policy coordination may become more likely. That includes the outright debt monetization. We think that inflation risks have increased as a consequence of COVID-19, and not in the near term. In the near term, inflation risks are virtually absent. That’s due to the massive demand shock, but over the next 10 years or so, we do see increased inflation risks. 

The key reason in our view is that central banks will be incentivized to keep interest rates low now to facilitate the higher debt burdens. That’s not a problem as long as inflation remains low, but if inflation picks up, they may still be incentivized to keeping interest rates low. So they may actually tolerate somewhat higher inflation because they’re facing the choice between making the debt burdens on sustainable or tolerating, somewhat higher inflation. In addition, on the inflation risk, in addition, some of the disinflation rate trends we’ve been observing over the last few decades may be reversing. One trend which had already been in the making ahead of the crisis is peaking globalization. Besides the US-China trade war, we expect to disruptions across the global supply chains due to the containment measures against COVID-19. We expect them to have a lasting impact on supply chains. 

Now don’t get me wrong, we don’t think companies will pull back from globalization. I don’t think that’s realistic, but we do think there will be restructuring of supply chains to make them more robust, more resilient. Potential changes could include the relocation of production to cut concentration risk, shortening of supply chains or the build-up of parallel supply chains. All of this will tend to increase costs and inflation. At the same time, any such changes will involve construction of new production units and associated infrastructure facilities, and that will present new opportunities for property engineering and business interruption insurance. So I guess, besides all the uncertainties and threats related to the crisis, we shouldn’t forget the opportunities resulting from it too. 

So let me conclude by reiterating that we should resist the temptation to see the current shock through the lens of previous shocks. This crisis is clearly very different from the global financial crisis, and I dare to say from any crisis that any of us has probably lived through. It is definitely much deeper, much sharper, I mentioned the speed of this crisis, but it is also likely much shorter than the global financial crisis. In fact, the economy is probably already expanding again as we speak. Second, the recovery will also be very different from the global financial crisis, not just the crisis itself, the recovery will also be very different. So we’re not suffering from the lingering financial system problems as then, but the lingering virus threat will keep us from returning back to full normality anytime soon. Finally, I’ve touched on some of the paradigm shifts that the crisis may bring forward, and some of them not only represent threats, but will bring new opportunities at the same time. With that, I will close and I think we will have ample time for questions. Thank you. 

Ben Telfer: 

Thank you very much, Astrid. That was an excellent overview of the impact that COVID-19 is having both on the economy and the insurance industry with some quite positive outlooks, I have to admit, so that is great to say. Everyone in the audience again, please do send your questions in. We do have a number already, but please do type them in and if you do want to ask a question verbally to Astrid, simply raise your hand and hopefully we can enable your microphone and you will be able to directly ask Astrid. So first question, Astrid, why have financial markets were covered so quickly after the initial decline? Isn’t that completely out of sync with the economic outlook? 

Astrid Frey Kaufmann: 

Yeah. I think it’s a question, I guess that’s on many people’s minds. I have to admit if you had asked me a few months ago, will we see S&P going back to January levels by early June, I would have said, well, probably not given the size of the economic shock that we’re facing. So it is a bit surprising, but I think there’re various elements to the answer. First of all, I think basically it’s about the timeframe. So I do have the suspicion that financial markets may be a bit short-sighted and there could be additional corrections, but the second part to the answer is stimulus and predominantly monetary stimulus. 

We have entered this crisis with basically not much ammunition left in terms of monetary stimulus. When I say not much ammunition left, I mean we didn’t really expect it to help the real economy much. I think that’s exactly true, but that didn’t prevent central banks from becoming even more innovative from cutting interest rates, where they could, from purchasing corporate bonds and all kinds of stuff. So I think it does support the financial markets. Less so the economy, and I think that’s probably the key explanation for the disconnection between the real economy and financial markets. But as I said initially, I’m not convinced this will have been the last downturn in this crisis. 

Ben Telfer: 

Thank you, Astrid. You mentioned that there’s been certain industries. I mean, I think it’s quite obvious that certain industries have been more negatively impacted by the various lockdown measures, things like the hospitality industry, aviation industry, retail. Has there been any sectors that have actually seen a positive growth over the last few months? 

Astrid Frey Kaufmann: 

Yeah, I would actually need to check the latest Q1 figures. I mean, I don’t recall now right from the back of my head, but obviously you can think of small sub-sectors, which have obviously seen positive growth, like some online retailers and so on, but in general, I think we’ve been surprised by the lack of broad positive performance. So for example, had you asked me say a year ago in a pandemic scenario, which sectors would you expect to perform positively? I would have said, “Well, the health sector.” It’s clear, right? People need to go to the doctor, hospitals are full, but what we’ve seen is that many, many services have been cut back. So even the health sector has seen a negative performance. So it’s been more on that side rather than on the positive side, maybe an additional remark on manufacturing. 

That’s also been a bit surprising how severe the contraction in the manufacturing sector has been. I mean, depending on the country lockdowns half more or less effected manufacturing, but in many countries, there has been no ban to go to production sites. But the thing is that this crisis is not purely one shock. It’s not just pandemic; it’s also a disruption to global supply chains. It is a demand shock originating in China initially, and then spreading all across the world. So I put it maybe, a bit into simple terms. So it’s the consumer facing services that have been affected predominantly, but the crisis is broader than that, and I think that explain some of the negative impacts all across the economy, basically. 

Ben Telfer: 

Yes, for sure. A question now; what is your outlook for the EU, and will it emerge stronger from the crisis or will it make the existing divisions worsen? 

Astrid Frey Kaufmann: 

Well, I have to say that until about two weeks ago, I had to become very negative on EU. I thought there was such an obvious lack of coordinated policy response in the EU. So that made me quite worried, but I’ve touched on it briefly. I think this latest plan from the EU commission, that’s a significant step into a positive direction especially when it comes to the signal that is sent out. I also think that the German fiscal stimulus is actually also a very positive sign for the future of the EU. Obviously, the German stimulus will end up in Germany mostly, but all of Europe benefits from it. All economies that interact with Germany benefit from the stimulus. I think that’s also a key sign on behalf of Germany to really make sure that this recovery will be supported by the countries that can afford it. So by now, I think I have become more optimistic that Europe will actually come out of this crisis in a stronger version of itself than before 

Ben Telfer: 

We have another question that is very related to the impact in the EU, and it’s from somebody in the UK. The question is, in the UK, we are also facing the prospect of a no-deal Brexit in the New Year. Will the concurrence of these two major economic shocks multiply the magnitude, or will the impact of Brexit be hidden by the pandemic shock? 

Astrid Frey Kaufmann: 

I think that’s the hope in Britain that the impact will be hidden and that no one can be blamed for it. But I mean, joking aside, I think what we expected in this pandemic to happen was that all players would become more pragmatic and therefore a solution on Brexit would be found, but recently what appears to be happening is quite the opposite. So I think the risk of a no-deal Brexit is actually increasing. I think it’s quite a significant risk. That’s been a bit of a surprising development, and I think that’s, that’s a key risk that we’ll have to watch. I don’t think the impact will be negligible. Obviously, we’re not talking about the same dimension as the pandemic impact, but I do think there’s a bit of complacency out there that you can simply ignore the repercussions from a lack of a deal. 

Ben Telfer: 

Thank you. Thank you, actually, that was a great question. Two great questions that I think you can see the comparisons and the differences there. Another question for you, Astrid, and it looks at the… Will there be a change in consumer buying behaviors, less face-to-face, and how will that impact both the economy and the sales of insurance policies? 

Astrid Frey Kaufmann: 

I think it will affect the sales of insurance policies tremendously and again, I think that’s not a new trend, right? Digitalization is nothing new. It’s just a trend that will probably experience quite some acceleration as a consequence of the crisis. I’m sure, there are plenty of experts in the audience on how that will work out for the insurance industry in specific lines of business exactly. I’m not the expert here, but I do think that will provide a boost. On the economy, it’s difficult to say in the aggregate what the impact will be, but I do think in general accelerating digitalization may help productivity. I think that’s actually a positive for future economic growth. I think it’s a good question and it’s important to also capture the opportunities that we get from the crisis. I think we all have examples of grandparents who have never done online shopping before, or never used the Skype conference before. I think increased adoption and also acceptance of digitalization, that’s a positive that we have to take out and really grasp from this crisis. 

Ben Telfer: 

That’s an excellent point. I think it’s something we can all see in our day to day life about how using less cash and like you said, using more of these online virtual meeting software platforms. A related question, actually looking at the outlook on growth that you mentioned about the difference between life and health and P&C. Do you see any differences in the outlook of globe for different insurance classes? Are there any new growth areas coming in different lines of non-life or health business? 

Astrid Frey Kaufmann: 

Well, I think on the life side, I would say broadly speaking; it’s the protection products that will benefit. On the savings products, I think I wouldn’t even call that an acceleration of the previous trend, but that situation remains very tough with a low interest rate environment. So we’ve been in that situation for many years after the global financial crisis. So in general, I would say it’s the protection products on the life side. On the P&C side, I mean, I’ve mentioned some of the opportunities related to global supply chains, but I’m sure those are not the only ones. I mean, think of digitalization, new channels, new risk awareness, business interruption. I think that’s the opportunities we have to discuss with our clients and you have to discuss with your clients. I’m sure there will be plenty of new lines of business, new ways of selling, new ways of raising awareness that we will benefit over the next few years. 

Ben Telfer: 

I think we’ve got time for one more question and you did touch on it previously actually. So maybe you can just expand on it a bit more. The question is yesterday on this webinar series, we had a panel on the current state of the reinsurance market. Could you say something about the impact of COVID-19 on the reinsurance market specifically on re-insurance pricing? 

Astrid Frey Kaufmann: 

Yeah. I mean, in general, we do think that the crisis is likely to accelerate some of the rate hardening that had already been in place. There will be elevated losses in a few lines of business, so that will help the pricing push. Also, we think there will be a trend towards maybe not scarcity of capital, but capital is likely to be less ample than it used to be before. Also, from non-traditional capacity providers where risk aversion is probably on the rise. So we do think that the hardening in rates is likely to continue in the aftermath of the crisis. 

Ben Telfer: 

Thank you, Astrid. Actually, we’ve just got one more question and it is quite related to the last one. If we were to enter a period of stagflation what are the likely repercussions for the insurance and the reinsurance industry? 

Astrid Frey Kaufmann: 

I think that’s a particularly bad scenario for the reinsurance industry because we tend to be particularly exposed to unexpected increases in inflation. If we expect inflation to be high, we can simply price that if the market allows for it, but most of the time inflation comes in unexpected ways. It does affect the long tail lines of business in particular, so liability, casualty business where it claims are influenced if not linked to inflation. It does harm the life business, less inflation, but because many of the benefits are fixed in nominal terms, but if inflation is long for a prolonged period of time that also undermines obviously the value proposition behind the fixed benefit such as term life cover. If inflation just erodes the value of that benefit over the course of say 10 years, then it’s also a tough environment for life insurance, but I would say that the key impact we should have on our radar is on the long tail P&C lines of business. 

Ben Telfer: 

Thank you very much, Astrid. Thank you everybody for your questions. If you’ve got any more, anybody watching this recording and would like to ask a further question, please do send them in and Astrid, I’m sure you’ll be happy to connect directly after this webinar. 

Astrid Frey Kaufmann: 

Yes, very much so. Thanks a lot for your attention. 

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