What disco-era stagflation means for insurers’ bottom lines

Tight supply chains are taking a bite out of GDP numbers, stagnating economies across the globe while simultaneously pushing up prices. For anyone whose memories don’t stretch back to the 1970s, the counterintuitive combination of a stagnating economy and rising prices is uncharted territory.

Still, we might be able to avoid partying like it’s 1979.

A new report from Swiss Re Institute, Stagflation: The risk is back, but not 1970s style, forecasts higher inflation and lower real GDP growth during 2022 and 2023. But, it adds, the stagflation will be cyclical.

That makes it different from the structural stagflation of the ’70s, spurred by price shocks linked to oil embargos and, in the U.S., the bill for the Vietnam war coming due.

A slowdown in overall economic growth will ease inflation in 2023, but it will remain high compared with recent decades. And, the P&C insurance industry should expect claims inflation to affect profitability in 2022, leading to further market hardening in 2023, Swiss Re said.

Plus, property insurance will be exposed to higher construction prices, while auto lines will feel the pinch of higher costs for car-parts and labour. Casualty lines, the report said, are less impacted by general inflation.

“Surging commodity prices and supply disruptions are pushing up economic inflation,” said Thomas Holzheu, Swiss Re institute chief economist for the Americas. “As the economic situation has become more uncertain, it will be more difficult for the U.S. Federal Reserve to manage a soft landing.”

The Fed posted a 0.5% interest-rate hike May 4, its most aggressive inflation-fighting signalling to date and the same pace the Bank of Canada opted for on Apr. 13.

Swiss Re’s report noted supply side shocks to global commodity prices spurred by the Ukraine war are a key stagflation driver. Impacts of those price hikes were amplified by government stimulus policies and reopenings following the easing of COVID-19 restrictions.

“Insurers can mitigate the downside risks through strong capital and risk management, repricing insurance risks to account for higher claims costs, reinsurance transactions, asset reallocation in investment portfolios and hedging against inflation,” the report added.

Overall, Swiss Re puts the likelihood of global recession at 20% to 30%, with a 55% to 70% likelihood of a stagflation-like scenario. The current inflation surge should peak this year, it said, with positive economic growth predicted for major economies.

The bright side, noted Swiss Re Group chief economist Jerome Haegeli, is that rising interest rates meant to fend-off inflation will bolster insurers’ options for low-risk investing.

“We are exiting the ‘low-for-longer’ and negative interest rate environment and this regime shift will benefit insurance companies over the medium and longer term. ‘Risk-free’ rates are finally not return-free anymore,” he said.

Feature image by iStock.com/RyanJLane