A new, higher interest rate era is emerging from the economic stresses of the inflation shock and war in Ukraine. Though economic growth has been relatively resilient this year, we expect global GDP to grow by just 1.7% in real terms in 2024 as inflationary recessions approach major economies such as the US and Europe, according to Swiss Re Institute report.
We continue to view inflation as the number one macro risk, and we expect it to stay sticky, even if headline inflation declines rapidly next year. It brings downside risks to growth from higher central bank interest rates.
In advanced markets we forecast real GDP growth of just 0.4% in 2023, the lowest since the 1980s outside of the global financial and COVID-19 crises. In emerging markets, we anticipate substantially lower growth rates than pre-pandemic that will likely feel akin to recession.
The world economy is set to slow
We expect the global economy to slow in 2024 due to cumulative monetary policy tightening and fading growth impulses from 2023. The Middle East conflict increases risks to this outlook.
Major economies diverge: the US continues to grow, Europe stagnates, and China faces structural growth challenges.
We forecast 2.2% global real GDP growth in 2024, rebounding to 2.7% in 2025, driven by lower inflation and interest rates. However, inflation and interest rates in developed markets will likely remain higher than previously anticipated, with risks skewed to the upside.
We expect global CPI inflation to moderate to 5.1% in 2024 and 3.4% in 2025, though price pressures will remain volatile.
Slower disinflation increases the cost to economic output and the risk of prolonged stagnation. A sharp rise in long-term US bond yields this autumn signals a regime shift, leading to higher yield forecasts. Higher real interest rates may expose fragilities in public and private debt.
Real GDP growth, inflation and interest rates in select regions
Dominant role for (geo)politics in driving the macroeconomic outlook
Geopolitics will impact the outlook. The war in Israel introduces new, potentially unpredictable risks, with energy price shocks being a key risk to the global economy.
An expanded conflict involving major regional oil producers could add 2.4 percentage points to global inflation.
Assertive industrial policies are emerging, with long-term implications. Major government initiatives to boost sectors like semiconductors and clean energy may increase inflation, fiscal deficits, and interest rates.
The insurance industry can benefit from growth in commercial lines like liability, property, engineering, trade credit, and surety as these initiatives develop.
Growth slowdown and geopolitical risk dampen the outlook for the primary insurance market
Geopolitical dampen the insurance outlook
The economic slowdown and geopolitical uncertainty are affecting the primary insurance industry’s outlook, according to World Insurance Industry report.
We predict global real premium growth to average 2.2% annually over the next two years. This is lower than the pre-pandemic trend of 2.8% but higher than the past five years’ average of 1.6%.
Profitability is improving, and underwriting gaps are closing as investment returns rise with high interest rates. However, the industry might not meet its cost of capital in major markets in 2024 or 2025. Events like the Middle East war could impact insurers’ capital due to inflation and market volatility.
Claims dynamics are a key concern in non-life insurance
For the insurance industry, we expect the macro environment of higher interest rates, insurance market rate hardening and scarce capital to be a very positive catalyst over 2023-2024; these drivers should strengthen medium-term investment results and profitability.
In our view, the global economy will cool down noticeably under the weight of inflation and interest rate shocks. The repricing of risk in the real economy and financial markets is actually healthy and a long-term positive.
Jerome Jean Haegeli, Group Chief Economist, Swiss Re
In today’s challenging times – and for the economic recovery ahead – the insurance industry can show its value as it provides financial resilience.
We anticipate significant rate hardening in 2024 and potentially some years after in response to high inflation and global natural catastrophe and financial market losses this year. Global premium growth is forecast at 2.1% in real terms annually on average over 2023 and 2024.
We continue to expect total (nominal) premium volumes to exceed USD 7 trillion for the first time this year.
Financial stability and debt sustainability risks
This year we add debt and its related risks, as a fourth dimension to the “3D” set of long-term economic drivers we identified last year. As central banks unwind unconventional monetary policies, it is exposing financial vulnerabilities that have built up over the past decade.
Debt, and specifically whether governments can sustain public spending commitments in the face of higher interest rates, is a key concern. We see a risk that market shocks accumulate and fuse into financial instability.
Central banks face competing priorities of price stability, financial stability and enabling governments to pursue looser fiscal policy. This creates a risk of real interest rates being repressed in the longer term, either through higher inflation or eventually lower nominal interest rates, to manage debt sustainability or financial stability concerns.
If so, we see inflation likely being higher and more volatile. Addressing demand-side drivers of inflation with supply-side or productivity-enhancing policies and investments would help ease this tension.
Inflation still a concern, but higher interest rates a tailwind for insurers
Inflation remains the number one industry concern. We forecast high inflation in cost components relevant for insurers, such as construction and healthcare that suggests insurers’ claims and costs could rise markedly in 2022 and 2023, even without considering changes in claims frequency and natural catastrophe activity.
However, higher interest rates should be a silver lining as inflation pressure abates in 2023 and 2024.
Insurance premium forecasts, global regions
In non-life insurance, slowing global growth and inflation will likely cut real premium growth to below 1% this year, with a recovery as inflation eases and the hard market goes on.
Global non-life insurance return on equity (ROE) is expected to be lower in 2024 as underwriting performance and investment results are weaker, but rebound to a 10-year high in 2024 as the interest rate tailwind and potential rate hardening take effect.
In life insurance, we forecast a 1.9% contraction in global premiums in real terms in 2023 as consumers face cost-of-living pressure, but a return to trend growth in 2023 and 2024, carried by emerging markets. Life profitability is improving due to rising interest rates and normalising COVID-19 mortality claims.
Non-life claims are in focus, life insurance premiums are recovering
Global non-life insurance is facing challenging claims dynamics, with rising claim frequency and severity despite declines in economic inflation. The rapid growth in claims in the liability line is making these risks harder to insure.
We estimate that natural catastrophe insured losses will reach $100 billion in 2023 for the fourth consecutive year and the sixth year since 2017 (adjusted for inflation). We expect hard market conditions to persist at least through 2024.
In the Property and Casualty (P&C) segment, we estimate global real premium growth of 3.4% in 2023, which is stronger than our forecast for 2024-25 (2.6%). This reflects significant risk repricing, especially in lines impacted by claims.
We expect health premiums to return to growth at 1.5% in 2024-25 (2023 estimate: -0.6%). In life insurance, higher interest rates are increasing demand for savings products, supporting bulk annuity transfers, and boosting profitability in 2024 and 2025.
We forecast an average life premium growth of 2.3% for 2024-25 (2023 estimate: 1.5%). Our forecast for life savings market growth over the next decade is significantly higher than in the past 20 years.
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AUTHORS: Fernando Casanova Aizpun – Senior Economist Swiss Re Institute, Li Xing – Head Insurance Market Analysis Swiss Re Institute, Roman Lechner – P&C Economic Research Lead Swiss Re Institute, Rajeev Sharan – Senior Economist Swiss Re Institute, James Finucane – Senior Economist of the Swiss Re Institute for the Americas
