Prolonged economic weakness resulting from the energy crisis will impact overall demand for insurance and drive claims costs higher, according to the Swiss Re Institute.
Europe is heavily exposed to the imminent energy crisis, which, according to analysts, will have a prolonged impact in the German economy, particularly because of its dependency on gas.
Currently the natural gas floor from Russia to Germany via Nord Stream 1 has resumed after a recent maintenance shutdown, but at just 20% capacity. Additionally, Russia could turn the gas taps off altogether, as its leverage as a supplier peaks over the winter months, according to the analysis.
Responding to the crisis, the government has laid out a multi-stage emergency plan including measures to protect the solvency of businesses, a legal basis to allow utilities to pass higher prices on to consumers, and the flexibility for government control of gas distribution/ rationing.
The Institute warns that fiscal stimulus will soften but not avoid a recession in Germany, adding to an already high national debt burden and setting the tone for more fiscal leniency Europe-wide.
Stimulus will also shift inflationary pressures into the mid-term, the key time horizon for the European Central Bank’s (ECB) inflation targeting – reinforcing ECB interest rate hikes for now, though its hiking cycle could end earlier if the broader euro area falls into a more severe recession.
Coming winter, the Institute expects Germany to enter an inflationary recession, involving at least two quarters of negative quarter-on-quarter growth.
Similar issues to Germany’s reliance on Russian gas have also spilled over into Europe impacting the insurance market as well as driving higher insurance pricing there too.
According to analysts, on the consumer side, reductions in real income, also on account of high inflation, could see deferment of non-essential insurance purchases.
Additionally high inflation will likely feed through to higher claims costs, with short-tail lines of business most immediately impacted. Disruptions to manufacturing processes could give rise to rising claims in, for example, non-damage business interruption (NDBI) insurance.
At the same time, a hard rate environment will likely continue as insurers look to offset the impact of claims inflation. This, analysts said, should support insurance market premium growth in nominal terms.
Finally, the Institute also predicts that there will be a greater push on green transition, providing long-term opportunities for insurers.
According to the Institute, accelerated investments in renewable energy could further boost premium growth and insurance product innovation in this area.
In terms of energy security and the green transition, falling back on other fossil fuels will stall progress on net-zero goals in the short-term. However, we believe the crisis will generate fresh impetus for accelerated investment in the green transition over the longer term.
The Global Weakness Index (GWI) is a real-time measure of how weak the global economy is. We use this index to assess on the spot how the repercussions of the coronavirus (COVID-19) crisis are playing out.
After the release of certain soft indicators on 2 March 2020 the GWI increased sharply – much faster than in the 2008 crisis. And at the time of writing it remains at a record high.
The COVID-19 crisis has once again shown how important it is to be able to assess economic conditions in real time. Although it has been clear since early March that some economies are sliding into recession, until very recently the standard measures – based on low-frequency indicators with publication delays – were silent about the increasing probability of recession in most advanced and emerging economies.
In order to solve this problem, various researchers have developed non-linear models based on several timely indicators.
Unlike many other models, the Markov-switching dynamic factor (MSDF) models introduced by Chauvet (1998) have been successfully used to account for co-movements and non-linearities across several economic indicators. These models have widely shown their ability to identify turning points fast.
In MSDF models, the economy is assumed to switch between expansions and recessions with constant probabilities. Expansions and recessions are respectively characterised by high and low growth rates of the various activity indicators. Conditional on being in each state, the indicators, including GDP, move around these high/low growth rates. Following Hamilton (1989), previous MSDF models have assumed that these two growth rates are the same for all the expansions and recessions in the sample.
by Peter Sonner