12 Dec 2006
Market outlook highlighted at annual economic forum
12 Dec 2006, 17:07 - New York
The value a reinsurer offers is the advantage of having a “macro” view of events. Continuing its tradition of sharing knowledge and expertise, Swiss Re held its Year-end Economic and Insurance Industry Forum.
The day was divided into two events: one for media and one for Swiss Re clients. Four speakers shared their insights on the economy, insurance markets and an economic view of terrorism risk.
Kurt Karl, Chief Economist, said the US economy is heading toward a soft landing and described the characteristics of a "soft landing" as slower growth and lower inflation.
As for consumer spending, Karl noted: "You get the same answer every year: it’s going to be a good holiday season. Consumption has moved down only a bit and income is finally coming back. With oil prices stabilizing we’re seeing a big jump in consumers’ after-inflation income."
Karl added that for those looking forward to 2008, it will be the good year for oil prices. He explained that supply will increase dramatically by then and demand will not grow as much, so prices will fall.
Pierre Ozendo, member of the Executive Board, Chariman & CEO, Swiss Re America Corporation, Head of Americas Division, said the US Property & Casualty industry is having a healthy year, has met its obligations through what he described as “debilitating” losses in 2004 and 2005, and is now realizing the benefits of a year of very modest natural catastrophes and continued underwriting discipline.
Ozendo added that there is a growing convergence between insurance markets and capital markets as innovators look for alternative ways to take risk to the capital markets. He noted that insurance-linked securities continue to grow in popularity, with USD 23 billion in transactions outstanding.
He said rate adequacy was holding in all major lines and terms and conditions are holding firm because the industry is generally exhibiting discipline. All of this, he said, portends good opportunities for growth and profitability.
Donna Kinnaird, Head of Swiss Re North America's Life & Health business, gave her perspective on trends in Life & Health insurance, noting a general shift in demand from mortality protection to asset accumulation. She added that as a result of this shift in demand prices on mortality protection products are becoming more competitive.
Kinnaird also recognized an uptick in innovation in the Life & Health industry, noting that as 401k funds are moved from institutional to retail accounts, the industry is responding by releasing more innovative retirement protection products.
As for the future, Kinnaird says Swiss Re predicts a continued decrease in cession rates and continued product development.
“We will continue to assist clients with securitization and look for acquisition opportunities with in-force books,” she said.
Roger Ferguson, Head of Swiss Re Financial Services, offered an economist’s view of terrorism risk. A former Fed Vice Chairman, Ferguson noted that the insurance industry has historically overcome imperfections, but terrorism is an exception. He noted information on terrorism is inconsistent and “asymmetrical”. Without proper information, he said, insurers cannot adequately accommodate terrorism risk in a vacuum.
Ferguson advocated for a permanent federal backstop, which he said would reduce the risk of market disruption and the gains of terrorism.
"An explicit government terrorism risk backstop offers numerous advantages," he said. "It reduces ambiguity both pre- and post-event and enhances transparency by making it clear who will pay how much for what, should an event occur. This clarity makes it easier for insurers to price risks and strengthens the incentives to purchase terrorism insurance and mitigate risks."