sigma 7/2020 - rebuilding better

The world economy is experiencing the deepest recession of our lifetimes, but positive news about a potential COVID-19 vaccine means the risks to the outlook are now balanced. Still, reflecting the world's weaker economic resilience, we forecast a 4.1% contraction this year, with a recovery to 4.7% global growth in 2021 (below market consensus of 5.2%).

These economic realities call for a focus on rebuilding better. Sustainable recovery will require a new direction that includes, among others, more investment in sustainable infrastructure, in the digital economy and in human capital, to make societies future fit and growth more inclusive.

COVID-19 has accelerated several paradigm shifts already in the making, including digital transformation, de-globalisation and a larger role for governments in the economy. We also expect structural shifts such as lower potential growth, lower real yields, and a widening rift between financial markets and the real economy.

Insurance markets have withstood this year's recession better than we initially expected. After a stronger-than-anticipated first half, notably in advanced markets, we have revised our growth forecasts upwards.

We now project global non-life premium growth will remain positive at 1.1% in 2020. We see a rebound to 3.6% growth in 2021 and 2022, with continued rate hardening momentum, particularly in commercial lines, underpinning the recovery. We forecast that global life premium volumes will still contract by 4.5% this year, but also recover strongly to annual 3% trend growth over the next two years.

China will take the lead, and emerging markets overall will continue to outperform advanced markets. Based on global economic recovery and rate hardening, we forecast a swift return to trend growth in the next two years.
 

The economic and insurance outlook contains significant uncertainty, making scenario thinking essential. We consider three alternative scenarios from our core forecast: two more pessimistic and one more positive.

Our analysis indicates that the European insurance market may be particularly at risk from interest rate sensitivity in a severe recession scenario. In a stagflation scenario, inflation surprises could disrupt insurers with long-tail business, for instance in the US casualty market. In China, insurance market growth will be more exposed to GDP elasticity than in the US and Europe under all scenarios.