Swiss Re's economists at a London press conference today predicted that insurers will be among the sectors impacted by severe recession, which will last until mid-2009 in industrialized economies.
The Zurich-based reinsurer, in giving that sobering forecast for the United States and Europe, said for emerging markets, slower growth is expected but not a full-blown recession.
Economists with the firm said that in 2008, the insurance sector successfully weathered the financial turmoil, but as market uncertainty could continue well into 2010, the industry needs to preserve capital to remain resilient.
Kurt Karl, Swiss Re's chief U.S. economist, said in a statement: "Due to the worst financial crisis since the 1930s, the world will see a severe recession. A rebound of the economy cannot be expected before mid-2009 and market uncertainty will continue well into 2010. Insurers are not immune to the crisis."
According to Swiss Re calculations worldwide, at the end of 2007, insurance companies held about $18 trillion of assets which they invest to match their liabilities.
In terms of portfolio size, the reinsurer said, this places insurers only slightly behind pension funds ($22 trillion) and mutual funds ($19 trillion).
The global insurance sector holds around $2.2 trillion (of the $18 trillion) of shareholder capital to cushion fluctuations in both claims and asset prices.
Thomas Hess, Swiss Re's chief economist, said insurers have weathered global asset meltdown and "there can be no 'run' on an insurance company because pay-outs are triggered by hazardous events, not by policyholders' will. The only exception is in life insurance where strict withdrawal penalties render policy cancellations unlikely."
Further, he said that insurers can hold assets until maturity, and are therefore not forced to sell assets "just because the stock market falls."
Swiss Re said it expects a sharp drop in demand for unit-linked business in 2009 and increasing focus on underwriting results in non-life insurance.
By the company's analysis the financial crisis has hit life insurers relatively hard due to declining invested assets along with a sales slowdown, and unit-linked saving products are on the decline due to poor returns and continuing stock market volatility.
Non-life insurance has been less affected by the recession because of its lower asset leverage and coverage demand has remained stable, said Swiss Re.
In the reinsurance sector, it said, prices are expected to increase for both non-life and life, partly because alternative capacity is no longer available.
Emerging markets will be significantly affected by recession, particularly in those countries that are dependent on external financing or exports, but the sector's "longer term prospects remain positive," said Clarence Wong, Swiss Re's chief economist in Asia.
Going forward, Swiss Re said insurers are expected to focus initially on preserving their capital, by postponing or reconsidering share buy-back programs, hedging asset risks and cutting.
It predicted some insurers are likely to exit non-core business lines and merger and acquisition activity will increase.
Further, M&A activity in the financial sector is expected to increase.
Mr. Hess disavowed pessimism, saying the current financial problems insurers face are temporary.
"Current market valuations have already priced in a severe recession. If the economy recovers in the course of 2009, we expect to see a rare combination of good underwriting and excellent investment results in non-life in 2010. Equally, life insurance could see a strong recovery, too," he advised.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.