Inflation pressures biting as risk awareness rises

The post-pandemic environment has seen risk awareness rising at the same time as increasing inflation is escalating costs for underwriters and increasing pressure on insurance buyers having to absorb higher prices, Swiss Re Asia Chief Economist John Zhu says.

Mr Zhu says inflation is a top issue for insurers, particularly in the property and casualty area, and is a challenge for their customers. Central banks around the world have raised interest rates to curb inflation, putting the brakes on the economic growth outlook, which is also adding to uncertainty.

“We’re at an interesting turning point, where one of the stories that we’ve been talking about post pandemic is rising risk awareness, and I think that story still holds,” Mr Zhu told insuranceNEWS.co.au during a visit to Sydney.

“But if we are right and we are now coming, at the end of 2022 and into 2023, into a slowing global economic environment, then there are also headwinds to demand to come from slowing economic growth and potentially rising unemployment rates.”

Surging prices for essential items such as petrol, energy and food are currently posing a cost-of-living shock and, with insurance not placed in the same category but also not a luxury, insurers will be thinking about affordability and pain points from the consumers point of view, Mr Zhu says.

Australia’s economy has benefitted from low unemployment and strong commodity exports, while supply-chain pressures have fuelled inflation. Swiss Re expects wages growth to pick up and to feed into the higher cost environment even as some pressures may ease.

The Reserve Bank of Australia (RBA) on Tuesday raised the cash rate by half a percent to 2.35%, marking the fifth-straight monthly rise in a row as it aims to wrangle inflation back into a 2-3% range. The RBA’s forecast is for inflation to be around 7.75% over this year and a little above 4% over next year.

“Our view is that the peak may not be far away, but that’s not the same as saying it’s going to come back to the 2-3% target range, anytime soon,” Mr Zhu said.

Surveys suggest supply-chain bottlenecks in the Asia-Pacific region may already have peaked, assuming there are no fresh shocks, and taking into account that supply chains are more fragile than once assumed. Recent covid-related lockdowns in China have not had the same impact as earlier disruptions.

Mr Zhu says global supply chain shocks are becoming more impactful, more frequent, and also more persistent, and some companies are looking to build-up parallel arrangements as they trade-off cost efficiency for resilience.

In the longer term, Australia may see benefits from the Regional Comprehensive Economic Partnership (RCEP), signed by 15 nations in November 2020. The RCEP, which came into effect for Australia in January, encompasses a region with about 30% of global gross domestic product and about a third of the the world’s population.

Mr Zhu says investment will be required by countries and industries in production and transport infrastructure to realise potential benefits, but the removal of trade barriers would change trade flows substantially.

“Lowering trade barriers is always good in our view in encouraging trade flows, allowing economies to grow through having more opportunities and bigger markets, but it’s not easy as it needs investment, and these investments are multi-year,” Mr Zhu said. “For the P&C side it provides a lot of opportunities to think about how are these supply chains going to evolve within this huge region.”

Looking ahead, insurers will also benefit from a more positive investment environment, with central banks not expected to return to approaches taken during the global financial crisis and through the pandemic. The RBA held the cash rate at 0.10% from November 2020 to April this year.

“Central banks are moving away from the era of extremely low interest rates or even negative interest rates, negative yields on some bonds, and the sort of the great monetary experiment of quantitative easing, or other unconventional monetary policies,” Mr Zhu said. “That is not necessarily bad news. I think for insurance, actually, that’s medium-to-long term a good development.”