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LONDON December 09 (BestWire) — Even as the major industrialized countries of the world struggle through a recession until at least the middle of 2009, insurance companies are better equipped than banks to survive the storm, according to Swiss Re.

“A global recession is under way,” said Kurt Karl, Swiss Re’s chief economist for the United States, at an economic forum hosted by the reinsurer in London. “It hit the U.S. first, then Europe and Japan, with emerging markets now facing a slowdown. We are now facing a mild or moderate to severe recession for the next six months.”

Swiss Re said it believes the insurance industry is well-placed to weather the financial storm, no matter how long or how short the recession eventually turns out to be.

The industry has lost a great deal of capital over 2008. The International Monetary Fund estimated that total credit turmoil-related losses so far come to $1.4 trillion (1.1 trillion euros), of which the banks are expected to record losses of between $720 billion and 820 billion, with insurers adding another $160 billion to $250 billion.

Karl added that so far the response to the ongoing crisis has been a vigorous one, with central banks cutting rates. “There’s a lot of fiscal stimulus in the pipeline,” he said, “Especially with the Obama administration coming in. Europe has seen it too, and China has moved fast as well.”

Still, Swiss Re said the insurance industry can still survive this, in part because insurance activities are different from other dealings in the financial markets because they are pre-funded by premiums. Apart from life insurers that specialize in savings products, there is little risk of funds being withdrawn, except in the event of a pay-out from a disaster.

Swiss Re also said insurers typically invest conservatively and normally focus on highly rated assets as a part of a well-diversified portfolio that is also well-regulated.

As Thomas Hess, chief economist and head of Swiss Re’s economic research and consulting branch, pointed out, the difference between the fall of Lehman Bros. and the bailout of American International Group Inc. showed the difference between the banking and insurance sectors. “The failure of an insurer does not necessarily then lead to a knock-on or cascade effect amongst other insurers,” Hess said.

The collapse of Lehman Bros. contributed to a number of other banks and financial institutions reporting severe financial problems due to a combination of severe losses and a lack of liquidity. In contrast, the problems experienced by AIG did not bleed into other insurers.

But Hess did admit that funding and risk management is now more difficult and expensive for insurers due to the crisis. If credit markets stop working, this makes it difficult for insurers to access liquidity, and if the majority of asset classes are stressed and the real economy of a country becomes unstable, equity capital becomes expensive and asset values are destabilized even further.

According to Swiss Re, the regulation of insurance is likely to be reviewed as a result of the crisis, with a number of regulatory issues needing to be addressed. These include the need to maintain distinct regulations as between banking and insurance, avoiding pro-cyclical regulatory and accounting rules, securitization and liquidity and finally the best way to reinforce international supervision. Swiss Re said most of the above have already been addressed by the European Union’s proposed Solvency II regime, which is currently the source of a great deal of debate (BestWire, Dec. 3, 2008).

Swiss Re also said that for insurance business in the emerging markets, the recession will be a temporary setback. While emerging market economic growth will be “significantly affected,” particularly those countries dependent on external financing or exports to the more developed countries of the world, the slowdown in insurance growth will not be as severe as in other, more mature, markets.

One reason for this is that emerging markets, such as China, are using aggressive monetary and fiscal policies to sustain domestic demand, which will then bleed over to the insurance markets there.

According to Karl, the worldwide recession is due to what he described as the worst financial downturn since the 1930s, when the world was hit by the Great Depression. Karl said it is unlikely there will be a rebound in the world economy before mid-2009 and that market uncertainty will persist into 2010.

Swiss Re said there are three possible scenarios ahead. First, there is a 70% chance that there will be a baseline recession, with 1% growth in 2008 that will slide into -1% growth in 2009, before a recovery starts in the second half of 2009 and then goes on into 2010, with the credit crisis finally stabilizing in 2009.

The second scenario is a worst-case projection, and has a 25% likelihood, according to Swiss Re. In this case the credit crisis will continue and real gross domestic product growth will be negative in 2009 and 2010, creating a deep recession, possibly even a depression.

The third scenario is the most optimistic, but is also least likely, with a 5% chance of happening. In this scenario oil prices retreat more quickly than they have so far been projected to fall, the housing market recovers and growth "muddles along" at around 0.5%.

“On average we get a recession every eight or so years,” said Karl. “The normal possibility of a severe recession happening is around 15%.”

The scale of the recession ahead remains unclear. Swiss Re claims its projections for U.S. gross domestic product show this will fall to 1.2% in 2008 from the 2007 figure of 2%, and fall further to -1.3% in 2009 and then recover to 2.2% in 2010. According to Swiss Re, the United States will also see deflation in 2009, before inflation returns in 2010.

Swiss Re currently has a Best’s Financial Strength Rating of A+ (Superior).
(By Marc Jones, London news editor: marc.jones@ambest.com) BN-NJ-12-09-2008 1214 ET #

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