Economic Uncertainty in 2016: The Potential Impact for Insurance Companies

Economic Uncertainty in 2016: The Potential Impact for Insurance Companies
Could continuing economic and political unrest spell trouble for insurance companies? We look at the key issues insurers need to consider as uncertainty continues through 2016.

While the opinion of the general public on Brexit may be split, most commentators in the financial services arena see Brexit as a negative option, and those working in the sector seem to agree. At our 5th Annual Insurance Underwriters event in London, 90% of polled attendees thought Brexit would be bad for their business.

This is perhaps unsurprising when the predicted consequences of Brexit are considered. The EU represents 45% of the UK’s export market, while EU-negotiated trade deals with 56 other economies, account for another 40%. The immediate effect of Brexit would probably be the imposition of tariffs on exports to these markets, and although trade deals might be negotiated in time, the US for example has made clear that such a one-to-one deal would be far from a priority.

The short term financial market impact is likely to include:

  • A further drop in pound sterling against the U.S. dollar and most other currencies
  • Negative consequences for the equity and credit markets, which are already showing an anticipatory effect

With the restriction of immigration likely to be a further brake on economic growth and a drop in foreign direct investment a likely consequence, financially a post-Brexit UK is likely to suffer over the long term.   Speaking at this event, David Page, Senior Economist at AXA Investment Managers, quoted AXAs own research alongside Treasury and OECD figures, all of which put the impact of Brexit in the region of 2-8% of GDP by the year 2030[1].

A Little Trouble in Big China
The international outlook is of course dominated by China, which faces many challenges which are structural rather than cyclical, as it tries to transition from an investment and manufacturing-based model to one focusing on consumption and services.

According to Jean-Michel Six, Chief Economist at S&P Global Ratings[2] concerns centre less on China’s painful but necessary slowdown and more on the leadership’s uncoordinated and clumsy attempts to manage the process. As the country’s balance sheet has been sacrificed to boost GDP, its total debt/GDP ratio has nearly doubled to reach ‘First World’ levels. At the same time the country is losing competitiveness as unit labour costs rise steeply, creating the need to add value in other ways to maintain a competitive edge.

A Raw Deal for Commodities Producers
The high sensitivity of key commodities to Chinese demand means that China’s rebalancing has serious implications for its suppliers, who are principally other emerging market economies.

Saudi Arabia has taken the unprecedented step of rebalancing away from its heavy focus on oil to a more diversified economy with its Vision 2030 plan. However, other commodity-focused economies have been less agile.

While commodity prices have probably reached bottom, they are unlikely to enjoy a strong recovery in the short term. This combined with the likely tightening of US monetary policy implies a painful deleveraging is in store for many commodity-focused economies.

A Growing Issue for Central Banks
Underlying the effects of Brexit on the markets are signs that the economic cycle in the UK is maturing. Although some investment decisions have probably been delayed pending the outcome of the Referendum, the recent slowdown in the UK is unlikely to completely reverse even if the vote outcome is to remain in the European Union. In fact slow economic growth pipped Brexit as the biggest risk to the UK insurance sector in the opinion of industry professionals surveyed at our event.

Globally, although some developed markets such as the US and Scandinavia are showing reasonable growth and the Eurozone and Japan are presenting mild recoveries, emerging markets are struggling.

Central banks in many countries are finding themselves caught between the need to raise interest rates to protect their currency and prepare for the next recession, and the pressure to keep them low to in an attempt to bolster faltering consumer demand. For many countries both ultra-low interest rates and quantitative easing will continue to be a feature for the foreseeable future.

Overall, the contributing factors are complex and their potential consequences on individual scenarios need to be analysed carefully to assess the potential impact on your business.

[2] “International Economic Outlook, May 2016”, S&P Global Ratings. 5th Annual Insurance Underwriters Event: Could Economic & Political Unrest Spell Trouble for Insurance Companies, May 17th 2016.

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