The Swiss Re Institute has forecast a slowing of the world economy in the year ahead, but also proposed that the insurance industry will not earn its cost of capital over the next two years.

A sigma article states the headwinds from the cumulative monetary policy will have an effect as the growth impulses of 2023 fade.

A source for market information, sigma has published a global economic and insurance market outlook for 2024-25, commenting: “The outbreak of war in the Middle East heightens the risks to the outlook.

“Major economies are diverging: the US continues to grow, while Europe is stagnating, if not already in recession in some countries, and China is grappling with structural domestic growth challenges.”

In their macroeconomic environment and outlook, they see a mixed future: “We forecast 2.2 per cent global real GDP growth in 2024 before a rebound to 2.7 per cent in 2025, supported by lower inflation and central bank interest rates.

“Still, in developed markets both inflation and interest rates will likely stay higher than previously anticipated in this decade, and risks are skewed to the upside.

“We expect global [Consumer Price Index] inflation to moderate to 5.1 per cent in 2024 and 3.4 per cent in 2025, but price pressures will likely be volatile.

“A slower disinflation process increases the cost to economic output and the risk of a protracted stagnation.

“A sharp rise in long-term US sovereign bond yields this autumn signals a durable regime shift, and we have raised our yield forecasts.

“Structurally higher real interest rates may expose fragilities in public and private debt balances.”

The report sees geopolitics, principally the Russia/Ukraine war, playing a dominant role in driving the outlook. But the Gaza conflict brings another dimension, especially if it affects the flow and/or price of oil from the Middle East.

“The war in Israel [Gaza] adds new, potentially non-linear, downside risks, with potential energy price shocks the key risk channel to the global economy.

“An adverse scenario in which the conflict expands to include major regional oil producers could add 2.4 percentage points to our global inflation forecast.

“More assertive industrial policy has emerged, with long-term implications. Major government initiatives to galvanise sectors from semiconductors to clean energy may add structurally to inflation, fiscal deficits and interest rates if implemented.

“The insurance industry is a key partner to such projects and we see the potential for growth in commercial lines of business from liability to property, engineering, trade credit and surety as these initiatives take shape.”

The slowdown in economic growth, together with the wars, will dampen prospects for the primary writers of insurance.

“We forecast total global real premium growth at only 2.2 per cent annually on average for the next two years, below the pre-pandemic trend (2018 to 2019: 2.8 per cent) but higher than the average of the past five years (2018 to 2022: 1.6 per cent).

“Profitability is recovering and underwriting gaps closing as investment returns increase with high interest rates, but we estimate the industry will not earn its cost of capital in 2024 or 2025 in major markets.

“Events such as the Middle East war may hurt insurers’ capital positions through channels such as inflation and market volatility.”