Brighter prospects, unsettling risks

Our economic forecasts expect normalising, resilient global GDP growth and progressive disinflation. We expect the US to grow at 2.1%, with inflation at 2.5% on average, in 2025. Yet risks that could upset this outlook are always evolving. We refreshed our three alternative economic scenarios to reflect global risks today. These now focus on "renewed supply shocks", "global recession", and an optimistic scenario, "productivity revival". Both downside scenarios envisage the US economy would contract in 2025.

• Despite a more benign baseline macro and industry outlook, risks are to the downside.
• A key risk is of escalating geopolitical tension or a disruptive trade war, which could cause a stagflationary shock to the global economy.
• Our updated alternative scenarios are "renewed supply shocks", "global recession", and "productivity revival".
• Each scenario brings distinct direct and indirect impacts for the re/insurance industry.
• Scenario analysis offers a means to cope with uncertainty and prepare for unknown or unexpected macro developments.

The world economy faces a benign outlook of steady economic growth, strong labour markets, real incomes rising as inflation moderates, and higher interest rates supporting insurance demand and profitability.¹ This is our baseline expectation for 2025 and 2026. Yet the risk landscape is continuously evolving, and we have renewed our three alternative future paths for the global economy to reflect this (see Figure 1).

We see (i) "renewed supply shocks" brought by escalating geo/political tensions, (ii) a "global recession" caused by monetary policy kept too tight for too long, and an upside (iii) "productivity revival" driven by, eg, tech-related investment and uptake. Each scenario has distinct direct and indirect impacts on the re/insurance industry. Awareness of them can help our industry remain agile and prepared.

Figure 1. Swiss Re's baseline and new alternative scenario narratives, key US forecasts, and insurance industry impacts

The key change in the risk landscape we see is that escalating geo/political tensions (eg, around the US presidential election or war in the Middle East) or disruptive trade wars could lead to new, inflationary, supply-side disruptions. This "renewed supply shocks" scenario would represent a stagflationary shock to major economies. Inflation reaccelerating, in the US to 6%, along with weak growth would stress underwriting performance. Real premium growth would be depressed and average claims severity, primarily in non-life, exacerbated via price shocks.

Supply disruptions themselves would also drive up claims for particular lines such as business interruption (BI). Life insurers would see heightened lapse risk as interest rates were raised.² Insurers would face mark-to-market losses in their asset portfolios, only gradually offset by reinvestment benefits from higher interest rates. However, high uncertainty may stimulate some further non-life insurance demand, eg, in marine, credit & surety and BI.

The second key risk we see is of major central banks holding rates too high for too long, tipping the global economy into recession. The risk of stock market correction is also high as significant stock price gains have outpaced earnings expectations and investors are being confronted with the mounting risk landscape. Our "global recession" scenario envisages a widespread fall in insurance demand.

In non-life, the greatest impact would be on economically sensitive commercial lines. In the 2020 recession year, global nominal premium growth slowed to 1%, vs an annual average 3.3% in 2010-2019.³ Higher insolvencies, bankruptcies or defaults would also weaken the profitability of certain exposed lines, such as trade credit insurance. In life, saving products with guarantees would become less attractive and profitable. Widening credit spreads and falling asset prices would weaken investment results. Still, lower inflation may minimise increases in claims overall.

We see some risk to the upside. Integrating artificial intelligence (AI) and other emerging technologies into the real economy could drive transformative productivity gains. Companies are forecast to invest almost USD 200 billion in AI globally by 2025, and optimistic estimates expect early AI adoption may add up to 1ppt to productivity growth annually in advanced economies.⁴ In our "productivity revival" scenario, stronger economic activity and higher interest rates would boost life and non-life premiums and investment returns.

Profitability would benefit from higher revenues and investment returns owing to higher interest rates and strong capital markets. In addition, AI risk solutions are a significant opportunity for the industry. For example, the global IT outage in July underscores the need for customised products.⁵ Still, caution is warranted. New technologies may lead to more severe, albeit infrequent, cyber, product liability or business interruption claims.

Considering shock scenarios, whether adverse or favourable, can be a useful tool to cope with uncertainty and prepare as an industry for unexpected developments.