For me, stagflation is both personal and business

With the pandemic and Ukraine war, the spectre of stagflation has forced its way back onto our radar screens. While Swiss Re sees a swifter exit from this current cycle of rising prices and slow growth than the one that gripped the world 50 years ago, the economic turbulence it is causing is still significant. We see a big role for re/insurers in helping global clients navigate this uncertainty.

In 1971, the year I was born into an immigrant family in Switzerland, the country's inflation rate nearly doubled. In fact, economic crisis and stagflation were prevailing themes in the years of my childhood. Switzerland and Italy, which my parents had left seeking new opportunities, were hardly unique, as rising prices and sluggish growth gripped many nations well into the 1980s.

A half century later, the world is yet again grappling with the spectre of stagflation. In a recent Swiss Re sigma publication, our economists analyse how the Ukraine war, coming in the midst of the COVID-19 pandemic and its supply chain disruptions, is spurring high inflation and acting as a brake on economic growth.

Given stagflation's repeat appearances in my life – initially as a child and now as Head Globals Reinsurance at Swiss Re – you can imagine its impacts have both personal and business relevance for me. Fifty years ago, as people in Switzerland struggled to find work, the parents of friends lost their jobs and their residency status; many families were forced to return to their countries of origin.

Today, our society faces fresh global challenges from this latest round of rising prices and sluggish growth. Fortunately, our industry has a proven toolbox, one that includes a significant role for reinsurers, to help our clients chart a confident course through unpredictable times.

First, let me say this: History doesn't often repeat itself, and we at Swiss Re aren't forecasting a return to the persistent 1970s-style stagflation. The stagflation-like conditions we're now observing, as disruptive as they may be, should be cyclical and temporary. We think they will be tamed next year, as rising prices and central bank tightening help bring inflation under control.

Nonetheless – and this is precisely why I'm writing this call to action – our industry can take some proactive steps to mitigate risks that have arisen in this the current environment, where we have exited the low-inflation landscape that prevailed in recent decades.

As product costs across supply chains soar, we should prepare for rising claims, from motor vehicles and property to construction or liability coverages. This could erode insurers' profitability – and comes atop social inflation driven by the booming third-party litigation funding. Skyrocketing inflation can result in the need to increase reserves.

Premium hikes to reflect rising prices can help. But while re-pricing of risks may be critical to reflect inflation-driven claims costs, we at Swiss Re are also actively working with clients to share our insights and forecasts, and help them strengthen their risk-management practices to avoid claims in the first place.

We can also support with capital management solutions, should deteriorating market conditions require measures to increase solvency ratios. We're ready to act, via quota shares to assume a percentage of our clients' risk or through retroactive reinsurance to better manage technical reserve risk.

As central bank tightening tamps down market liquidity, this, too, may present opportunities for insurers to deepen ties to reinsurers, to shore up their balance sheets, seek rating and solvency capital relief, or to tap fresh capital.

We also expect positive developments. For instance, rising interest rates should result in increased solvency for all insurers. On Life & Health solvency, higher interest rates are seen outweighing falling equities prices, meaning a likely positive impact for L&H insurers. This, accompanied by waning COVID-19 mortality since the first quarter of 2022, should give life insurers a boost.

While we do see headwinds to P&C profitability this year, there are also prospects for a lift from further rate hardening in 2023 on the insurance and reinsurance side. In general, we still see heightened risk awareness driving insurance premium growth in 2022 and 2023.

When I sit with Global insurance clients, it becomes quickly clear to me they have a  differentiated view of what is happening on the ground, everywhere they operate. Their business mix matters. The type of inflation we are witnessing today impacts both short- and long-tail classes.

Some tell me they believe risks of inflation and recession are highest for Europe, while suggesting the US economy may keep charging ahead, even as prices rise. Moreover, brokers with whom my team and I speak practically daily are rather optimistic, convinced recent price increases, in particular on the Property & Casualty side, are sufficient to cover inflationary impacts.

But when I talk to CFOs and Chief Risk Officers, I sense caution. Some see inflation as a risk of unknown dimensions. They want to ensure they've done everything they can to be prepared. That's a sound approach, considering our economists also don't rule out a downside scenario where stagflation turns structural.

As we navigate this volatility, I'd like to leave you with a key takeaway: Staying close to clients, supporting our trusted partnerships, and ensuring the open exchange of information during technical discussions around underwriting performance have never been more important as we seek to transform the uncertainty of the moment into future opportunities.