Economic and insurance trends in a

post-pandemic world
Group Economic Research and Strategy
Swiss Re Institute
Swiss Re

1
Outline

1. Macroeconomic and Insurance outlook

2. Supply chain changes are under way
3. COVID-19 and inequality
4. The aging of emerging markets

Group Economic Research & Strategy | May 2022 | Swiss Re Institute 2

Key macroeconomic changes

More inflation

Faster monetary tightening

Lower growth

Election surprises, political risk

Dr. Jérôme Haegeli | September 2020 3

Inflation has not peaked yet …
• LatAm’s inflation is expected to be the highest across the major global regions.
• The regional aggregate is biased towards Brazil and Mexico – together they account for 57% of the regional economy

Source: Datastream, Swiss Re Institute

Group Economic Research & Strategy | May 2022 | Swiss Re Institute 4
… and neither has the monetary tightening process.

• LatAm is now approaching a full year of policy tightening, as it responds to both internal and external factors.
• As we now expect a more aggressive response from the Federal Reserve, policy rates in LatAm are likely to continue climbing higher
• For reference: the Mexican central bank expects inflation to convergence with its target in the first quarter of 2024 – indicating a
long adjustment process

Monetary policy rates

Source: Datastream, Oxford Economics and Swiss Re Institute Group Economic Research & Strategy | May 2022 | Swiss Re Institute 5
 Higher interest rates and commodity prices easy FX pressures
• The favorable effect of rising commodity prices on terms of trade has had a positive effect on LatAm currencies; except MX, which
relies heavily on manufacturing exports
• Higher than average EM interest rates are also attracting foreign investors to the region
• Commodity prices and bond yields in Latin America have had a negative correlation in the past. This time however, bond yields
have increased given the different nature of the upturn in commodity prices compared to previous episodes

Foreign exchange rate, January 1st , 2022 = 100 MSCI EM Latin America

PER CHI MEX BRA COL CRI

105

100

95

90

85

80
03/01/2022 03/02/2022 03/03/2022 03/04/2022 03/05/2022

Source: Datastream and Swiss Re Institute

Group Economic Research & Strategy | May 2022 | Swiss Re Institute 6
Transmission channels of Ukraine conflict into the global economy

• Energy shock will weigh on both growth and inflation, especially in Europe
Energy markets and • Shock to commodities with Russia/Ukraine being major exporters of
broader commodities wheat/grain, fertilizers and key metals used in the semiconductor industry

• Trade will be disrupted not just due to direct sanctions and export controls, but
Trade flows also due to knock-on supply chain issues

• SWIFT sanctions will weigh on banking and lending channels and the exclusion
Banking and of Russia from major capital market indices
financial markets • Financial stability and contagion risks have risen

• The conflict is taking a temporary hit on broader investor sentiment via financial
Broader sentiment markets as well as on consumer and business sentiment in the real economy will
weigh on growth

Tighter financial • Global financial conditions tightened significantly, which in turn will reinforce the
conditions growth drag

Group Economic Research & Strategy | May 2022 | Swiss Re Institute 7

Insurance Market Outlook

“We expect premium growth to moderate

in 2022 but still be higher than GDP;
bringing the regional insurance market size
to almost USD 160 billion by the end of
2022.”

Group Economic Research & Strategy | May 2022 | Swiss Re Institute 8

Premium growth to moderate but the outlook is still positive
• We still expect higher premium growth than GDP in 2022-23, but less than historical levels for L&H
• L&H premium growth will be eroded by higher inflation, but performance is expected to be better due to a downward trend in loss ratios, mainly Covid-related
claims, and higher interest rates
• As of end of 2021, COVID-related life claims in BR amounted to USD 1.1 bn, while for Mexico it was for USD 1.6 bn (costliest event in history in MX)
• P&C profitability will be exposed to inflation-driven uptick in claims severity that offsets improvements in rates
o Property and motor to be particularly affected by higher claims costs in 2022 due to inflation in construction materials and spare parts
o The pandemic-related improvement in auto theft is beginning to wane in some of the larger markets

LatAm - insurance premium real

growth
Real GDP P&C Real GDP L&H
12% 8%
10% 6%
8%
4%
6%
4% 2%
2% 0%
0% -2%
-2%
-4%
-4%
-6% -6%
-8% -8%
2018 2019 2020 2021 2022 2023 2018 2019 2020 2021 2022 2023

Source: Swiss Re Institute

Group Economic Research & Strategy | May 2022 | Swiss Re Institute 9
 Fernando
Latin America rate increases pick up pace
Commercial insurance prices in Latin America rose by 6% in 1Q 22; accelerating since 3Q21 as opposed to
a global trend of deceleration

Composite insurance pricing change

• We expect further rate hardening momentum in 2022 as the
invasion of Ukraine and subsequent sanctions have
exacerbated already-high inflation expectations.
Latin America 1Q 22:
• Property pricing increased by 8%; increases happened across
the region, more so where facultative reinsurance capacity
was required; BR up by 10%
• Casualty prices (incl. motor) was flat, after seven consecutives
quarters of declines; local capacity and competition continued
to mitigate pricing
• Financial and professional liability rose 11%; increased
appetite in both D&O and crime markets; cyber prices
increased 30% to 40%

Source: Global Insurance Market Index 2022 (marsh.com)

Group Economic Research & Strategy | May 2022 | Swiss Re Institute 10
 Not all inflation is created equal

• Property-related inflation (based on construction materials), has outpaced headline inflation in all major markets
• Health-related costs have remained stable in recent years, growing at a lower pace than headline inflation
• Motor-related prices have been particularly steep in Brazil and Peru. In Colombia and in Mexico they’ve grown close to par with CPI
• The FX passthrough to CPI has country-specific effects across the different sub-components, that vary depending on
importer/exporter status.

Annual inflation rates Headline inflation Health inflation Construction inflation Motor-related inflation

Source: Central banks, national statistics agencies, Swiss Re Institute

Group Economic Research & Strategy | May 2022 | Swiss Re Institute 11
Not all inflation is created equal

• Property-related inflation (based on construction materials), has outpaced headline inflation in all major markets
• Health-related costs have remained stable in recent years, growing at a lower pace than headline inflation
• Motor-related prices have been particularly steep in Brazil and Peru. In Colombia and in Mexico they’ve grown close to par with CPI
• The FX passthrough to CPI has country-specific effects across the different sub-components, that vary depending on
importer/exporter status.

Source: Central banks, national statistics agencies, Swiss Re Institute

Group Economic Research & Strategy | May 2022 | Swiss Re Institute 12
Watch out: food price increases cause increases in social unrest

Food prices spikes and social unrest

• The recent surge in food insecurity could aggravate
social tensions and spark social unrest
o The spike in food prices in 2007 to 2008 led to 160
Food
unrest in several African countries, Haiti and Arab Spring
140 crisis riots
Yemen
o Again in 2010 to 2011 was followed by a wave 120

of social upheaval (Arab Spring)

Global food price index

100
• The consequences can be profound, including the
collapse of a government and/or civil war 80

• Agro insurance can help improve food security and 60

poverty
40
o It helps farmers to manage their risks, maintain
income levels and facilitate access to credit 20

2009

2011

2013

2015

2017

2019

2021
2000
2001
2002
2003
2004
2005
2006
2007
2008

2010

2012

2014

2016

2018

2020

2022
Note: Data is shown through March 2022
Source: Food and Agriculture Organization of the United Nations (FAO), Swiss Re Institute
Group Economic Research & Strategy | May 2022 | Swiss Re Institute 13
 Caroline
Key takeaways

The Ukraine war will impact Latin America indirectly, mostly through commodity
prices. Improved terms of trade will be offset by unfavorable underlying domestic
and global conditions. We revised our growth forecasts down and inflation up. Key
to watch: social unrest and political risk due to cost-of-living crisis.

Inflation has not peaked yet. Limited fiscal space to subside key CPI items. LatAm
CBs are expected to further increase policy rates. Geopolitical tensions and faster-
than-expected tightening from leading CBs could lead to capital outflows and
currency depreciation.

Claims inflation vary widely. LoBs that depend on imported goods to service
payments have suffered from supply chain bottlenecks and FX fluctuations. In
LatAm, construction costs have seen the steepest increase while medical inflation
has been stable over the past two years.

Group Economic Research & Strategy | May 2022 | Swiss Re Institute 14

Supply chain changes are
under way

“Underlying drivers, such as diminishing cost

arbitrage benefits, costly disruptions from more
frequent natural catastrophe events, new
technology and rising political risks, are
reshaping global supply chains. COVID-19 has
simply been an accelerator.”

Dr. Jérôme Haegeli | September 2020 15

COVID-19 has instilled new urgency for restructuring of Global Supply Chains

Underlying drivers Accelerator Supply chain adjustments

Diminishing cost arbitrage advantages Diversification

(narrowing wage differentials) (geographic, suppliers)

Rising political risk

Relocation/parallel supply chain
(ie rising protectionism, trade war)

Social values
Reshoring/stay close to consumers
(ie ESG, equality, diversity & inclusion)

Increasing cost of business interruption COVID-19 Simplified supply chain

(ie natural catastrophes)

3D printing and digital manufacturing

Insurance and risk transfer solutions
(ie tailored products instead of mass production)

Source: Swiss Re Institute

Group Economic Research & Strategy | May 2022 | Swiss Re Institute 16

Global supply chain disruptions: China in focus
In the world's largest 20 economies, 40-80% of exports are integrated into global supply chains
As the largest supplier of intermediate goods, China is at the core of GSCs and disruptions
The computer and electronic equipment trade is most vulnerable, with ~13% of its intermediate inputs coming from China

Participation of the 20 largest economies in GSCs Chinese intermediate input as a % of total global output excl.
(% of total export values added, 2018) China, by industry (2015)

80%
Computer and electronic equipment
60% Electrical equipment
Textiles & apparel
40% Non-metallc mineral products
Basic metals
20%
Fabricated metal products
0% Rubber & plastics
Machine and equipment
Netherlands

Italy
France

Australia
USA
UK

India
Japan
Germany

China
Mexico

Brazil
Canada
Russia
Spain

Saudi Arabia
Turkey
South Korea
Switzerland

Indonesia

Wood & wood product

Other transport equipment
Motor vehicles
Agricultural, forestry & fishing

Backward participation Forward participation 0% 5% 10% 15%

Note: Forward participation is defined as a country's domestic value-added content embodied in intermediate exports that are further re-exported to third countries, as a percentage of total exports.
Backward participation is foreign value-added content embodied in a country's exports as a percentage of total exports.
Source: UNCTAD-Eora database, Swiss Re Institute

Group Economic Research & Strategy | May 2022 | Swiss Re Institute 17

Key takeaways

The urge for Macro trends in reshaping the global supply chains were in place already pre-
Global Supply Chain COVID-19. The ramping up of US-China trade tensions and COVID-19 instils greater
resilience urgency for Global Supply Chain resilience

Parallel supply chains will emerge. We estimate they will generate ~USD 1
Opportunities
trillion from additional export and investments globally, boosting growth and
during transition adding USD 63 billion from insurance premiums over a 5-year period

Medium-term global growth is expected to increase, but longer-term economic

The trade-offs in growth will be adversely affected. The adverse impacts on growth will be larger,
the long-run should politics lead to more friction in the trade of goods and services, lowering
productivity growth

Group Economic Research & Strategy | May 2022 | Swiss Re Institute 18

COVID-19 and inequality

“During the COVID-19 pandemic, lower-skilled

workers bore the brunt of the labour market
downturn. Early research from the IMF
estimates that the average Gini coefficient in
emerging and low-income countries may have
increased by 2.6 ppt during the first wave of
COVID-19, to a level close to that of 2008,
meaning the reverse of a decade's gains

Dr. Jérôme Haegeli | September 2020 19

 Current developments

Covid-19 and the invasion of Ukraine has exacerbated inequality

The US misery index reflects mounting pain from high inflation

Share of spending on food versus income inequality Evolution of the US misery index with recessionary
episodes highlighted
25 1
0.9
20 0.8
0.7
15 0.6
0.5
10 0.4
0.3
5 0.2
0.1
0 0

1983

1991

1999

2007

2015
1971
1973
1975
1977
1979
1981

1985
1987
1989

1993
1995
1997

2001
2003
2005

2009
2011
2013

2017
2019
2021
Recession
US Misery Index

Note: The misery Index is computed as the sum of headline CPI and the unemployment rate.
Sources: SWIID; USDA, Bloomberg, Swiss Re Institute
Group Economic Research & Strategy | May 2022 | Swiss Re Institute 20
 Role of insurance

Rising income inequality has a negative effect on insurance penetration

• Macro level: panel data shows a rising Gini coefficient correlated with slower insurance penetration growth in the past three
decades.
• Micro level: US household data confirms higher income households spend a smaller fraction of their income on insurance.

Average growth in total insurance penetration rate (in %) US household spending as % of after-tax income on
vs average growth in Gini (in %) for advanced economies, health and motor insurance in 2020, by income quintile
1990-2019
16%
6
Average growth in penetration (in %)

14%
5
ITA 12%
SGP
4
10%
GRC DNK
3 PRT
8%
2 GBRFRA ESP SWE FIN
NZL BEL NOR 6%
NLD DEU
1 CAN
CHE 4%
USA
0 AUT
AUS JPN 2%
-1
0%
-2 Lowest Second Third Fourth Highest
-0.4 -0.2 0.0 0.2 0.4 0.6 0.8 20 20 20 20 20
percent percent percent percent percent
Average growth in Gini (in %)
Health insurance Motor insurance

Note: Figure shows average annual growth in insurance penetration rates (where penetration
rate is calculated as total insurance as share of GDP) and average change in Gini coefficient for
advanced markets over the period 1990-2019
Source: US Bureaau of Labor Statistics, Swiss Re Institute Group Economic Research & Strategy | May 2022 | Swiss Re Institute 21
 Role of insurance

Public policy and private insurance can work together to reduce inequality

PPPs
Risk with the
insurance sector
Regulatory
support for

transfer digital
via social security
(health,
unemployment,
distribution
of insurance products
pensions)

Source: Swiss Re Institute

Group Economic Research & Strategy | May 2022 | Swiss Re Institute 22
The aging of emerging markets

“Emerging markets are at risk

of growing old before they
grow rich. COVID-19
exacerbates the structural
challenges to the
sustainability of emerging
market pension systems.”

Dr. Jérôme Haegeli | September

2 July 2020
2021 23
Current pension assets and savings will cover about 43% of emerging markets’ need to
fund retirement

Pension adequacy: savings available as a

percentage of pension funding need Key factors affecting pension savings gap
65%

55% Average age of the worker

Demographic
45% Average life expectancy

35% Retirement age

Regulatory
25% Contribution for pension funds
Total Emerging Markets
Czech Republic

Colombia

India

Indonesia
Peru

Vietnam
Philippines
Mexico

Russia
Turkey

Malaysia

Thailand
China

Poland
Brazil

Chile
Hungary

Income growth expectation

Economic Interest rate expectations

Inflation expectations

Source: Swiss Re Institute

Group Economic Research & Strategy | May 2022 | Swiss Re Institute 24
Insurance can provide protection against disruption to pension savings and a
stable income in retirement
Life insurance and mandatory
pension systems
Compulsory or voluntary purchase
of insurance through the
mandatory DC pension scheme to
protect individuals against
mortality and morbidity risks (eg,
Chile and Australia).
Bundling biometric risk and a
savings component
Instead of pure life or savings
contracts, insurers can offer
consumers composite products
that provide mortality, morbidity
and LTC protection with a savings
component.
Life insurance for the sandwich
generation
In many emerging markets,
families support the financial
needs of older members. Insurers
can developed solutions that
protect three generations of a
family: policyholders, their
children and their parents.
Group Economic Research & Strategy | May 2022 | Swiss Re Institute
Combining life and mortgage
protection
Households that rely on real
estate as a long-term savings
vehicle (eg, China) risk losing
their home in case of unexpected
death of a breadwinner. Mortgage
insurance is not widely used in
most emerging markets.
25
Group Economic Research & Strategy | May 2022 | Swiss Re Institute 26
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Group Economic Research & Strategy | May 2022 | Swiss Re Institute 27