Swiss Re Economic Forum 2011e2e73506-6d56-4a1c...Swiss Re Economic Forum 2011 Economic outlook is...
Transcript of Swiss Re Economic Forum 2011e2e73506-6d56-4a1c...Swiss Re Economic Forum 2011 Economic outlook is...
Swiss Re Economic Forum 2011 Thursday 1 December 2011
Kurt Karl, Chief Economist, Economic Research & Consulting Darren Pain, Senior Economist, Economic Research & Consulting
Global economic and insurance market outlook Kurt Karl, Chief Economist, Economic Research & Consulting
1 December 2011
Swiss Re Economic Forum 2011
Economic outlook is currently extremely uncertain and depends greatly on the actions of policymakers, particularly in Europe but also US.
– We assume policymakers will gradually deliver on their duties, but not pro-actively
– Market volatility will continue for quite some time
Low growth, falling inflation and large deficits are keeping monetary policy very accommodative
– Yields on long-term government bonds will remain low for a prolonged period
The insurance industry is well-capitalised, so will weather this storm – Slow growth in developed economies will weaken P&C and L&H premium growth, but
markets recover partially next year and more fully in 2013
– Low yields are reducing profitability, but P&C rates will rise toward end of 2013
– Market volatility from euro debt crisis and US fiscal impasse is reducing capital & profits
Emerging markets are also slowing in growth, but are still expected to perform well in 2012 and 2013
– Both L&H and P&C growing at 7 – 9% in 2012 and 2013, after inflation
Global Outlook
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Economic recovery has been moderate in most developed economies
Source: Datastream
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Key economic indicators and forecasts for the major economies
Source: Swiss Re Economic Research & Consulting, forecasts as of 3 November 2011
2010 2011 2012 2013Real GDP growth, annual avg., % US 3.0 1.8 1.3 2.6
Euro area 1.8 1.6 0.5 1.6UK 1.8 0.9 1.0 1.8Japan 4.1 -0.2 2.3 1.6China 10.4 9.1 8.8 8.2
Inflation, all-items CPI, annual avg., % US 1.6 3.1 1.4 1.5Euro area 1.6 2.6 1.8 2.0UK 3.3 4.4 2.6 2.0Japan -0.7 -0.2 0.3 0.7China 3.3 5.3 3.5 3.2
Policy rate, year-end, % US 0.25 0.25 0.25 2.00Euro area 1.00 1.00 1.00 2.00UK 0.50 0.50 0.50 1.50Japan 0.08 0.08 0.10 0.25
Yield, 10-year govt bond, year-end, % US 3.3 2.2 2.6 3.6Euro area 3.0 2.0 2.6 3.5UK 3.4 2.6 3.2 4.2Japan 1.1 1.1 1.2 1.7
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Credit conditions are tightening while demand for credit is falling
Source: ECB bank lending survey
Note: Positive values indicate a tightening, negative values a loosening of banks’ lending standards. Positive/Negative values indicate increasing/ decreasing demand for credit.
ECB bank lending survey, quarterly data (Net percentage of domestic respondents expecting to tighten standards/expecting increased credit demand)
Are we heading for another credit crunch?
Credit conditions for non-financial corporations Non-financial corporations' demand for credit
-40
-20
0
20
40
60
80
2003 2004 2005 2006 2007 2008 2009 2010 2011
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-6
-4
-2
0
2
4
France Germany Greece Ireland Italy Portugal Spain United Kingdom
United States
200820092010201120122013
7.2%
Change in cyclically adjusted general government balance vs. previous year (% of potential GDP)
Sources: IMF Fiscal Monitor September 2011, Swiss Re Economic Research & Consulting
Fisc
al t
ight
enin
g Fi
scal
eas
ing
Fiscal contraction is dampening growth
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Example of Emerging market risk: China's housing market is much more subdued after monetary tightening
Source: Datastream
8
%
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Non-life primary market in developed economies
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Profitability has deteriorated, but is expected to improve
Profitability of global non-life insurance industry (% of premiums, shareholder capital)
-15
-10
-5
0
5
10
15
20
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Investment result Underwriting result
Operating result ROE after tax
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Source: Economic Research & Consulting; based on an aggregate of 8 major non-life markets
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Significant worsening of u/w results since 2006: from 97% to 104% on average.
Motor business low point was 2010, rates are now rising
In commercial lines, rate softening is slowing
Still positive reserve releases, should reverse next year
Due to weak economic growth, premium growth is also anaemic (low demand) and competition fierce
Due to low interest rates, profitability of insurance will be subdued for next couple of years
Given low investment yields, productivity increases will be sought
European P&C market: Weak, but rates are likely to rise
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Adjusted US combined ratio, % of net premiums: Casualty rates set to rise
Points of combined ratio 2008 2009 2010 1H 2011
Headline figure,
based on calendar year
of which effective cat losses (-) 6.3% 3.4% 4.7% 12.8%normal cat losses (+) 4.0% 4.0% 4.0% 4.0%
Cat adjusted combined ratio 101.7% 101.8% 100.1% 100.8%A&E reserves additions (-) 0.4% 0.4% 0.9% 0.9%Core reserves releases (+) 2.2% 3.0% 2.5% 4.0%Adjusted AY combined ratio 103.5% 104.4% 101.7% 103.9%
104.0% 101.2% 100.8% 109.6%
Source: A.M. Best, Swiss Re Economic Research & Consulting
Motor rates rising in Europe, even UK and Italy Cat property rates rising in select markets and losses have reduced industry capital Select surveys in US imply commercial insurance rates are on cusp of hardening In Europe, commercial insurers are attempting to raise rates
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Sources: A.M. Best, estimates by Economic Research & Consulting. [1] based on 10-year average.
2011 industry assumptions: Asset leverage: 313% Tax rate [1] 25% NPE/ avg. surplus 97% 2011 ROE was 4.8%; total yield was 4.1%, and CR 106% [US as an example]
Combined Ratio
ROE
5.3%
4.3%
3.3%
A 1 percentage point lower investment yield requires about a 3 ppt decline in CR to maintain ROE (5% in example)
Investment yield
Non-life insurers can compensate for lower yields with a lower combined ratio (example US)
0%
2%
4%
6%
8%
10%
12%
14%
95% 97% 99% 101% 103% 105% 107%
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If low nominal interest rates reflect lower inflation, the negative effect from lower investment yields gets fully compensated by lower claims.
If the drop in interest rates is real (not only due to change in inflation), insurers need to charge higher premium rates to compensate for lower investment yields.
– In theory, this should be possible as there are usually no substitutes for non-life insurance products.
– In practice, insurers are reluctant to take investment returns fully into account for pricing, as they are afraid of losing clients.
A prolonged period of low interest rates is usually not favourable for non-life insurers' profitability.
Nevertheless, the insolvency risk resulting from low interest rates is low.
Non-life: Insurers and policyholders share the low yield burden
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Life & Health primary market in developed economies
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The shareholder equity of 32 mainly life and global companies (IFRS/GAAP data), 2007Q4 = 100
Source: Company reports, Bloomberg, Swiss Re Economic Research & Consulting
80
90
100
110
120
07Q
4
08
Q1
08
Q2
08
Q3
08
Q4
09
Q1
09
Q2
09
Q3
09
Q4
10Q
1
10Q
2
10Q
3
10Q
4
11Q
1
11Q
2
Market cap weighted average
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AFLAC; Allianz; Assurant Inc; Aviva; AXA; China Life; CNP; Delphi Financial; Generali; Genworth Financial; Great-West Lifeco; Hartford; Legal & General; Lincoln National; Manulife; Metlife Group; Phoenix Companies; Ping An; Principal Financial Group; Protective Life; Prudential (UK); Prudential (US); St. James Place ; StanCorp Financial Group; Standard Life; Storebrand ASA; Sun Life; Swiss Life; Torchmark; Zurich
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Return on equity of 32 mainly life and global companies (IFRS/GAAP data), %
AFLAC; Allianz; Assurant Inc; Aviva; AXA; China Life; CNP; Delphi Financial; Generali; Genworth Financial; Great-West Lifeco; Hartford; Legal & General; Lincoln National; Manulife; Metlife Group; Phoenix Companies; Ping An; Principal Financial Group; Protective Life; Prudential (UK); Prudential (US); St. James Place ; StanCorp Financial Group; Standard Life; Storebrand ASA; Sun Life; Swiss Life; Torchmark; Zurich
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Source: Company reports, Bloomberg, Swiss Re Economic Research & Consulting
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
07
Q4
08
Q1
08
Q2
08
Q3
08
Q4
09
Q1
09
Q2
09
Q3
09
Q4
10
Q1
10
Q2
10
Q3
10
Q4
11
Q1
3 Canadian companies 7 European Globals 6 UK companies
2 Chinese companies 14 US companies Market cap weighted
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Risk products: They have similar characteristics to non-life products, since there are few substitutes to mortality or disability products: Insurers can maintain profitability via higher risk charges. Though a long-tail business, interest rates have only a small effect on the price of pure mortality risk.
Savings products: As investment yields drop, insurers have to face lower profitability and/or reduce guaranteed interest rates. But low guarantees impair the attractiveness of savings products.
In-force business: If the duration of assets and liabilities is not adequately matched, a sustained decline in interest rates lowers profitability and if this continues it increases the risk of insurers defaulting. Some of the low investment yields may be shared with policyholders, depending on product
New business: If guarantees are not adjusted in a timely manner, the risk increases of writing unprofitable business
Life insurance and the low interest rate environment: The key issue is in-force business
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Interest rate guarantees in life contracts vs. insurers' investment returns and 10y government bond yields
0%
1%
2%
3%
4%
5%
6%
7%
8%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
USA
Insurers' investment result 10y government bond yield
Guaranteed rate
0%
1%
2%
3%
4%
5%
6%
7%
8%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Switzerland
Insurers' investment result 10y government bond yieldGuaranteed rate individual Guaranteed rate Group
0%
1%
2%
3%
4%
5%
6%
7%
8%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
France
Insurers' investment result 10y government bond yieldGuaranteed rate ST Guaranteed rate LT
0
1
2
3
4
5
6
7
8
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
10-y-government bond yield investment yield life insurersnew business guarantee average guarantee
Germany
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Risk heat map life insurance Country
Interest rate sovereign equity macro-economyUS long-term guarantees mainly in UL and
fixed annuities, reinvestment risk for DI and LTC business
marginal exposure to downgraded European sovereign debt
low equity exposure on general account, exposure through VA with guarantees
exposure through sales, group business, disability claims, mortgage investments
UK annuities contain long-term guarantees, other products not very rate sensitive
minimal direct sovereign debt exposure, significant indirect exposure via holdings of
corporate bonds
relatively high equity exposure on general accounts
exposure through housing market for mortgage related products
Germany long-term savings products with long-term guarantees
some direct & indirect exposure to sovereign defaults
low equity exposure on general accounts sales are not very macro sensitive
France low and flexible guarantees (60% of the prevailing 10y bond yield or annual
crediting rates), fairly short duration of liabilities
significant direct debt exposure to vulnerable sovereigns, plus indirect
exposure via bank bonds
low equity exposure on general accounts sales are not very macro sensitive; however unit-linked products would likely be
impacted if the financial market situation deteriorates
Italy relatively low guarantee level significant direct debt exposure to vulnerable sovereigns, plus indirect
exposure via bank bonds
low equity exposure on general accounts bankassurance sales might drop if the banking sector has troubles
Spain some guaranteed savings products (new business guarantees linked to Spanish
government bond yields)
significant direct debt exposure to vulnerable sovereigns, plus indirect
exposure via bank bonds
low equity exposure on general accounts continuing high unemployment and weak domestic demand, housing market still
under pressure
Japan lingering but diminishing problem on guaranteed savings products (the problems in companies that were most vulnerable to
guarantees have been resolved)
marginal exposure to downgraded European sovereign debt
some equity exposure on general account, exposure through VA mainly limited to
foreign insurers
vulnerable if unemployment increases; demographic trend is believed to be a more
important driver (particular on 3rd sector products)
China limited impact from new business and strong growth will dilute the negative
spread problem on older business
very limited impact; investment mostly confined to domestic debts/equity
small but increasing exposure to equity markets
relatively sensitive to overall economic and income growth; bancassurance also a major channel vulnerable to economic downturn
Risks
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Conclusions
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The economic and financial outlook is currently extremely uncertain, particularly in Europe and US – Premium growth has been modest, but will improve next year and further in 2013
– The value of assets have been volatile, challenging insurers' capacity
– Interest rates will remain low, reducing profitability until 2013
– It will be a bumpy ride, but insurers are well capitalised, so will perform well
P&C rates, particularly casualty rates, are expected to improve next year
The low interest rate environment reduces profits through low investment yields
– The P&C sector is less affected than life segment
– Life insurers not only have low investment yields, but some products have return guarantees, so are really challenged by low yields
– In addition, life insurance products tend to be very long in duration, so most of the profits often come from investment returns
Conclusions
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Emerging markets Kurt Karl, Chief Economist, Swiss Re Economic Research & Consulting
1 December 2011
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Emerging market economies continue to outperform
Slowing economic growth
Moderating inflationary pressure
Interest rates staying at low levels
Slowing capital inflows and currency appreciations
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
2006 2007 2008 2009 2010 2011 2012 2013
Real GDP growth
Emerging markets Industrialised countries
Sources: Oxford Economics; Swiss Re Economic Research & Consulting.
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-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Emerging Asia Middle East Latin America Central & Eastern Europe
Industrialised markets
Life insurance premium real growth rate, 2007-12
2007
2008
2009
2010
2011
2012
25
Growth in life premiums has stalled in 2011; a recovery expected in 2012
Source: Swiss Re Economic Research & Consulting
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Weak performance of the Chinese and Indian markets led the global slowdown
Sources: CIRC, IRDA
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
Jan.
09
Mar
.09
May
.09
Jul.0
9
Sep
.09
Nov
.09
Jan.
10
Mar
.10
May
.10
Jul.1
0
Sep
.10
Nov
.10
Jan.
11
Mar
.11
May
.11
Jul.1
1
Sep
.11
Year-on-year growth of life insurance premiums in China
Introduction of new bancassurance regulations in Nov 10
-100%
-50%
0%
50%
100%
150%
200%
250%
300%
Jan.
10
Mar
.10
May
.10
Jul.1
0
Sep
.10
Nov
.10
Jan.
11
Mar
.11
May
.11
Jul.1
1
Sep
.11
Year-on-year growth of new life insurance premiums
(individual business) in India
Single Premium Non-Single Premium
Introduction of new unit-linked insurance product regulations
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Developments in 2011 and trends in 2012/13
•Premiums increased by 0.6% in 2011 (2010: 10.5%) in real terms
•Premiums declined in China and grew slower in India in 2011 due to regulatory changes
•Other emerging regions continued to report robust growth, in particular the Middle East (+12.0%) and Latin America (+9.9%)
•Central and Eastern Europe is lagging behind but Poland and Russia reported further premium growth
Developments in 2011
•Growth of premiums will recover in 2012, lead by China and India
•Premiums are projected to increase by 8.4% in real terms in 2012
•Other regions will maintain stable growth, supported by rising affordability, health and pension reforms as well as increasing awareness
•Protection type products will likely gain popularity as rising financial and economic risks will dampen interests in investment products
Trends in 2012/13
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-10%
-5%
0%
5%
10%
15%
20%
25%
Emerging Asia Middle East Latin America Central & Eastern Europe
Industrialised
Non-life insurance premium real growth rate, 2007-12
2007
2008
2009
2010
2011
2012
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Non-life premiums sustained broad-based growth in 2011; growth is however slowing
Source: Swiss Re Economic Research & Consulting
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Developments in 2011 and trends in 2012/13
•Steady premium growth by 8.9% in real terms in 2011 (2010: 9.6%)
•Strong growth in Emerging Asia in particular China (+15%), Indonesia (+10.3%) and Vietnam (+6.9%)
•Nat cat has limited impacts on emerging Asian insurers but raised awareness and demand
•Other regions saw broad-based improvement
•Motor, health, personal accidents and agricultural insurance have contributed to growth
Developments in 2011
•Growth is expected to stabilise at 7-9% in 2012/13
• Trade and investment related insurance will be negatively affected by evolving crisis in Europe
•Central and Eastern European markets face significant downside risk – in terms of both economic and insurance business growth
•Emerging Asia and Latin America will perform relatively well, supported by strong demand for personal and speciality lines
Trends in 2012/13
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Further convergence of emerging market regulations
Move towards risk-sensitive solvency regimes (eg Solvency II in CEE)
Further liberalisation in key emerging markets
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Major regulatory changes expected in 2012/13
Chi
na
Planned opening of the motor third party liability insurance market to foreign participation
Indi
a A bill to raise foreign investment ceiling to 49% from current 26% could be passed by the parliament in 2012
Rus
sia There are
proposals to increase the 25% limit of foreign capital in the insurance industry, as this limit has been reached
Euro sovereign debt crisis Implications for the insurance industry
Darren Pain, Senior Economist, Economic Research & Consulting
1 December 2011
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Selected European sovereign credit spreads
0
5
10
15
20
25
30
35
2007 2008 2009 2010 2011
10-yr yield spreads over German bunds (pp)
Greece Ireland Italy Portugal Spain
Source: Datastream
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Sovereign debt maturing in 2012
0
50
100
150
200
250
300
350
Portugal Ireland Greece Spain Italy
€bn
Source: Bloomberg
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Potential direct effects on European insurers
50% haircut on sovereign bonds issued by:
Potential losses for European insurers (€bn)
% of shareholders’ funds
Greece 14 2.4
Greece, Ireland, Portugal (GIP)
25 4.3
Greece, Ireland, Portugal and Spain (GIPS)
58 9.8
Greece, Ireland, Portugal, Spain and Italy (GIIPS)
143 24.3
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European Insurers’ gross exposure to sovereign bonds (% of shareholders equity)
Greece Ireland Portugal Spain Italy
Ist quartile average 5.9 7.1 8.5 43.0 81.0
2nd quartile average 1.2 2.3 1.7 8.4 20.4
3rd quartile average 0.0 0.3 0.1 2.2 2.7
4th quartile average 0.0 0.0 0.0 0.0 0.0
Average 1.9 2.5 2.7 14.0 27.1
Weighted average 2.5 2.9 3.3 12.0 40.5
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Distribution of exposure is important
Source: Moody's
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European Insurers’ gross exposure to sovereign bonds (% of shareholders equity)
Greece Ireland Portugal Spain Italy
Ist quartile average 5.9 7.1 8.5 43.0 81.0
2nd quartile average 1.2 2.3 1.7 8.4 20.4
3rd quartile average 0.0 0.3 0.1 2.2 2.7
4th quartile average 0.0 0.0 0.0 0.0 0.0
Average 1.9 2.5 2.7 14.0 27.1
Weighted average 2.5 2.9 3.3 12.0 40.5
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Distribution of exposure is important
Source: Moody's
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Policyholder participation...
... but the "devil is in the detail" and there are considerable differences across jurisdictions.
Losses could be offset against future taxes ...
... yet there may be limits on deferability of tax/carrying forward losses indefinitely.
Many insurers would have already have taken "mark-to-market" (ie unrealised) losses against equity ...
... although not to the same degree as in the extreme stress scenario involving multiple defaults.
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Mitigating factors
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Indirect effects operate through impacts on: – values of other investments/assets – overall economic activity and revenue generation.
Depending on the scenario, these could be very significant (and may be greater than the direct effects).
Multiple defaults and/or persistently high costs of borrowing for vulnerable sovereigns (especially Spain and Italy) would increase uncertainty about the break-up of the euro.
The resulting market volatility would reduce the value of other assets (through higher risk premia) and intensify funding pressures on banks. In turn, this would likely lead to a further pull back in credit supply accentuating recessionary forces.
Again, some mitigating factors: "safe haven" assets could rise in value and some insurers might have hedged some forms of extreme market risk.
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Indirect effects on European insurers
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European insurers’ capital buffers appear adequate to cope with direct losses on their sovereign bond holdings provided any debt restructurings are limited to the smaller peripheral European countries.
But the direct and indirect implications would be much more serious if write-downs on Spanish, and especially Italian bonds, were ultimately required.
In such a scenario, the prospect for heightened volatility, disorderly markets and a severe recession appear high, imposing additional realised and unrealised losses on insurers’ investment portfolios as well as restricting revenue and earnings generation.
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Conclusions
Thank you
Swiss Re Economic Forum 2011
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