Sigma 02 2022 Stagflation en

No 2 /2022
Stagflation: 02 Executive summary

03 Key takeaways
the risk is back, 05 Low growth and

high inflation: a
challenge
but not 1970s style 17 Three alternative
scenarios
19 The impact on global
insurance markets
29 Insurance markets
under alternative
scenarios
35 Appendix
2 Swiss Re Institute sigma No 2/2022
Executive summary
The conflict in Ukraine is worsening a Fifty years on from the 1970s, stagflation fears have returned. The mix of multi-decade-
stagflationary supply-side shock to the high inflation and slowing economic growth was already challenging major economies
world economy. worldwide after an initial strong rebound from the COVID-19 crisis. We now expect the
conflict in Ukraine to push global Consumer Price Index (CPI) inflation even higher and
put a further brake on growth momentum. The impact of the conflict is already showing
through in sharply higher prices for key commodities. Many emerging markets highly
dependent on food imports are now even more vulnerable to food insecurity. To
exacerbate the challenge, high inflation is forcing central banks to tighten policy into a
slowdown, although real interest rates will remain low by historical standards.
We see the current stagflationary We have revised our forecasts for inflation higher and growth lower for all regions, so our
environment as cyclical rather than baseline outlook can be characterised as “stagflation-like”. However, we see this as
structural. temporary and driven by cyclical factors, rather than the structural stagflation seen in the
1970s. Today’s economic conditions are very different, and we believe the expected
growth slowdown will ultimately bring inflation down. Still, uncertainty is high and risks
are skewed to significantly worse outcomes. For instance, it will be difficult for the US
Federal Reserve (Fed) to engineer a soft landing. In such uncertain times, scenario
analysis is important to recognise risks. We monitor three alternative scenarios to the
baseline: two pessimistic – a global recession, a 1970s-style stagflation – and one
optimistic. We assign the two downside scenarios a joint 25–40% probability over 12–
18 months, with a global recession the more likely. There is a risk that today’s cyclical
stagflation could turn structural and entrenched, but we see this as a “tail risk”.
We expect claims inflation to impact P&C This year will be one of transition for the insurance industry as it seeks to manage the
insurers’ profitability in 2022, leading to inflation surge and consequent rises in interest rates. Lower equity markets and widening
further market hardening in 2023. credit spreads will likely lead to mark-to-market valuation losses to assets and capital.
Property & Casualty (P&C) insurers are most exposed to the inflation shock, which will
increase claims severity. In the near term, property and motor will likely be hit hardest, as
price rises in construction and car parts outstrip those in the wider economy. In the
medium term, lines of business with longer tails will be most exposed to sustained
elevated inflation. We do not expect benefits from higher interest rates to offset higher
claims in 2022 and so see headwinds to P&C profitability in 2022, but tailwinds from
further rate hardening and rising interest rates from 2023.
Higher interest rates should benefit L&H For Life & Health (L&H) insurers, sustained high inflation has primarily indirect effects, as
insurers’ profitability, though inflation rising interest rates support profitability. Investment results benefit as bond portfolios roll
creates demand headwinds and short-term over into higher yields, while the profitability of saving products with guarantees – a
pressures in health. large legacy book of the life industry –improves. The nature of fixed-benefit products
insulates them from claims inflation, though indemnity-based health insurance is
exposed to claims pressure in the near-term. However, we expect higher inflation to
erode consumers’ disposable incomes and the value proposition of (in-force) saving
policy benefits, resulting in higher rates of lapse and surrender. This would decrease
societal resilience to mortality and health risks.
A silver lining to the current crisis is higher Given the many uncertainties today, significant downside risks to insurers’ profitability
interest rates, a long-term positive for the remain. For example, if our alternative global recession scenario were to play out,
insurance industry. Still significant risks premium revenues would fall across all lines of business and in all regions. And the
arise from our alternative scenarios, and “1970s stagflation” scenario would curb demand in both P&C and L&H. In addition,
discipline in underwriting is imperative. credit spread widening and equity losses would create large mark-to-market losses on
assets. Downside risks can be mitigated by strong capital and risk management,
underwriting rigour, reinsurance, asset allocation and hedging. If there is to be a silver
lining to this crisis, it is that we see an acceleration to the exit from the extreme monetary
policy of the past decade. A paradigm shift towards higher yields is a long-term positive
for insurance companies.
sigma No 2/2022 Swiss Re Institute 3
Key takeaways
Our revised baseline for 2022 is “stagflation-like”, with our inflation forecasts revised higher and
our growth forecasts lower because of the shocks caused by the conflict in Ukraine.
This cyclical environment is not the same as the structural stagflation of the 1970s. We expect a late-cycle demand and growth
slowdown to ultimately bring prices back down. However, uncertainty is high and risks are skewed to the downside, with an increased
likelihood of either a recession or1970s-style stagflation materialising.
Direction of our 2022 and 2023 CPI and real GDP growth forecasts vs 2021 Our alternative scenarios and their likelihoods
8% Higher
7%
5–10%
6%
5% 1970s
Stagflation
CPI inflation
4%
3% Global inflation
55–70%
2% <5%
SRI Baseline
1% 20–30%
Optimistic
0%
Scenario
Global
–1% Recession
0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
Real GDP growth Lower Global growth Higher
Euro area UK US China Japan Australia

Source left chart: Bloomberg, Swiss Re Institute. Source right chart: Swiss Re Institute. Note left chart: The figure shows the combination of CPI inflation and real
GDP growth for 2021 (actual), 2022 and 2023 (SRI forecasts) along the direction of the arrows for major economies. Note right chart: Percentages indicate scenario
likelihoods over the 12–18 month time horizon. 25–40% indicates the combined likelihood of the downside scenarios or combinations thereof playing out. Left of dotted
axis indicates global growth is below trend growth.
Several major institutional differences between today and the 1970s make any current
stagflationary outcomes cyclical and temporary.
However, the probability of more structural stagflation, while still unlikely, may have increased due to regime shifts in policy and labour
markets, and long-term inflation expectations becoming unanchored.
Stagflation is more cyclical Stagflation turning structural

Persistence of ̤ Demand will fall as real incomes are squeezed ̤ Government spending set to rise (eg, on defence)
shocks ̤ Signs of supply blockages easing prior to the conflict ̤ More redistributive tax policy and regulatory shocks
̤ Commodity futures suggest prices will decline ̤ Deglobalisation means less efficient global supply chains
̤ Supply chains adapting, less sensitive to lockdowns ̤ Introduction of distortionary price controls
Central banks ̤ Central banks no longer believe in an exploitable long-term ̤ New frameworks tolerant of inflation overshoots
unemployment and inflation trade-off ̤ More conflicting mandates (eg, climate change)
̤ Explicit and credible inflation targeting regimes ̤ Other priorities (eg, national security) may override central bank
̤ Greater political independence independence, risking fiscal dominance
Labour markets ̤ Unionisation rates are low and labour markets more flexible and less ̤ Cost-of-living crisis leads to a regime shift in workers’ wage
regulated than in the 1970s bargaining (collective or otherwise) to compensate
̤ Firms will continue or even accelerate automation to substitute ̤ Reduced migration lowers supply of foreign workers, and reduced
capital for labour entry of emerging markets workers into the global labour market
̤ Workers who left the labour market during the pandemic will return ̤ Labour supply falls are permanent (eg, preference for work-life
in a hot economy balance), and reservation wages rise
Inflation ̤ Long-term inflation expectations remain anchored* ̤ Inflation surprises, long-term expectations drifting higher
expectations ̤ Forecasters expect central banks to meet targets ̤ Inflation “too high for too long” now turning broader
̤ Financial market pricing of future inflation has not accelerated ̤ Consumer surveys show perceived and expected inflation both
beyond central bank targets sharply higher
Productivity growth ̤ Productivity boom due to new technologies eg, AI, clean energy ̤ Overestimation of trend productivity growth and the output gap
allows faster non-inflationary growth cause policy to be systematically too loose
*US 10-year breakeven inflation is at 3% as of 18 April 2022 (up from 2.4% as of 18 February 2022), the highest on record. Source: Swiss Re Institute
4 Swiss Re Institute sigma No 2/2022 Key takeaways
In P&C insurance we expect claims inflation to be most severe this year, and feed through into
rate hardening in commercial and personal lines of business.
Despite expected rate hardening and higher interest rates, we see a deterioration of P&C sector profitability due to strong
inflationary headwinds.
P&C lines of business Impact Reason

Property Above average Soaring construction prices
Motor, physical damage Above average High car (part) prices and wage growth
Motor, bodily injury Average Wage growth in line with core CPI; medical cost inflation has remained below general CPI inflation so far
Liability Average Wage growth in line with core CPI; medical cost inflation has remained below general CPI inflation so far
Marine/Aviation/Transport Average In line with general CPI inflation
Source: Swiss Re Institute
The impact of inflation on L&H insurance is generally positive, through higher interest rates.
Investment income is set to improve gradually as the anticipated rise in the yield curve feeds into bond portfolio returns. The
profitability of large legacy books of saving products with guarantees also stand to improve under a gradual tightening, while fixed-
benefit products are inflation-neutral.
Profitability headwinds Profitability tailwinds
Downside risk for demand due Heightened demand for protection

to persistent high inflation products in wake of the pandemic
Continued low interest rate environment Normalisation of claims severity as pandemic
despite impending rate hikes phase of COVID-19 appears to end
Negative impact of Ukraine-Russia conflict Improvement in investment income
on global economic outlook considering impending rate hikes
Each of the alternative scenarios would affect the profitability and premium outlook of insurers.
Economic slowdown and higher unemployment would be negative for premium growth and societal resilience to risks, while
persistent inflation would further increase claims severity. Investment performance would worsen under the two pessimistic scenarios.
Optimistic “Golden 20s” Pessimistic “Global recession” Pessimistic “1970s style stagflation”
(<5%) (20–30%) (5–10%)
Profitability excluding general investment returns
P&C
Property   
Casualty   
Trade credit   
Life
In-force
Protection   
Life savings, guarantees   
Life savings, unit linked   
New business
Investment returns   
    
Source: Swiss Re Institute Negative Moderately negative Neutral Moderately positive Positive
Low growth and high inflation: a challenge

After a 50-year absence, the spectre of severe stagflation outcomes is back. The conflict in Ukraine comes as another
“stagflationary” supply-side shock to the global economy – back-to-back with COVID-19 – and is already being felt
through sharply higher prices for many key commodities. This reinforces our above-consensus inflation and below-
consensus growth outlook. The challenging mix of multi-decade high inflation and below-trend GDP growth will make it
difficult for the Fed, among other central banks, to engineer a soft landing. If there is to be a silver lining to this crisis, it is
that we see an acceleration to the exit from extreme accommodative monetary policy.
The recent commodity price shocks are The 1970s stagflation has been increasingly invoked recently as a metaphor to suggest a
stagflationary: they will hurt growth and parallel between the situation today and the high-inflation, high-unemployment
further push up inflation. experiences some 50 years ago. Inflation was rising globally even before the invasion of
Ukraine, as demand recoveries in advanced economies driven by policy stimulus and
reopening from COVID-19 ran ahead of start-stop global supply chains tied to slower-
recovering emerging markets. Higher inflation, initially concentrated in a few sectors
such as energy and cars, has since broadened out to an increasing share of CPI baskets,
as well as to wages. How the Ukraine conflict evolves is extremely uncertain, but the
nature of the shock is clearly stagflationary. Nevertheless, we believe the stagflationary
macroeconomic outcomes will remain cyclical instead of developing into the structural
and persistent stagflation of the 1970s.
The conflict creates a net stagflationary shock through five channels

We have lowered our global real GDP Though Russia and Ukraine combined account for less than 2% of global GDP, the
growth forecasts and raised our inflation conflict will transmit an outsized impact to the global economy that will result in both
forecasts through 2023. Risks are firmly to higher global inflation and lower growth through 2022. We have lowered our already
the downside. below-consensus growth forecasts and increased our above-consensus inflation
forecasts. We expect that relative to our pre-conflict forecasts, the shock will add
2.2 percentage points (ppts) to global annual CPI inflation to reach 6.4% in 2022, and
shave 0.6ppts off real GDP growth to 3.4% this year (see Figure 1 and Table 1). Our
revised forecasts assume a protracted conflict, with risks to growth and sentiment
skewed downward.
Figure 1
Swiss Re Institute’s current global annual CPI inflation and GDP growth forecasts versus pre-invasion
Annual global real GDP growth Annual global CPI inflation

6% 8%
4%
6%
2%
4%
0%
2%
–2%
–4% 0%
2018 2019 2020 2021 2022 2023 2018 2019 2020 2021 2022 2023
Actual Pre-invasion forecast Current forecast Actual Pre-invasion forecast Current forecast
Source: Oxford Economics, Swiss Re Institute
6 Swiss Re Institute sigma No 2/2022 Low growth and high inflation: a challenge
Table 1 2021 2022F 2023F

Selected Swiss Re forecasts Real GDP growth, annual avg., % US 5.5 3.1 1.4
UK 7.5 3.3 1.8
Euro area 5.2 2.5 2.2
Japan 1.6 2.4 1.2
China 8.1 5.1 5.3
Inflation, all-items CPI, annual avg., % US 4.7 6.9 3.1
UK 2.6 7.5 3.5
Euro area 2.6 6.3 2.1
Japan –0.2 1.1 0.8
China 0.9 2.3 2.4
Policy rate, year-end, % US 0.13 2.13 2.13
UK 0.25 1.50 1.75
Euro area 0.00 0.25 0.50
Japan 0.00 0.00 0.00
Yield, 10-year govt bond, year-end, % US 1.4 2.3 2.3
UK 1.0 1.4 1.6
Euro area –0.2 0.2 0.4
Japan 0.1 0.2 0.2
Note: F = forecasts. Euro area policy rate refers to the interest on the main refinancing operations.
Data as of 18 April 2022. Source: Oxford Economics, Swiss Re Institute
The conflict in Ukraine has an economic We see five main channels through which the conflict in Ukraine will hurt the global
impact primarily through five channels. economic outlook (see Figure 2). Transmission through disruptions to energy and
broader commodity markets is the most significant channel to monitor, followed by
tighter financial conditions and weaker sentiment. The direct impact from disruption to
global trade flows due to sanctions and export controls is likely to be small, but we
anticipate larger second-round effects on prices, trade balances and global supply
chains. When assessing the banking channel, financial stability issues are not currently
an immediate concern, but possible contagion and systemic risks can’t yet be ruled out.
Figure 2
The main channels through which the conflict in Ukraine will hurt the global economic outlook, in order of importance
 Energy shock via higher prices but also risks of reduced supplies, especially in Europe, will further raise inflation
Energy markets and pressures and weigh on GDP growth
broader commodities  Broader commodity shock with Russia/Ukraine as major exporters of other raw materials (e.g. wheat, metals for
semiconductors). Supply chain disruptions to be amplified
Tighter financial conditions and  The Russia-Ukraine conflict has significantly tightened global financial conditions, which in turn will have a
financial market sentiment negative impact on both GDP growth and inflation
 The conflict is taking a temporary hit on broader sentiment in the real economy (consumer and business
Broader economic sentiment
confidence), which will weigh on growth and inflation
 SWIFT sanctions will weigh on banking and lending channels and the exclusion of Russia from major capital
Banking and financial system market indices has also made Russia “uninvestable”
 Financial stability and contagion risks have risen, but so far appear manageable and not systemic
 Trade to be disrupted not just due to direct sanctions and export controls, but also due to knock-on supply chain
Trade flows
issues. This will also weigh on growth and worsen inflation

Low growth and high inflation: a challenge sigma No 2/2022 Swiss Re Institute 7
All five transmission channels interact in On balance, all channels working together are likely to result in a net drag on GDP
complex ways and the impact will differ by growth and net increase in inflation. The energy and commodities price shock, for
country, but net overall impact is likely to be example, is strongly inflationary, especially for net importers, whereas the financial and
negative for growth as well as inflationary. sentiment shocks in isolation are disinflationary. In most countries, however, the
commodities channel is expected to dominate. The net result of the combination of these
shocks is an amplified growth slowdown and higher inflation relative to pre-invasion, but
with inflation slightly offset by the disinflationary effect of the financial and sentiment
shock and therefore lower than it would be in the face of a pure commodity price shock.
This does not mean any of the channels should be underestimated. For each individual
country, the relative importance of each channel ultimately depends on the structure of
the domestic economy (Table 2) and this may also change as the conflict unfolds.
Table 2 Energy and commodities Direct trade

Selected indicators of vulnerabilities to
energy consumption, %
the energy and commodities channels
Food EX, % merch. EX
Food share in cons, %
EX to Ukraine, % GDP
Fuel EX, % merch. EX
Crude petroleum NX,
EX to Russia, % GDP
Share of renewable
Agric. raw mat. EX,
versus the trade channels
Merch. EX, % GDP

Wheat NX, % GDP
Ore & metals EX,

Commodity NX,
% merch. EX
% merch. EX
% GDP
% GDP
Advanced economies
Australia 9.3 –0.1 0.2 18.9 40.0 1.4 11.4 13.9 9.7 10.8 0.0 0.0
Canada 6.7 2.4 0.4 23.7 8.3 4.2 15.1 19.3 22.2 10.6 0.0 0.0
France –1.9 –0.4 0.2 18.6 2.0 1.0 14.0 1.9 15.3 15.0 0.2 0.0
Germany –2.8 –0.5 0.0 35.9 2.8 0.8 5.9 1.8 15.8 11.7 0.7 0.1
Hong Kong 0.0 0.0 0.0 158.3 1.5 0.1 1.5 0.1 0.2 13.8 0.2 0.0
Italy –3.3 –1.3 –0.1 26.3 2.3 0.7 10.4 2.0 17.1 16.5 0.4 0.1
Japan –4.8 –0.8 0.0 12.7 3.1 0.6 1.2 1.2 7.4 15.7 0.1 0.0
Singapore –6.2 –3.7 0.0 106.6 0.7 0.4 3.4 8.1 0.7 7.9 0.2 0.0
South Korea –8.4 –2.6 –0.1 31.3 2.6 0.9 1.6 5.0 3.2 11.6 0.5 0.0
Spain –1.5 –1.2 0.0 24.0 3.2 1.1 19.0 4.0 17.4 15.0 0.2 0.0
Switzerland –1.5 –0.3 0.0 42.4 2.0 0.1 3.0 0.6 24.2 10.2 0.4 0.1
UK –2.8 0.1 0.0 14.7 6.6 0.5 7.6 7.1 11.1 9.4 0.1 0.0
US –0.2 –0.1 0.0 6.8 3.2 2.1 11.5 12.7 10.1 7.1 0.0 0.0
Emerging markets
Asia
China –4.8 –1.0 0.0 17.6 1.1 0.3 2.7 1.2 13.1 21.8 0.0 0.1
India –5.0 –2.2 0.0 10.4 4.7 1.3 12.8 10.0 31.7 27.9 0.1 0.0
Indonesia 3.5 –0.2 –0.2 15.4 5.6 5.1 23.6 15.7 20.9 32.6 0.1 0.0
Malaysia 2.2 0.1 –0.1 69.5 3.5 1.6 10.1 11.3 5.3 25.2 0.3 0.1
Philippines –4.7 –0.3 –0.4 17.6 6.6 1.1 9.3 1.1 23.2 42.8 0.1 0.0
Thailand –2.0 –2.9 –0.1 46.1 1.9 3.6 14.4 2.7 23.7 24.8 0.2 0.0
Vietnam –5.6 –0.7 –0.3 104.3 1.1 1.8 8.8 0.9 23.5 31.7 1.2 0.1
EMEA
Kenya –1.6 0.0 –0.4 6.0 5.1 11.8 48.2 6.7 72.3 58.7 0.1 0.0
Nigeria 9.7 6.9 –0.5 8.2 0.3 0.2 3.0 88.7 79.7 59.1 0.0 0.0
Saudi Arabia 22.4 13.7 –0.1 24.8 1.8 0.2 1.9 67.6 0.0 20.5 0.0 0.0
South Africa 6.6 –1.5 –0.1 25.6 31.4 2.0 11.8 8.1 10.3 21.2 0.2 0.0
Turkey –3.9 –0.5 –0.3 23.6 4.0 0.5 12.0 2.7 11.9 21.3 0.6 0.3
UAE 30.3 11.3 –0.1 89.0 3.4 0.0 3.5 71.5 0.4 13.9 0.2 0.0
LATAM
Argentina 6.5 0.2 0.6 14.1 0.2 0.9 64.9 2.7 10.5 23.1 0.2 0.0
Brazil 6.0 1.2 –0.1 14.5 16.2 5.7 38.9 11.9 47.1 17.3 0.1 0.0
Chile 15.4 –0.7 –0.1 29.1 57.1 5.4 24.0 0.7 25.5 17.9 0.4 0.0
Colombia 6.4 2.7 –0.2 11.4 1.3 4.9 20.4 41.6 30.7 18.6 0.0 0.0
Mexico –0.6 1.7 –0.1 38.9 2.9 0.2 9.1 3.8 9.6 27.9 0.1 0.0
Note: EX, IM and NX denote exports, imports, and net exports, respectively.
Source: IEA, IMF, UNCTAD, USDA, World Bank, Swiss Re Institute
Growth headwinds will blow around the globe, but differ by region
We have lowered our growth forecasts for We have lowered our growth forecasts for all global regions since the onset of the
all regions since the onset of the conflict. conflict, but expect the impact to differ substantially between countries (see Figure 3).
Our largest downward real GDP growth revisions are in Europe due to the region’s high
exposure to the Ukraine conflict, most notably through its reliance on Russian oil and
gas.1 The US is more insulated, and we expect a smaller additional growth slowdown, in
part indirectly driven by more aggressive monetary policy tightening in response to high
inflation (see Nominal interest rates rising, but by less than inflation). We believe it will
be very difficult for the Fed to engineer a soft landing that avoids a contraction, starting
from current historically very high inflation and low unemployment rates.2 In China,
growth will also slow compared to 2021, in part due to the latest COVID-19 wave and
lockdowns. Nevertheless, lower domestic inflation provides more room for monetary and
fiscal policy support measures to help boost GDP growth.
For broader emerging markets, the growth Emerging economies in aggregate will continue to see higher real GDP growth rates than
outlook is more mixed. advanced economies through 2023, but the impact on growth from the commodity
price shock differs widely between countries, depending on available policy space and
economic resilience. Tighter financial conditions – higher interest rates and a stronger
US dollar – could weigh on more indebted economies, whereas commodity-exporters
may benefit from higher selling prices (see Figure 4). Most countries in Asia-Pacific are
net commodity importers3 and face a negative terms of trade shock that subtracts from
GDP growth.4 However, even for net exporters e.g. several key Latin American
economies, high commodity prices are not expected to boost growth momentum, since
high inflation, tighter financial conditions and political uncertainty will likely outweigh the
positive terms of trade effects.5 Overall, as prices for so many key imports are rising
sharply all at once, the net effect on global demand is likely to be negative. We expect a
year of lacklustre economic growth.
Figure 3
Current vs. pre-invasion real GDP growth forecasts across different regions, in %
6%
5%
4%
3%
2%
1%
0%
2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023
Advanced markets Emerging markets China US Europe Asia Pacific Latin America
(excl. China) and the Caribbean
Pre-invasion forecast Current forecast

1 In 2020, the EU imported around 25% of its oil and 40% of its natural gas from Russia. See EU imports of
energy products – recent developments, Eurostat, October 2021.
2 See also A. Domash, L. Summers, Overheating conditions indicate high probability of a US recession, VoxEU,
13 April 2022.
3 Australia, New Zealand, Malaysia and Indonesia are commodity net exporters.
4 Economic Insights - Food over fuel: Asia’s price shock, Swiss Re Institute, 29 March 2022.
5 Economic Insights - Latin America: existing growth headwinds to prevail over rising commodity prices, Swiss
Re Institute, 24 March 2022.
Figure 4
Commodity terms of trade changes since the invasion, in %
1.5%
1.0%
0.5%
0.0%
–0.5%
–1.0%
–1.5%
an
re
ia
nd
es
ile
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ia
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in
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an
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Ch
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la
Ko
ay
ex
Ch
In
m
Ko
Br
pi
Ja
al
on
st
i
ai
ga
Ta
lo
al
M
ilip
Ze
ng
Au
Th
h
d
M
Co
n
ut
In
Ph
Si
Ho
w
So
Ne
Note: The figure shows Goldman Sachs’s Commodity Terms of Trade Index gains between 17 February 2022 and 18 April 2022.
Source: Goldman Sachs, Swiss Re Institute
Over the longer term, we expect to see How the conflict will evolve is highly uncertain, but the risks to growth are skewed to the
regime shifts in trade, financial flows and downside (see Chapter 2: Three alternative scenarios). The long-term impact is subject
economic policies. to factors such as major regime shifts in monetary and fiscal policy. In addition, further
fragmentation of global trade and financial linkages will mean lower economic efficiency
– and lower returns on investment. Yet the crisis may also bring renewed focus on much-
needed investment in and fiscal spending on renewable energy capacity and
infrastructure.
Inflation to rise further and persist for longer, but is expected to peak soon
We have raised our inflation forecasts The strongest and most immediate economic impact of the conflict in Ukraine is adding
significantly, particularly in the US, Europe further fuel to existing inflationary pressures, which has prompted us to further revise up
and Latin America, with risks skewed to the our already above-consensus CPI forecasts across all regions. CPI inflation in advanced
upside. economies is now expected to reach 5.4% in 2022, while emerging markets are
expected to see more than double that at 11.5% (see Figure 5). Among the major
economies, we expect headline inflation for the US, euro area and UK to peak later and
higher this year (in the second quarter for the US and euro area, and the autumn for the
UK) than previously expected. Risks are skewed to the upside. China is the key exception,
where we expect CPI inflation to be more contained due to weak domestic demand
conditions. For many other emerging markets, particularly in Latin America, the
additional inflationary pressure from commodity prices comes amid already significantly
above-target inflation. In Asia, inflationary pressure remains more muted, partly due to
price controls, but cost-push inflation will nevertheless be felt, particularly through
higher imported food prices.6
6 Economic insights - Food over fuel: Asia’s price shock, Swiss Institute, op. cit.
Figure 5
Current vs. pre-crisis CPI inflation forecasts across different regions, in %
14%
12%
10%
8%
6%
4%
2%
0%
2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023
Advanced markets Emerging markets China US Europe Asia Pacific Latin America
(excl. China) and the Caribbean

Commodities prices are a key source of We see commodity prices adding to global inflation, with the potential for a drawn-out
global inflation pressure that we do not conflict causing more persistently elevated prices. Brent crude oil prices are up by 46%
expect to ease soon. year-to-date, European natural gas prices up by 36% and wheat prices up by 45%.7
Other agricultural and raw materials, such as metals and fertilizers, are seeing similar
price pressures. Yet financial markets are pricing in a rather rapid resolution of both the
conflict and commodity price shock. Prices trading in the futures market are lower than
spot prices, meaning the impact is expected to be relatively short-lived. For example, oil
futures imply prices will return to pre-conflict levels (around USD 95/bbl) by mid-2023.
This contrasts with the onset of the Arab Spring – the demonstrations and political
upheaval in north Africa and the Middle East from late 2010/early 2011 – when the
market priced persistently higher prices for the foreseeable future (see Figure 6). The
risk is that a drawn-out conflict instead keeps commodity prices higher for longer,
leading to a larger and more extended inflationary impact. In addition, fiscal support
(such as subsidies or foregone tax revenues) may be needed to offset the impact on the
poor of sharply higher prices of necessities. Fiscal offsets to commodity price shocks will
increase government deficits and debts, reducing longer-term fiscal resilience.8
7 As of 18 April 2022.
8 Price controls: no panacea for the current cost-of-living crisis, Swiss Re Institute, April 2022.
Figure 6
Brent crude forward prices, USD/bbl
Arab Spring Conflict in Ukraine

Oil futures curves shift upwards and flatten. Oil futures curves shift upwards and steepen.
Markets expect persistently higher prices. Markets expect temporarily higher prices.
120 120
110 110
100 100
90 90
80 80
70 70
60 60
07 1
12
01 2
07 3
01 3
07 4
01 4
07 5
01 5
07 6
06 6
11 22
05 22
11 23
05 23
11 24
05 24
11 25
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11 28
8
01
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0
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0
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/2
1/
01
07
05
18 Nov 2010 (One month before onset of the Arab Spring) 24 Jan 2022 (One month before onset of conflict in Ukraine)
27 Dec 2010 (One week after onset of the Arab Spring) 03 Mar 2022 (One week after onset of conflict in Ukraine)
7 Feb 2011 (7 weeks after onset of the Arab Spring) 18 Apr 2022 (7 weeks after onset of conflict in Ukraine)
Source: Bloomberg, Swiss Re Institute
Surging commodity prices challenge food security

Disruptions to energy and agricultural Commodity prices, especially energy and agricultural, have surged due to actual and
products supplies from Russia and Ukraine feared supply-chain disruptions and sanctions. In 2021, Russia was the largest natural
are pushing prices higher. gas-exporting country in the world, the second-largest crude oil and condensates-
exporter and the third-largest coal-exporter.9 Russia is also a major producer of
fertilizers (around 16% of world production) and, combined with Ukraine’s production,
among the largest producers of sunflower oil (73%), wheat (34%), barley (27%), and
corn (17%), jointly accounting for the production of 12% of all calories traded globally.10
The loss of supply from Russia and Ukraine cannot be replaced quickly, so is translating
into higher prices.
Higher food and agricultural input costs The UN FAO’s global food price index was already climbing before the conflict,
threatens future food production and reaching in January 2022 the highest level since the 2008–12 cycle peak. Since then,
security. prices have increased a further 18% to the highest level of all data since 1990.11
Increased energy and fertilizer prices, important inputs for agriculture, could further
disrupt global food supply, with the real test to come at the next planting season. This
unfolding crisis threatens both the availability and affordability of food, with potential
for severe malnutrition and even starvation in the most-affected countries. COVID-19
already pushed the number of undernourished people in 2020 to more than five times
higher than any other peak in the last two decades.12
Low-income countries and households may Food price spikes can disproportionately harm low-income countries – and those on
be hit disproportionately hard. low incomes within countries – as staple foods typically account for a larger share of
imports and expenditure. The countries most dependent on wheat exports from Russia
and Ukraine are in Africa and the Middle East.13 In Egypt, for example, the world’s
9 Europe is a key destination for Russia’s energy exports, US Energy Information Administration, March 2022.
10 Data refers to the average share of global trade between 2018 and 2020 by volume, based on FAO and UN
Comtrade data. See also: How will Russia’s invasion of Ukraine affect global food security?, International
Food Policy Research Institute, February 24, 2022.
11 FAO Food Price Index: World Food Situation, Food and Agriculture Organization (FAO) of the UN, April 2022.
12 The State of Food Security and Nutrition in the World 2021, FAO, 2021.
13 Information Note – The importance of Ukraine and the Russian Federation for global agricultural markets
and the risks associated with the current conflict, FAO, 2022.
largest wheat importer, bread prices rose by 50% in the first week of March.14 In the
US, food spending accounts for 27.1% of all expenditure for individuals in the lowest
quintile of the income distribution but only 6.9% for the highest.15 Incomes are unlikely
to adjust quickly enough to maintain consumption levels in real terms, meaning
drastically increased risk of falling into food distress and poverty. The IMF estimates
that the global food price spikes of 2007–08 and 2010–11 kept or pushed respectively
105 million and 48.6 million people into poverty.16
The US labour market is very tight, and In the US, inflation is becoming more entrenched, with pressure broadening out to
inflation is broadening out to slower moving slower moving and harder-to-reverse price categories, such as services as well as
and harder-to-reverse price categories such wages. More than 50% of price categories in US headline Personal Consumption
as wages. Expenditure (PCE) are now experiencing price growth above 5%, for example.17 Yet
labour market conditions in the US are very different from other advanced economies. A
significant number of US workers left the workforce during the pandemic and have yet to
return for various reasons. This has been constraining labour supply, causing a very tight
labour market and rising wages, even as absolute employment numbers remain at below
pre-pandemic levels. With academic research suggesting that this tightness in the US
labour market is more structural, wage inflation may also become higher and/or more
persistent and fears of wage-price spirals are increasing.18 Outside the US, we believe
concerns about “second round” feedback loops for inflation through the labour market
are overdone. The labour market in the euro area, for example, has more slack with no
accelerating wage gains (see Figure 7).
Figure 7 6%
Euro area negotiated wages and US
average hourly earnings, % change 5%
4%
3%
2%
1%
0%
Mar 2009 Mar 2011 Mar 2013 Mar 2015 Mar 2017 Mar 2019 Mar 2021
Euro Area negotiated wages US average hourly earnings

Source: ec.europa, Swiss Re Institute
We envision inflation being structurally While we expect inflation to moderate over the medium-term (see Cyclical stagflation,
higher over the next ten years than in the not the 1970s), on average it will be structurally higher over the next 10 years than in the
past decade. past decade (see Table 3). We have increased our long-term inflation forecasts (beyond
2023). We see US CPI, for example, averaging 2.9% over 2022–2031 compared to the
observed CPI range of 1.8%–2.2% during the last two economic cycles. The reasons for
longer term structurally higher inflation include deglobalisation, decarbonisation and
restructuring of energy supply chains, and somewhat greater tolerance for inflation by
central banks.
14 The Russia-Ukraine crisis poses a serious food security threat for Egypt, International Food Policy Research
Institute, 14 March 2022.
15 J. Orchard, Cyclical Demand Shifts and Cost of Living Inequality, University of California, February 2022.
16 Global Monitoring Report, IMF, March 2012.
17 Trimmed Mean PCE Inflation Rate, Federal Reserve Bank of Dallas, April 2022.
18 A. Domash, L Summers, “How tight are US labor markets?”, NBER working paper 29739, February 2022.
Table 3
Long-term average CPI forecasts across key markets vs. history, in %
Next 10-year average (2022–2031) Average CPI rate over prior Average CPI rate over last
New forecast as of Mar 2022 Prior forecast as of Nov 2021 cycle (2010–2019) two cycles (2000–2019)
US headline CPI 2.9 2.5 1.8 2.2
US core CPI 2.6 N/A 1.9 2.0
UK headline CPI 2.9 2.1 2.2 2.0
Germany headline CPI 2.5 2.0 1.3 1.4
China headline CPI 2.3 2.3 2.6 2.2
Cyclical stagflation, not the 1970s

Our baseline scenario will feel like Our baseline economic outlook is stagflation-like in 2022 and 2023, given we expect
stagflation, but a return to 1970s structural above-trend inflation and below-trend real GDP growth. However, generally strong
stagflation is unlikely. labour markets and well anchored long-term inflation expectations in economies
worldwide set it apart from a structural stagflationary environment as seen in the 1970s.
Our global baseline view is assigned a 55–70% likelihood, and though downside risks
are high, we see only a 5–10% chance of a “1970s-style structural stagflation” scenario
over the 12–18 month horizon (see Chapter 2: Three alternative scenarios).
We expect cyclically high inflation first, The supply shocks from pandemic disruptions and now from the Ukraine conflict have
followed by slower growth and lower caused (large) jumps in many prices, but that is different from a sustained increase in the
inflation through 2023. rate of change of general price levels. Very high inflation is self-correcting most of the
time as it eventually lowers demand, in turn leading to a cooling of price pressures. In our
view the combination of current cost-push inflation and central bank policy tightening
should ultimately subtract from global GDP growth and contribute to lower inflation in
2023 (see Figure 8). Any stagflation-like environment as described in this chapter is thus
expected to be temporary, driven mostly by cyclical factors.19
Nevertheless, 1970s-style stagflation is However, the current cyclical stagflation could become structural, and Table 4
a tail risk, and any erosion of central bank summarises some of the factors that could portend a regime shift. The greatest
independence would be a warning sign. difference between the baseline or recession scenarios and the 1970s scenario is a sea
change in central bank policymaking. The rise of independent inflation-targeting central
banks in both advanced and emerging economies was a paradigm shift that helped to
lower and anchor inflation expectations. So despite large upside inflation surprises, for
now financial markets are still pricing in a high probability of central banks eventually
tightening policy sufficiently to meet their core price stability mandates. Second, labour
markets have become less unionised and recent anecdotal evidence aside, it is hard to
imagine a return to 1970s levels of insider-outsider collective wage bargaining dynamics
causing both higher wage inflation and weaker trend productivity growth. While it is
possible that economic consensus and institutions undergo another paradigm shift (e.g.
a return to economically distortionary and ultimately ineffective widespread price
controls), or perhaps with national security objectives dominating price stability, this in
our view remains a low probability event for now.
19 Economic Insights - Stagflation: cyclical rather than structural, and temporary, Swiss Re Institute, 21 March
2022.
Figure 8 8%
Phase diagram of CPI inflation and real GDP 7%
growth rates (2021 actual, 2022 and 2023
6%
Swiss Re forecasts
5%
CPI inflation
4%
3%
2%
1%
0%
–1%
0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
Real GDP growth
Euro area UK US China Japan Australia

Note: The figure shows the combination of CPI inflation and real GDP growth for 2021 (actual), 2022 and 2023
(SRI forecasts) along the direction of the arrows for major economies. Source: Bloomberg, Swiss Re Institute
Table 4
Cyclical vs structural stagflation
Stagflation is more cyclical Stagflation turning structural

Persistence of ̤ Demand will fall as real incomes are squeezed ̤ Government spending set to rise (eg, on defence)
shocks ̤ Signs of supply blockages easing prior to the conflict ̤ More redistributive tax policy and regulatory shocks
̤ Commodity futures suggest prices will decline ̤ Deglobalisation means less efficient global supply chains
̤ Supply chains adapting, less sensitive to lockdowns ̤ Introduction of distortionary price controls
Central banks ̤ Central banks no longer believe in an exploitable long-term ̤ New frameworks tolerant of inflation overshoots
unemployment and inflation trade-off ̤ More conflicting mandates (eg, climate change)
̤ Explicit and credible inflation targeting regimes ̤ Other priorities (eg, national security) may override central bank
̤ Greater political independence independence, risking fiscal dominance
Labour markets ̤ Unionisation rates are low and labour markets more flexible and less ̤ Cost-of-living crisis leads to a regime shift in workers’ wage
regulated than in the 1970s bargaining (collective or otherwise) to compensate
̤ Firms will continue or even accelerate automation to substitute ̤ Reduced migration lowers supply of foreign workers, and reduced
capital for labour entry of EM workers into the global labour market
̤ Workers who left the labour market during the pandemic will return ̤ Labour supply falls are permanent (eg, preference for work-life
in a hot economy balance), and reservation wages rise
Inflation ̤ Long-term inflation expectations remain anchored* ̤ Inflation surprises and long-tern expectations drifting higher
expectations ̤ Forecasters expect central banks to meet targets ̤ Inflation “too high for too long” now turning broader
̤ Financial market pricing of future inflation has not accelerated ̤ Consumer surveys show perceived and expected inflation both
beyond central bank targets sharply higher
Productivity growth ̤ Productivity boom due to new technologies eg, AI, clean energy ̤ Overestimation of trend productivity growth and the output gap
allows faster non-inflationary growth cause policy to be systematically too loose
*US 10-year breakeven inflation is at 3% as of 18 April 2022 (up from 2.4% as of 18 February 2022), the highest on record.
Nominal interest rates rising, but by less than inflation

High inflation is triggering major central The prospect of inflation rising further from already high rates is forcing central banks to
banks to accelerate interest rate rises this accelerate interest rate hikes, particularly in the US and UK. We have raised our policy
year. rate expectations for the Fed this year to six rate rises (from four) for a total of 200bps,
and from three to five rate hikes for the Bank of England (BoE, see Table 1). Risks are
skewed upward. Even for the European Central Bank (ECB) we now expect a lift-off in
interest rates at year end, starting with a hike to the current –0.5% deposit rate, followed
by another hike to the deposit and also the current 0.0% refinancing rate. The ECB may
delay the normalisation of negative interest rates if the euro area falls into a recession,
and/or if European peripheral bond yield spreads widen significantly. We do not expect
further rate rises from either the Fed or BOE in 2023, given slowing growth and likely
meaningfully easing inflation pressures. We believe it will be difficult for central banks to
engineer a soft landing as they hike interest rates into slowing growth, with a
significantly higher risk of recession (see Chapter 2: Three alternative scenarios).
Further tightening will come from the sharp Major central banks are also on the path to sharply withdrawing liquidity from financial
withdrawal of liquidity as major central markets as they actively reduce the size of their balance sheets. The Fed and BoE are set
banks reduce their balance sheets. to lead the charge on quantitative tightening (QT). We expect the Fed to do this via a
passive roll-off of Treasury bonds and outright active sales of mortgage-backed
securities from Q2 onwards (we estimate about a USD 90 to 100 billion per month
reduction in the overall Fed balance sheet for later this year). The BoE earlier this year
ceased reinvestments of its maturing bonds and signaled that it would consider actively
selling assets after the policy rate reaches 1%, implying this could happen this year if the
economy is not derailed materially. In March, the ECB also reaffirmed an accelerated
tapering of net asset purchases (QE) for this year. Active QT (outright asset sales)
tightens financial conditions more than passive QT (not reinvesting maturing bonds, as
happened in the previous policy normalisation cycle) and pushes yields more forcibly
higher. Central banks’ limited experience with more active tightening however makes the
market impact more uncertain compared with hiking policy rates, further reducing the
likelihood of a soft landing and presenting another downside risk for growth.
Emerging economy central banks will also Rapid withdrawal of liquidity from the global financial system, in combination with
continue their tightening cycle, though less anxiety over geopolitical events, may spill over to emerging markets via capital outflows.
so in Asia. That would cause exchange rate depreciation and add to stagflationary pressure. Many
emerging markets already tightened monetary policy pre-emptively during the economic
recovery last year, earlier than advanced economies. Further tightening may still be
needed driven both by additional inflationary pressures and to follow the tightening by
advanced economies. There are exceptions in Asia. In China, we expect the People’s
Bank of China to stay accommodative and cut rates further this year as it seeks to
stabilise growth. Other Asian central banks can also be more patient in policy tightening
given more modest domestic inflation so far, less tightness in labour markets and weaker
pandemic recoveries.
We may be at the start of a regime shift in Inflation and monetary policy tightening are driving long-term sovereign bond yields
global interest rates. We expect slightly higher across regions and the global phenomenon of negative nominal bond yields may
higher long-term sovereign bond yields this be approaching an end but slowing growth will constrain the extent of policy tightening
year versus year-end 2021. and the sheer magnitude of inflation will continue to keep real yields at historically low
levels. The total amount of global negative-yielding debt is now less than USD 3 trillion
(or 8% of total global government bonds), sharply down from USD 10 trillion this January
and USD 18 trillion at end-2020.20 We expect higher long-term nominal sovereign bond
yields this year versus year-end 2021 and have raised some of our year-end 10-year
sovereign bond yield forecasts, notably for the US from 1.8% to 2.3%, with risks skewed
to the upside. Yields may be particularly high in the first half of this year as markets price
in both higher real yields and inflation expectations over the next few months (see Figure
9) but slowing growth will likely weigh on long-term bond yield levels in the second half
of this year. The tightening is similar in kind but different in degree across regions, with
the rise in the US, for example, being higher and more sustainable than in Europe, where
debt sustainability is a greater issue given high debt and comparatively lower growth.
20 Data as of 18 April 2022, Bloomberg. See also Keeping it real: the start of a new interest rate regime?, Swiss
Re Institute, 13 April 2022.
Figure 9
Evolution of 10-year US Treasury bond yield (%)
3.5% 0.0%
3.0% –0.2%
2.5% –0.4%
2.0% –0.6%
1.5% –0.8%
1.0% –1.0%
0.5% –1.2%
0.0% –1.4%
21
21
21
21
21
21
21
21
21
21
22
22
22
2
02
02
02
20
20
20
20
20
20
20
20
20
20
20
20
20
l2
v2
r2
n
ar
ril
ay
ct
ar
Ju
Ap
No
De
Ja
Ju
Fe
Au
Se
Ja
Fe
Ap
O
M
M
M
US 10y Nominal Yield US 10yr Breakeven US 10y Real Yield (RHS)

Source: Bloomberg, Swiss Re Institute
A shift away from extreme monetary policy Finally, looking beyond the 12–18 month horizon, this tightening cycle is also a chance
enables better future long-term market for central banks to exit where possible from unconventional monetary policies, and ease
functioning and resource allocation. the related negative effects on economies. Prolonged periods of extremely low or
negative interest rates distort the capital allocation in the economy, slow structural
change by keeping zombie companies afloat, weaken the long-term financial resilience
of banks and insurance companies,21 and create a disincentive for governments to
undertake structural reforms. Undistorted capital allocation decisions and a resilient
financial sector are prerequisites for strengthened productivity and long-term growth.
21 Financial stability implications of a prolonged period of low interest rates, Bank of International Settlements,
Committee on the Global Financial System Paper 61, 5 July 2018.
Three alternative scenarios

The macroeconomic outlook is currently extremely uncertain, with risks skewed to the downside. We assign our global
baseline view only a 55–70% likelihood. The combined likelihood of our two pessimistic alternative economic scenarios,
“global recession” and “1970s-style stagflation”, now have a higher 25–40% probability over the next 12–18-month
horizon. Of the two downside scenarios, we assign a 20–30% likelihood that higher inflation leads central banks to hike
policy rates more aggressively, leading to a hard-landing recession, and 5–10% to structural stagflation. We assign a
below-5% likelihood to an optimistic “Golden 20s” scenario over said forecast horizon.
We see a “global recession” as the most The most likely of our two downside scenarios is a “global recession” (20–30%
likely downside scenario. probability). As inflation continues to rise, the outlook for more abrupt and aggressive
policy tightening (in particular for the Fed) is quickening. With more aggressive policy
rate hikes, the likelihood that policymakers will be able to engineer a soft-landing and
avoid a recession is falling. Policy rate hikes large enough to tame elevated inflation
would lead to a sharp, persistent tightening in financial conditions, crushing aggregate
demand and pushing major economies into recession. This would pull inflation down
(see Figure 10). Several indicators point to the US being in a late stage of the business
cycle22, suggesting high recession risk.23 See also Table 5 for an assessment of some key
risks and drivers that could see the US economy pushed into one of the downside
scenarios.
Another alternative downside is severe As discussed in Chapter 1, we also assign a small probability to current cyclical
“1970s stagflation”, though the likelihood stagflation becoming structural, resulting in “1970s-style stagflation” (5–10% likelihood).
remains low. For stagflation to be structural and prolonged there must be more than irregular
increases in prices, even if the magnitudes of individual price shocks are large. Should
central banks focus on supporting growth rather than bringing inflation under control,
fundamental shifts in the labour market allow wage-price spirals to develop, or long-term
inflation expectations become unanchored, the environment could quickly tilt toward
one akin to that of the 1970s.
An end of supply constraints and A third, optimistic alternative is “Golden 20s”, but we assign this a less than 5%
normalisation of prices could ease probability. If global supply constraints ease and inflation falls faster than expected,
conditions into an optimistic “productivity sustained non-inflationary growth is possible. For example, a quick resolution of the
revival” scenario. conflict in Ukraine and a positive supply shock would allow central banks to tighten
interest rates by less or more slowly, boosting economic growth. Monetary and fiscal
stimulus could be smoothly phased out, with interest rate rises translating into benign
financial conditions. Under this scenario, the outlook would be supported by increased
digitalisation and smart, long-term spending from governments and corporates (eg,
towards sustainable infrastructure investments, education, R&D, and capital
investments).
Figure 10 Higher
Overview of our scenarios
5–10%
1970s
Global inflation
Stagflation
55–70%
<5%
20–30% SRI Baseline
Optimistic
Global Scenario
Recession
Lower Global growth Higher

Note: Percentages indicate scenario likelihoods. 25–40% indicates the combined likelihood of the downside
scenarios or combinations thereof playing out. Left of the dotted axis indicates global growth is below-trend growth.
22 Is the US business cycle about to turn? Late-cycle dynamics emerge, Swiss Re Institute, February 2022.
23 See the Appendix for detailed forecasts associated with the alternative scenarios.
18 Swiss Re Institute sigma No 2/2022 Three alternative scenarios
In a recession scenario, the length and In case of a renewed global recession, the longer-term growth outlook beyond the 12–
depth of the contraction also matters 18 month horizon depends in part on whether the contraction is relatively short and
mild, or whether it is more like the balance sheet/deleveraging recession triggered by
the 2008–09 global financial crisis (GFC). For now, the same financial imbalances and
mis-allocation of resources are not present today as there was in 2007, and labour
markets are notably stronger compared with the “jobless recovery” post-GFC. A faster
process of restructuring and reallocation of resources towards more productive firms
would be the best of a bad scenario. Stagflation, in contrast, could represent another
decade of lost real growth.
Table 5
Scenario narratives and signposts
Scenario Narrative Signpost Series to monitor Assessment

̤ Geopolitical tensions and supply bottlenecks remain Policy shift Deviation of 36-month inflation (annualized) from 2%
̤ Central banks step in too late to address inflation and Months of 36-month inflation overshoot
their tools prove insufficient, reining in demand but ineffective
Labour market Collective bargaining
Severe 1970s-style stagflation
against supply issues

Trade union density
̤ Longer-term inflation expectations are unanchored in a
disorderly fashion Unemployment rate (U-1)
̤ Fundamental labour market shifts allow wage-price spirals Unemployment rate (U-6)
(5–10%)
to develop Initial jobless claims

̤ Slowing economic activity from tightening monetary policy
Labour force participation
leads to higher unemployment. Central banks’ high priority
Broadening inflation Nominal hourly wages
on achieving full employment sees them ease policy again,
pressures Core CPI
resulting in further upward inflationary pressure
Unanchored inflation Consumers' expected inflation during the next 5–10 yrs
expectations Fed Common Inflation Expectations
10y breakeven
̤ US is in the late stage of the business cycle Risk of more Difference between CB rate and Taylor Rule (absolute)
̤ Geopolitical tensions and supply bottlenecks remain aggressive policy Monetary policy uncertainty
unresolved tightening
Core CPI
̤ Disorderly oil cuts between Europe and Russia pushes the risk
Rent (CPI component)
premium on oil and gas even higher
̤ The inflationary backdrop prompts quicker and more Share of PCE items with price growth above 5%
aggressive central bank tightening than expected, especially Further energy Brent crude futures (price level)
in the US, which results in a “hard landing” market stress Brent crude futures (rate of increase, 7-day average)
̤ Financial conditions tighten sharply and persistently,
Natural gas futures (price level)
feeding back negatively to the real economy
Natural gas futures (rate of increase, 7-day average)
Global recession
Demand slowdown Real wages

(20–30%)
Consumer sentiment
Real consumer spending
Disposable income
Household savings
Consumer credit
Manufacturing PMI
Services PMI
Abrupt market/ Financial conditions index
financial conditions 10yr-2yr spread
stress
IG credit spreads
30y mortgage rate
Bankruptcies
Notes: These are possible narratives and not mutually exclusive. Data is for the US only. Colour shading is based on the percentiles and Legend:
z-scores of the latest data, as well as the recent trend (3 month). For the 1970s-style stagflation scenario, data since 1970 are used Not close to being met
where available, otherwise data as far back as possible are used. For the global recession scenario, data since 2011 are used. The top
signposts to watch for further stagflationary pressure are: (1) tight labour markets and signs of wage-price spirals, (2) broadening of Near being met
inflation and unanchored inflation expectations, and (3) insufficient policy tightening to combat inflation pressures. Threshold breached
Source: OECD, Bloomberg, Swiss Re Institute
The impact on global insurance markets

2022 will be a transition year for the insurance industry with the inflation surge and rising interest rates. Inflationary
pressures will be felt through higher claims, particularly for P&C insurers, and we expect to see some direct loss exposures
in specialty lines. Therefore, we see headwinds to P&C profitability in 2022, and tailwinds from further rate hardening
responses in 2023. Rising interest rates are a positive prospect for the whole industry and will likely benefit investment
results, although volatile financial markets and widening bond spreads are expected to create accounting losses in 2022.
Furthermore, we see rising inflation and slowing economies to lower demand for both life and non-life insurance this year.
However, nominal premium growth is set to rebound stronger in 2023 mainly due to higher pricing for P&C and health
insurance business. In life insurance, we anticipate lower consumer disposable income and a slower economy to
temporarily increase lapses and surrenders and curb real demand for life products. This will be partly offset by the need for
higher benefit limits and increased attractiveness of guaranteed benefit products from higher interest rates.
The full implications of the conflict for the global insurance industry will depend on its
length and severity. However, insurers will not avoid feeling the impact of the
significantly higher inflation, lower growth outlook this year. Higher inflation creates
multiple challenges for insurance companies, particularly in P&C insurance. However, the
effect of high inflation can be complex since higher interest rates typically benefit
insurers’ fixed income-heavy investment portfolios.
P&C insurance: claims inflation the key exposure

P&C insurers will feel the impact of high P&C insurers will primarily feel the impact through two channels, both connected with
inflation through claims and investments. inflation. On one hand, the conflict is exacerbating the post-COVID-19 inflation shock
and we expect this to cause an increase in claims severity, which would erode insurers’
profitability. On the other hand, the impact of inflation will operate though a second
channel – that of rising interest rates – that will positively impact their investment
income. Nevertheless, we believe that any gains in investment returns from inflation-
induced higher interest rates will not be enough to offset higher claims, and that overall
impact on P&C sector profitability will be negative. In parallel, there could be ambiguous
effects on P&C insurers’ balance sheets, as a mismatch between the duration of assets
and liabilities can lead to unsynchronised exposure of the balance sheet to varying
interest rates and inflation over time. The predominant effect we expect on P&C insurers
will therefore be through the claims channel.
Ukraine: limited direct, but potential large indirect impacts for P&C insurers
The direct effects of the conflict on P&C For the global P&C insurance industry outside Ukraine and Russia, we expect the
insurers are expected to be manageable. immediate and direct impact from losses triggered by the conflict to be confined and
manageable. The Ukrainian and Russian markets will face considerable loss of premium
income due to the conflict and international sanctions. We expect Russian direct P&C
premiums to drop significantly in 2022 given economic sanctions, the voluntary
withdrawal of foreign companies from the market, and the volatility of the Russian
ruble. Wider negative premium impacts may be felt in specialty insurance covers that
are directly linked to lower demand due to disrupted economic activity or limitations in
capacity due to re-underwriting. We expect accelerated premium growth for cyber due
to rising rates and higher risk perception.
Significant claims may occur in niche Significant claims may be asserted in niche markets such as aviation war, trade credit,
markets such as aviation war, trade credit, political risk or marine war, depending on the provided covers and policy wordings
political risk or marine war. (there likely will be protracted litigation). First loss estimates put the final claims cost for
Lloyd’s of London in a GBP 1billion- GBP 4 billion range after reinsurance, indicating a
significant but manageable overall loss.24 There are concerns about several hundred
aircraft still in Russia that are leased from international firms. Another line of business
that may be directly exposed globally is cyber. One recent research note from S&P
outlined a range of USD 16 billion (baseline) to USD 35 billion for potential specialty
24 “Insurance industry braces for soaring payouts from war in Ukraine” Global Reinsurance, 17 March 2022.
20 Swiss Re Institute sigma No 2/2022 The impact on global insurance markets
insurance losses from the conflict.25 Willis Towers Watson estimates insurance losses
of “something close to” USD 15 billion.26
However, the indirect effects of the conflict However, we see the indirect effects as widespread and considerable. These will
will be widespread and considerable. primarily manifest in claims, via higher inflation and potential supply chain shortages.
New business growth will also decline as the global economy slows.
Higher inflation to increase P&C claims severity this year

The indirect impact of the conflict will be The indirect impact of the conflict will be felt primarily through additional inflationary
felt primarily through additional inflationary pressure that increases claims severity. Pressure from higher energy prices, as well as
pressure that increases claims severity. further impacts on already-disrupted supply chains, is expected to intensify claims
inflation in immediately affected lines of businesses such as property and motor
insurance.
Higher-than-average inflation shocks in In the current inflation shock, characterised by particularly high construction and car part
car parts and repairs will cause a surge costs, we expect motor and property insurance claims to be most affected in the short
in motor claims and put pressure on run (see Table 6). Car and part prices are currently trending higher than general CPI
profitability for this largest line of business. inflation in most advanced economies, driven mainly by supply chain shortages still
lingering from COVID-19 lockdowns. Car repair costs are also experiencing higher-than-
average inflation due to high wage growth. In the US, for instance, prices of motor
vehicles and parts rose by more than 13% in 2021, almost three times the general
inflation levels of the country and is expected to continue to increase in 2022.27 In the
euro area, car repair costs were also rising in 2021, but with around 3.5% much less than
in the US, and higher than core CPI of 2.6%.28 We expect the conflict, as well as renewed
lockdowns in China, to cause further disruptions to the automotive industry’s supply
chains, prolonging current supply bottlenecks for new cars and spare parts and creating
upward pressure on car part prices in the short to medium term. However, we would
expect the supply chain shortages to clear past the medium term, unwinding inflation in
motor parts and easing the pressure on motor claims.
Table 6 Line of business Impact Reason

Impact of current inflation shock on Property Above-average Soaring construction prices
global P&C claims by line of business
Motor, physical damage Above-average High car (part) prices and wage growth
Motor, bodily injury Average Wage growth in line with core CPI; medical cost inflation has
remained below general CPI inflation so far
Liability Average Wage growth in line with core CPI; medical cost inflation has
remained below general CPI inflation so far
Marine/Aviation/Transport Average In line with general CPI inflation
Supply shortages in construction sector are Soaring construction prices, growing at rates faster than general CPI inflation, are putting
putting short-term inflationary pressure on particularly high pressure on property claims. In the US by the end of 2021, the
property claims. construction sector had an estimated inflation rate of 5.1%, double the average of the
past decade, and we predict it will continue growing at 7–8% for 2022. The current
inflationary shock is primarily driven by supply disruptions for construction materials and
labor shortages, but we see this as temporary and expect price rises to revert to the
wider US CPI level over the next two years. In the European Union, construction costs for
new residential buildings increased by 10% in 2021.
25 Russia-Ukraine Conflict Adds To A Bumpy Start To 2022 For Global Reinsurers“, S&P, 31 March 2022.
26 Insurance Marketplace Realities 2022 Spring Update, Willis Tower Watson, 7 April 2022.
27 See Consumer Price Index, US Bureau of Labor Statistics.
28 See Harmonised Index of Consumer Prices (HICP) - Overview, Eurostat.

The impact on global insurance markets sigma No 2/2022 Swiss Re Institute 21
Over the long term, P&C lines of business Over the long term, P&C lines of business with longer tails will be the most exposed to
with longer tails will be the most exposed sustained elevated inflation in all sectors of the economy. This applies in particular to
to sustained elevated inflation. unanticipated inflation trends, while anticipated inflation levels should be considered in
pricing of insurance contracts. Long-tail lines include general liability, medical
malpractice and workers’ compensation, and are characterised by long-tail settlement
periods that are exposed to inflationary risk between the loss occurrence and its
settlement. These lines are particularly vulnerable to persistent inflation in wages and
medical costs. In 2021, US wage growth was 4.2%, twice the average rate of the past
decade and is expected to average 5% in 2022. For Europe we observe similar trends,
while Asia Pacific has remained less affected. Other lines of business such as property
and motor claims, are also exposed to inflation in the long run but less severely. In these
lines of business, claims are mostly settled based on the prices in the moment when the
loss occurred, limiting the potential for inflation effects to accumulate over time. Capping
of total losses by policy limits and automated indexing would also help to lower the
exposure of these lines to inflation.
Commercial rate hardening to go on as claims severities move higher

Claims inflation is expected to feed through Claims inflation is expected to feed through into further P&C rate hardening. After two
into rate hardening in both 2022 and 2023. years of strong gains, we expect additional inflation to exacerbate the uptrend in
premium rates in many commercial and personal lines, to catch up with rising loss costs.
In 2021, rate momentum moderated partly, but remained strong in the US, Europe and
Australia. In the fourth quarter of 2021, gains were mainly in Financial & Professional
lines (+31%), and softened to +8% for Property, with Casualty lagging (at +5%).
Table 7
Commercial insurance rate trends at the beginning of 2022 (data as of end fourth quarter 2021)
Rate changes in % Global US UK Europe LatAm Asia China Pacific

Property  8%  7%  10%  10%  7%  3%  0%  8%
Casualty  5%  4%  4%  7%  –3%  2%  0%  15%
Financial & Professional Liability  31%  34%  43%  13%  12%  17%  15.7  18%
Composite  13%  14%  22%  9%  4%  4%  2.4  13%
Source: Global insurance market index, Marsh
We expect continued hardening, We expect the market to continue hardening, particularly in commercial property and
particularly in commercial property liability, and especially in advanced markets. We expect property and motor insurance to
and liability, and especially in advanced be particularly challenged by higher claims costs in 2022 due to inflation in construction
markets. materials and spare parts. The pressure should be lower in casualty and financial &
professional lines of business, since these are more exposed to healthcare expenditure
and wage developments, which are comparatively more stable so far. We would expect
additional rate increases to only be partially earned in 2022 and spill over into premium
growth in 2023.
Reduced risk appetite and mark-to-market We see the momentum for rate hardening also being sustained by a reduction in
capital losses are further contributing to insurers’ risk appetite which is driven by modelling uncertainty in an environment of
rate hardening. ambiguity about macro developments and volatile capital markets. Elevated modelling
uncertainty arises from multiple factors including social inflation, which has pushed up
US liability claims; prior-year adverse reserves development,29 uncertainty around
COVID-19 business interruption losses; successive years of above-average cat losses;
continued uptick in secondary peril losses; and increased scrutiny of the modelling of
climate change impacts. 30 Furthermore, economic capital has been squeezed in the first
quarter of 2022 by rising interest rates, widening credit spreads and lower equity
indices. Mark-to-market impacts decreased US and Bermuda P&C insurers’ tangible
book values by an estimated 7%, according to Dowling & Partners.31
29 There is ongoing adverse development of US liability (general liability occurrence and commercial auto)
underwriting years of 2015 through 2019.
30 Economic Insights - The re/insurance underwriting cycle: hard market conditions go on“, Swiss Re Institute,
4 June 2021.
31 IBNR Weekly no. 12, Dowling Research, 24 March 2022.
Real-terms premium growth expected to soften

Heightened inflation will subdue real Although the P&C sector emerged resilient from the COVID-19 pandemic, heightened
premium growth across the entire segment. inflation will subdue real premium growth across the entire segment. Inflation of
exposure values and rate hardening will drive strong nominal premium growth in 2022
and 2023 despite the economic slowdown, particularly in North America and Europe
(see Figure 11). We forecast strong nominal global P&C premium growth of 7.1% in
2022, but expect this to be very largely eroded by persistent and even higher inflation,
down to only 1.9% in real terms. We estimate that global premiums will reach USD 2 130
billion in 2022. Growth should resume at an above-trend 3.2% in 2023, and to stabilise
at around 2.4% through to 2025.
Bifurcation in motor and commercial lines Recent bifurcating dynamics in motor and commercial lines premiums are expected to
premiums is expected to narrow in 2022. narrow in 2022. In 2021, global motor premiums contracted 0.6% in real terms while
global commercial lines grew by 5% real (11% nominal) due to strong pricing and
resilient demand. We see global motor expanding by 1.0%, also partly due motor
insurance in China which should normalise after the government dramatically liberalised
the market in a de-tariffication shock in 2021. Commercial lines insurance growth will
moderate to 2.4% in real terms.
Figure 11 7%
Global and regional real P&C premium 6.4% 6.4%
6.2% 6.2%
growth forecasts, February 2022 and current 6%
5%
4.2%
4% 3.8%
3.6%
3.2%
3%
2.7% 2.6%
2.5% 2.5%
2% 1.9% 1.9% 1.8%
1.2%
1%
0%
2022 2023 2022 2023 2022 2023 2022 2023
World Advanced markets Emerging markets China
(excl. China)

Premium growth in advanced and We expect sustained inflation to erode premium growth in advanced and emerging
emerging markets to suffer more from markets (excl. China) this year. In advanced markets we forecast real annual premium
sustained inflation in 2022. growth to be below trend on average in 2022 at less than 2%, and well below 2021.
High inflation in Europe and the US is the key dampener on real growth in what is
otherwise a strong nominal recovery as pandemic restrictions roll back. We expect rate
hardening due to higher claims inflation this year to support the recovery in 2023. In
contrast, P&C premiums in emerging markets will grow above trend at 4.3% in 2022 and
5.0% in 2023, supported by recovery in China. The Chinese market will see particularly
strong growth in commercial lines (eg, liability, engineering, commercial property),
which are benefiting from fiscal stimulus.
The expected growth slowdown will also The accelerated global economic slowdown will also cause an expected small but
cause a small negative impact. broad-based negative impact on new business across all lines. The decline in economic
activity is more significant for Europe compared to other regions. However, since the
majority of P&C insurance is related to real asset values (eg, buildings, cars), we do not
expect the forecast lower GDP growth to feed 100% through to the sector.
Inflation headwinds to weaken industry ROE in 2022

We expect global non-life insurance We expect global non-life insurance industry profitability to be challenged this year and
industry profitability to be challenged this next as inflation headwinds on claims offset the significant ongoing rate increases in
year and next. commercial insurance, and partly also in personal lines. We forecast sector return on
equity (ROE) of around 5% in 2022, down from 6.2% in 2021 based on statutory
accounting data,32 against a more stagflationary macroeconomic backdrop resulting
from the conflict in Ukraine. We see significantly higher inflation globally increase claims
costs. As a result, we forecast a worsening of the underwriting result in 2022 to a
combined ratio of 101%, compared to a significantly cat impacted 2021. We see an
improvement of underwriting results and ROE in 2023 based on the benefits of ongoing
rate hardening while inflation pressures are normalizing. The profitability gap in non-life
insurance33 will narrow, but not disappear.
Investment income is forecast to remain Investment income is forecast to remain subdued despite the trend towards higher
subdued despite the trend towards higher interest rates in the US and other economies (see Figure 12). Moderately higher re-
interest rates. investment yields in key markets will not significantly improve insurers’ overall portfolio
yields immediately but are a positive to earnings in the long run as bond portfolios
gradually roll over into higher yields. Meanwhile, lower equity markets, rising interest
rates and widening credit spreads have led to mark-to-market valuation losses. Dowling
estimates an average 7% negative impact on tangible book values for their sample of US
and Bermuda P&C re/insurers during the first quarter of 2022.34 With (re)insurers
typically holding fixed income investments to maturity, most of these near-term book
value losses are not flowing through earnings (ROE) but reduce capital in GAAP
accounting.
Figure 12 20%
Operating performance for eight major
advanced insurance markets
15%
10%
5%
0%
–5%
2006 2008 2010 2012 2014 2016 2018 2020 2022
Underwriting result Investment result Operating result

Note: The sample consists of the US, Canada, United Kingdom, Germany, France, Italy, Japan, Australia, based
on statutory accounting. Source: Swiss Re Institute
Stock price indices suggest P&C sector Forward-leading indicators, such as non-life insurance sector stock price indices,
profitability will deteriorate in key markets suggest mixed profitability outlooks (see Figure 13). Relative valuations of US and
in 2022. European non-life insurers were roughly reflecting interest rate changes throughout
2021. We see therefore our forecasts of gradually rising interest rates as a long-term
positive for P&C insurers’ earnings potential. There was valuation boost around the
January renewals when news of solid rate increases spread, however, current inflation
worries are a counterforce to the perceived benefits of the current rate environment.
Relative valuations started to worsen at the beginning of 2022 for European insurers
which are exposed to a stronger economic slowdown and also have more direct loss
exposures to the Ukraine conflict through specialty lines in the sample (especially UK).
32 Statutory industry ROEs tend to be lower with the inclusion of mutuals, and less volatile with no mark-to-
market valuation changes flowing through income statements.
33 For an analysis of the non-life profitability gap, see sigma 5/2022: Turbulence after lift-off: global and
economic and insurance market outlook, Swiss Re Institute.

34 Dowling & Partners, op. cit.
Figure 13
P&C insurance sector stock price index ratios (1 December 2020 = 100) and US 10-year Treasury bond yield.
140 3.5%
130 3.0%
120 2.5%
110 2.0%
100 1.5%
90 1.0%
80 0.5%
70 0.0%
0
20
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21
21
21
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US Europe UK APAC UST10 (RHS)

P&C Insurance index relative to broad stock market index. Indices: US = Dow Jones US Non-life Insurance Index, Europe = STOXX Europe Non-life Insurance Index,
UK = FTSE 350 Non-life Insurance Index, APAC = BI APAC Non-life Insurance Valuation Peers. Sources: Bloomberg, Swiss Re Institute.
The impact of economic inflation on L&H insurers

Inflation has a complex and primarily The impact of heightened inflationary pressure on life and health insurance is complex,
indirect impact on L&H insurers, starting primarily indirect, and starts with investment results. First and foremost, we expect
with investment results. investment results to benefit moderately from rising interest rates. Only slightly higher re-
investment yields for long-dated bonds in key markets will not significantly improve
insurers’ overall portfolio yields immediately but are a positive to earnings in the long run
as bond portfolios gradually roll over into higher yields. Meanwhile, lower equity
markets, rising interest rates and widening credit spreads have led to mark-to-market
valuation losses. With insurers typically holding fixed income investments to maturity,
most of these book value losses are not flowing through earnings (ROE) but reduce
capital in GAAP accounting.
Interest rate hikes have a mixed impact The interest rate hike impact on profitability of savings and guarantee products is mixed.
on profitability of savings and guarantee In-force life savings products with guarantees will see improved nominal profitability
products. from higher interest rates driven by increasing inflation. This is particularly relevant for
European insurers with large legacy books of guarantees that are currently in the money.
At the same time, in-force business with guarantees may see an increase in lapses and
surrenders. This will be partially offset by replacement with new policies with higher
guarantees, which adds to expenses.
Meanwhile, claims facing traditional On claims, we do not see the same cost inflation seen in P&C to impact traditional life
life insurers are relatively insulated from products. The inflationary impact on fixed-benefit life insurance products like term life or
inflation dynamics… critical illness (CI) insurance is largely neutral, since payouts are defined at the inception
of policies. However, higher CPI inflation can adversely impact life insurance profitability
through higher wages and increases in other operational expenses – limited at the
moment – by pushing up the expense ratio. A majority of life premiums written in a year
are in-force business, where premium rate for the entire policy duration and benefits are
normally fixed at the inception of the policy. For new business written, inflation has no
impact on the mortality experience and thus the mortality claims payment and the
charge for risk. Any inflation-related upwards adjustment in premium would only be to
the extent of its impact on the operating and expense ratio, which is a small part of the
pricing.
…whereas health insurers are exposed to Nevertheless, higher inflation typically leads to higher claims payouts for indemnity-
claims inflation and insufficient reserving. based health insurance. It implies higher costs of future claims and increases the risk of
insufficient reserving for business from prior underwriting years. However, health is a
short tail business and premiums are usually repriced based on claims experience and
age-bracket. Health insurers can react to a surprise in claims inflation and expenses
relatively quickly.
Table 8
Impact of high inflation on L&H insurance
Thematic Impact Reason

Premium growth
Protection products Moderately negative ̤ Lower disposable income and a slower economy will curb real demand for protection products.
(mortality, CI, etc.) ̤ Stronger nominal premium growth due to need for higher benefit limit.
Savings products Moderately negative ̤ Prolonged and/or severe inflation erodes the value proposition of savings products and increase
(unit-linked, guaranteed lapses and surrenders.
benefit, annuity, etc.) ̤ Lower disposable income and a slower economy will curb demand for saving products.
̤ Rising interest rates will trigger some replacement of savings products with new policies with higher
guarantees.
Indemnity-based Moderately negative ̤ Lower disposable income and a slower economy will curb demand for indemnity-based products.
products (Health)
Profitability
Protection business Neutral ̤ Payouts defined at the inception of policies
(Mortality, CI, etc.)
Savings-linked business positive ̤ Rising interest rates boost profitability of in-force business with guarantees.
(unit-linked, guaranteed
benefit, annuity, etc.)
Indemnity-based negative ̤ Higher claims payouts and higher cost of future claims. Short-tail business and rates can be adjusted
products (Health) relatively quickly
Investment results Moderately positive ̤ Slightly higher investment income due to higher interest rates. Only new investment will benefit from
interest rate hikes.
̤ Lower realised investment gains/higher realised investment losses due to increase in mark-to-market losses
Expenses Moderately negative ̤ Higher wages and administrative expenses, with negative impact on profitability
Societal resilience to risks will also take a In parallel, societal resilience to risks will take a hit as inflation impairs demand for
hit as inflation impair demand for insurance insurance coverage. Sustained high inflation in a low real growth environment may erode
coverage consumers’ disposable income, resulting in lower demand for life and savings insurance
products. Prolonged high inflation also tends to erode the value proposition of (existing)
savings policy benefits and may result in increases in lapse rates and surrenders, an
effect that is only partially mitigated by the extent to which insureds opt for higher policy
limits.
Inflation and growth headwinds to slow L&H premium growth

The weaker economic outlook is a The weaker economic outlook represents a significant headwind for life insurers. We
headwind for life premium growth. forecast global real L&H premium growth of only 0.7% this year, down from 1.8% in our
previous forecast (see Figure 14), primarily due to strongly higher inflation and
secondarily due to slower real economic growth. We expect the global L&H market to
grow by an average 3.0% between 2022 and 2026, above the historical average.
Figure 14 7%
Global and regional life & health real premium
6% 5.8%
growth forecasts, February 2022 and current
5.5% 5.3% 5.3%
5% 5.1%
4% 4.0%
3% 2.6% 2.8% 2.7% 2.7%
2.2%
2% 2.0%
1.7%
1% 1.2%
0.4%
0%
–0.2%
–1%
2022 2023 2022 2023 2022 2023 2022 2023
World Advanced markets Emerging markets China
(excl. China)

Traditional life premium to weaken, while In traditional life, higher inflation expectations erode real premium growth, while positive
positive structural factors remain. structural factors subsist. We have revised down our forecasts for global traditional life
premiums to growth of 0.7% in real terms in 2022, below the historical average (2.1%)
and our medium-term forecast (3.0%). Life risk premiums will grow by a below-trend
2.1% in 2022 in real terms. Still, we expect 4.4% average annual growth from 2023–
2026 as the segment continues to benefit from heightened risk awareness post-
pandemic, global economic and labour market normalisation, and a continued shift to
online sales and digital underwriting.
Saving premiums to soften under volatile Savings premiums – the vast majority of traditional life – will soften under challenging
financial market conditions... financial market conditions and we see real growth of only 0.4% in 2022, after an
exceptionally strong 4.5% growth in 2021. Falling equity markets in Europe due to the
Ukraine conflict and still-low interest rates will dent the attractiveness of savings-linked
products in the near-term. This will temporarily divert the demand from unit-linked
towards traditional saving products.35 In the medium-term, we expect demand for
savings-linked insurance products to resynchronise with macro-financial conditions.
… but demand for protection products Structural demand for pure mortality products – relatively insulated from inflationary
remains well anchored. pressures – is growing as consumer awareness about the role of life insurance in
financial planning has increased during the pandemic. Over the medium-term, we
expect real growth in pure mortality business to be stronger than for savings business.
Overall, life insurers will continue to de-risk their balance sheets by detaching from
guarantee products and transferring protection risks to reinsurers.
We expect the global medex market to We expect the global medex market to stagnate in 2022 with –0.1% real premium
stagnate in 2022. growth, well below the historical average (4.6%) and below our medium-term
expectation (3.0%). The driver is a 1.1% contraction in the US primary health insurance
market as Medicaid eligibility re-determinations are expected to resume later this year
after suspension during the pandemic. We expect this to cause both individual
premiums and Medicaid (which accounts for close to 40% of all global medex premiums
and more than half of US medex premiums) to decline.36 Emerging markets will be the
main driver of medex premium growth in the medium term, with growth of 8.6% over
2022–26, led by China.
35 Traditional insurance-linked savings products face competition with other pure savings products available in
the market, which generally offer better returns and smaller lock-in period.
36 March 2020 Families First Coronavirus Response Act, American Rescue Plan of 2021.
Expected higher yields strengthen profitability outlook

for life insurers
Rising interest rates change our profitability On the back of rising interest rates, we assess the profitability outlook for the primary life
assessment to moderately positive. insurance sector as moderately positive. This is also reflected in sector stock price
indices, a forward-looking indicator of expected performance (see Figure 15). The
indices for all regions improved around March 2021 with the receding of the second
COVID-19 wave and crisis levels within a year of the onset of the pandemic in March
2020. Relative valuations of US life insurers were roughly reflecting interest rate changes
throughout 2021. Indices fell in February 2022 after the invasion, but quickly recovered
partially, an indicator of tightening rates and the limited expected direct impact of the
conflict on the life insurance industry.
Figure 15
Life insurance sector stock price index ratios (1 December 2020 = 100) and US 10-year Treasury bond yield.
150 3.5%
140 3.0%
130 2.5%
120 2.0%
110 1.5%
100 1.0%
90 0.5%
80 0.0%
0
20
21
21
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US Europe UK APAC UST10 (RHS)

L&H Insurance index relative to broad stock market index. Indices: US = Dow Jones US Life Insurance Index, Europe = STOXX Europe Life Insurance Index, UK = FTSE 350
Life Insurance Index, APAC = BI APAC Life Insurance Valuation Peers. Source: Bloomberg, Swiss Re Institute
Three factors should support life We expect L&H sector profitability to improve moderately in 2022, driven by three key
profitability in 2022. factors (see Figure 16):
̤ Improvement in investment income: L&H insurers’ investment income is set to

improve gradually given the anticipated rise in yield curves.
̤ Increased demand for protection products: The COVID-19 pandemic has resulted
in greater public awareness about protection products among consumers. This will
support strong growth in life premiums in coming years.
̤ Normalisation in claims severity: claims severity, which increased considerably in

2020 and 2021 mainly due to pandemic-related mortality, is expected to normalise.
Figure 16
Life insurance profitability tailwinds and headwinds
Profitability headwinds Profitability tailwinds
Downside risk for demand due Heightened demand for protection

to persistent high inflation products in wake of the pandemic
Continued low interest rate environment Normalisation of claims severity as pandemic
despite impending rate hikes phase of COVID-19 appears to end
Negative impact of Ukraine-Russia conflict Improvement in investment income
on global economic outlook considering impending rate hikes
Our profitability outlook also factors in Our profitability outlook also factors in several headwinds to our baseline view. In most
several headwinds. countries, especially in Western Europe and North America, high inflation will lead to
higher expense ratios, as well as potentially lower demand for insurance, particularly for
savings-linked products. Interest rates in all major markets are still in low territories and
lower-than-expected rate hikes will adversely impact life insurers’ investment results. The
conflict in Ukraine is a significant potential headwind for life insurers in Western Europe
in particular, from a weaker economic outlook.
G8 insurers: normalising claims and rate rises to support profitability

We use a proprietary profitability model Swiss Re Institute has developed a proprietary profitability model to forecast return on
to forecast return on operating revenues operating revenues (ROR) for life insurers. ROR is chosen because it best represents life
(ROR) for life insurers. insurers’ underlying profitability from core business. We model eight major life
insurance markets (US, Canada, UK, Germany, Italy, France, Japan, and Australia),
which we refer to as “G8 markets”. Life premiums written in these eight markets
represent close to three-fifths of global life premiums and three-quarters of life
premiums in advanced markets. We estimate that RoR for G8 life insurers will improve
to 3.8% in 2022 and 4.8% in 2023 (2021: 3.0%). Stronger demand, normalised
severity in mortality claims and interest rate hikes will support life profitability in 2022–
2023. The outlook for COVID-19-related mortality claims remains uncertain, despite
widespread vaccination and lower death rates at present.
Figure 17
Life insurers’ investment (LHS) and operating results (RHS) in G8 markets
600 4.0% 140 6.0%
3.5% 120
500 3.3% 3.4% 5.0%
3.1% 3.1% 3.1% 3.1% 4.8%
3.0%
3.1% 100
400 3.8% 4.0%
2.5% 3.8%
80 3.4%
300 2.0% 3.0% 3.0%
60
1.5% 2.7%
200 2.0%
40
1.0% 2.0%
100 20 1.0%
0.5%
0 0.0% 0 0.0%
2017 2018 2019 2020 2021E 2022F 2023F 2017 2018 2019 2020 2021E 2022F 2023F
Investment income, USD billion (LHS) Return on investment (RHS) Operating result, USD billion (LHS) Return on operating revenues (RHS)
Insurance markets under alternative scenarios

We monitor how our alternative economic scenarios would affect the global insurance outlook and outline avenues to
mitigate risks through capital and risk management. A global recession would damage premium revenues in both L&H and
P&C insurance across all lines and all regions, and we would expect weaker profitability. A “1970s stagflation” scenario
would severely impact demand for both P&C and L&H insurance, including both savings and group policies. P&C insurers’
profitability would weaken due to higher claims costs. For life insurers, higher interest rates from stagflation may benefit
the profitability of in-force business with guarantees, and improve current investment income, but credit spread widening
and equity losses would offset this through likely severe mark-to-market losses. Both downside scenarios pose significant
risks to real investment returns and insurers’ balance sheets. Reinsurance, inflation-hedging instruments, and capital
management tools can help insurers de-risk their balance sheets.
Insurers face elevated downside risks

Macro uncertainty could create a range of Alongside our low-growth, high-inflation baseline scenario, we monitor the impact on
responses in insurance markets. global insurance markets under each of the three potential alternatives described in
chapter 2. In Table 9 below, we illustrate how each would change insurance premium
growth, claims and profitability by segment.
The global recession is the most likely We see the “global recession” scenario as the most likely alternative to play out. This
negative scenario and will reduce would have a strong negative effect on premium revenues in both L&H and P&C
insurance demand and increase claim insurance, across all lines, and all regions. The sharp slowdown in economic activity,
severity. large increase in unemployment and financial market losses would all lower demand for
insurance substantially. The most exposed P&C line of business would likely be trade
credit contracts, as trade volumes are highly volatile to economic activity. Figure 18
shows our quantitative estimations of the relative impact of this scenario on nominal
premium growth of L&H and P&C markets. These estimations are based on our in-house
model to quantify the impact based on the macroeconomic assumptions outlined in
Chapter 1. Under a global recession scenario, we estimate nominal premium growth in
the US would be around 3ppts lower in 2022 for L&H, and around 2ppts for P&C (relative
to our baseline forecasts).
Figure 18
Global recession scenario: change in direct insurance market nominal premium growth vs our baseline outlook
(percentage points of nominal growth)
L&H P&C
1% 1%
0% 0%
–1% –1%
–2% –2%
–3% –3%
–4% –4%
2022 2023 2024 2022 2023 2024
US Europe China US Europe China

30 Swiss Re Institute sigma No 2/2022 Insurance markets under alternative scenarios
Global recession would cause lower claims P&C claims would benefit from lower inflation compared to the current elevated baseline,
severity. but the profitability of trade credit lines would weaken due to the higher risk of
insolvency, bankruptcy or default. For L&H business, global recession would have a
strong negative impact on the profitability of saving-linked business with guarantees, as
a decline in interest rate will result in lower investment income and duration mismatch.
The impact on profitability from unit-linked business is more limited as the asset risk is
borne by the policyholder. Protection business profitability would experience a moderate
hit, mainly due an increase in lapse rate, increase in payments for surrenders and decline
in group business. We expect the impact of the recession on medex claims to be neutral.
Weaker investment results due to lower interest rates and stock market volatility would
lower profitability for all insurers.
A 1970s stagflation scenario would hurt In a “1970s style stagflation” scenario, the slowdown in economic activity would
demand for both P&C and L&H insurers. severely impact demand for both P&C and L&H insurance, including both savings and
group policies. Across all P&C lines of business, real premium growth would be lower
than under our baseline forecasts (which already assume some stagflationary pressure),
given slower real exposure growth, although nominal premium growth would be due to
the stronger nominal growth of exposures. Workers’ compensation would also be
negatively affected as slower economic activity curbs employment levels.
Figure 19
1970s style stagflation scenario: change in direct insurance market nominal premium growth vs our baseline outlook
L&H P&C
6.0% 6.0%
4.5% 4.5%
3.0% 3.0%
1.5% 1.5%
0.0% 0.0%
–1.5% –1.5%
2022 2023 2024 2022 2023 2024

Underwriting performance would worsen P&C profitability would suffer due to higher claims cost mainly in long-tail business lines.
but investment performance improve Higher risk of insolvency, bankruptcy or default would further weaken profitability in
moderately under this scenario. trade credit lines. Accelerated monetary tightening will benefit in-force life business
profitability, particularly in-force life savings with guarantees. Investment results will
moderately benefit from rising interest rates. Higher re-investment yields for long-dated
bonds are a positive to earnings in the long run as bond portfolios gradually roll over into
higher yields. Mark-to-market losses arising from revaluation of bond portfolio, equity
market volatility and widening spreads will have a limited offsetting impact on the
investment profitability as most of these losses are unrealized and not recognized in the
income statement. Having said that, it will stress insurers’ balance sheets and their
capital/solvency positions.
Under the “optimistic” scenario, In the “optimistic” scenario, we expect higher real GDP growth and lower general
commercial lines and life insurance would inflation as well as stronger government investment in climate change mitigation and
rebound more strongly than expected. digitalisation, than in our baseline forecast. In this environment, premium growth and
investment returns would be stronger across all lines (indicated by green signal in Table
9). In the P&C segment, commercial lines would benefit most from improved economic
activity, while L&H business would benefit from lower lapse rates. Higher interest rates
as well as strong capital markets will improve investment returns
Insurance markets under alternative scenarios sigma No 2/2022 Swiss Re Institute 31
Figure 20
Optimistic scenario: change in direct insurance market nominal premium growth vs our baseline outlook
L&H P&C
2.0% 2.0%
1.5% 1.5%
1.0% 1.0%
0.5% 0.5%
0.0% 0.0%
2022 2023 2024 2022 2023 2024

Table 9
Impact of alternative economic scenarios (relative to baseline) on insurers’ real premium growth and profitability (12–18 months)
Optimistic “Golden 20s” Pessimistic “Global recession” Pessimistic “1970s style stagflation”
(<5%) (20–30%) (5–10%)
Premium growth
P&C
Life
In-force
New business
Profitability excl general investment returns

P&C
Life
In-force
New business
Investment returns   
    
Source: Swiss Re Institute Negative Moderately negative Neutral Moderately positive Positive
Investment returns under different scenarios

In a stagflationary scenario, an insurer’s Insurers are long-term investors and the global insurance industry held assets under
investment portfolio is exposed to credit, management (AUM) of an estimated USD 34 trillion in 2020, close to around 30% of
inflation, and interest rate risks. total global AUM.37 The majority of insurers’ financial investments are in fixed income
securities, primarily government and corporate bonds (see Figure 21). These are
vulnerable to erosion of total returns in an economic climate of lower GDP growth, higher
inflation and monetary policy tightening as we forecast in our outlook. For corporate
credit, lower economic growth implies weaker earnings and balance sheets and
therefore greater risk of default or insolvency. High inflation erodes coupon income in
real terms. Most bonds pay a fixed-rate coupon and so market values are highly exposed
to interest rate risk. Although insurers typically benefit from a higher interest rates
environment, sudden and large increases in interest rates will adversely impact insurers
investment portfolios and liquidity position.
Figure 21
Japan
Asset allocation of insurers in major markets
(L&H and P&C combined, 2021 or latest Australia
year available)
Canada
US
UK
Italy
Germany
France
0% 20% 40% 60% 80% 100%
Bonds Equities Real estate Other assets and investments Cash and deposits
Increases in interest rates benefit Interest rate rises are supportive for insurance companies’ investment income and
investment income but… portfolio yields. Higher interest rates are first priced in through short-term investments
and reinvestment yields for new/maturing bonds. The positive impact of rising interest
rates on bond portfolio yields – the dominant investment asset class among insurers –
will only be gradual as the bulk of the portfolio comprises long-term fixed-income assets
and turns over slowly. For instance, despite the recent uptick in interest rates, the
effective portfolio yield of life insurance sector in the US remains near historical levels.
…depreciate existing older investments in There is a counter-effect from rising interest rates, however, as higher yields lower the
insurer’s investment portfolios. market value of existing bonds in insurers’ portfolios. A majority of investments in
insurers’ portfolios are classified as available-for-sale and reported at market value. This
exposes invested assets to revaluation losses on account of change in market value of
the securities between accounting periods. The change in market value is included in
“accumulated other comprehensive income” (AOCI) as realised and unrealized capital
gains/losses. The steeper the interest rate rise, the more the existing bonds are devalued
and the bigger the hit to the insurer’s capital position.
Portfolio revaluation due to change in Portfolio revaluation due to change in interest rates does not normally have a material
interest rates does not significantly impact impact on the overall profitability of insurers. Change in interest rates affect long-term
insurers’ profitability. bonds and other interest-rate-sensitive investments more than short-term investments.
Moreover, insurers (particularly life insurers) typically hold bonds to maturity because of
the need to match the timing of asset returns and policyholder claims and, thus, most of
the capital losses are not realised. The effect on profitability is generally limited to the
part of investments with shorter maturity (less than 12 months) and those redeemable at
37 The Power to Shape the Future, PwC, 2020.
Insurance markets under alternative scenarios sigma No 2/2022 Swiss Re Institute 33
current market price. However, mark-to-market losses arising from equity market
volatility and widening spreads will stress insurers’ balance sheets and their capital/
solvency positions.
Asset class performance under alternative scenarios

Negative real bond portfolio returns open The risk that persistently high inflation and low growth pose to real investment returns
the door to alternative inflation-hedged and insurers’ balance sheets calls for recalibrating the industry’s asset allocation towards
assets and securities. instruments that offer “real” (inflation-linked) returns. Equity markets and credit spreads
are reacting to macroeconomic uncertainty, while short term deviations from the Fisher
effect are yet to dissipate.38 We believe it is imperative that insurers prepare to hedge
against inflation in the near term to mitigate the risk of negative real returns, balance
sheet devaluation and stress on their solvency position.
Inflation-hedged securities and real assets The historical performance of different asset classes in different inflation regimes
provide investment protection... indicates that inflation-linked bonds and some real (value-storing) assets have been the
key outperformers in times of high or rising inflation and weak economic growth.
Academic studies show that under anchored inflation expectations, real estate offers
some protection against inflation, but not necessarily against unanticipated inflationary
shocks.39 The type of real estate is also crucial in the interplay of real estate returns and
inflation. Equities tend to perform poorly during short-term inflationary periods, but
provide some inflation hedging over horizons of five years or more if high inflation is
accompanied by strong economic growth. 40 In a 1970s style stagflation, nominal bonds
tend to underperform inflation-protected securities, especially over longer horizons.4142
Finally, as stagflation expectations are factored into credit spreads, spread widening
would add to valuation losses. In a recession, sovereign bonds carry less default risk than
corporate bonds. Table 10 shows the expected performance of asset classes under
alternative scenarios relative to the baseline.
Table 10
Performance assumptions of inflation-sensitive asset classes relative to baseline for the 12–18 month outlook.
Scenario Probability Sovereign bonds Corporate bonds TIPS Equities Real estate
Pessimistic “1970s style stagflation” 5–10%     
Pessimistic “Global recession” 20–30%     
Optimistic “Golden 20s” < 5%     
    
Colour indicates performance Strong Generally Strong
relative to the baseline as follows: underperformance Underperformance unchanged Outperformance outperformance
Note: Indicate our assessment for the level of outperformance of each asset class under each of our alternative scenarios relative to the baseline, TIPS also relative to
duration-matched nominal sovereign bonds. See Chapter 2 for scenario description. Source: Swiss Re Institute
38 The Fisher effect states that nominal interest rates will eventually adjust for inflation in the long-term, while
short-run deviations arise. Therefore, in the long run nominal interest rate can be expressed as the sum of an
expected real return and an expected inflation rate.
39 M. Hoesli, C. Lizieri, B. MacGregor, “The inflation hedging characteristics of US and UK investments: A multi-
factor error correction approach”, Journal of Real Estate Finance and Economics, vol 2, 2008.
40 S. Arnold, B. Auer, “What do scientists know about inflation hedging?” North American Journal of Economics
and Finance, vol 34, 2015.

41 M. Brière, O. Signori, “Inflation-hedging portfolios: Economic regimes matter”, Journal of Portfolio
Management, vol 38, 2012.

42 The safest asset class, TIPS are highly correlated with inflation since their coupon are inflation-adjusted.
… with TIPS, ILS and real-asset securities Specific investment instruments to protect against rising inflation are treasury inflation-
available on financial markets. protected securities (TIPS) and inflation-linked swaps (ILS). Both types of instrument will
benefit in the event of higher headline CPI, however, at the current 5-year break-even
rate of over 3%, TIPS would only outperform in the severe stagflation scenario. With an
outstanding volume of USD 1.7 trillion, US TIPS have sizeable market depth, though only
representing 3.3% of all US fixed income securities.43 All other G7 countries and some
major emerging economies (e.g. India, Brazil, Mexico) also issue inflation-linked bonds,
although with much smaller liquidity.
Risk mitigation and capital management for adverse scenarios

Risk mitigation and capital management With macro risks skewed towards downside scenarios, strong capital and risk
tools include underwriting rigour, management becomes even more important for insurance companies. There are several
reinsurance transactions and inflation- ways how to mitigate and de-risks on both sides of the balance sheet:
hedging.
̤ Underwriting risks (liability side): the main measure is re-pricing of insurance risks
which reflects elevated claims costs. Companies can steer new business towards
products with lower risk profiles, however, there are limitations and costs to changing
a market portfolio. Underwriting risk exposures can be mitigated through reinsurance.
Legacy business (Life) and loss reserves (P&C) can be adjusted through portfolio
transfers and adverse development covers.
̤ Investment risks (asset side): Increasing the share of assets allocated to TIPS and real
assets will provide some hedge against economic inflation, although with
considerable basis risk for real-asset securities.44 The hedging properties of real assets
revert during a severe stagflation scenario when fixed income and equity-based
securities underperform. Hedges against these market risks are available and can be
useful to de-risk the asset portfolio against adverse scenarios and protect assets /
capital, especially for tail risks. However, all re-positioning needs to take capital
requirements (regulatory, rating agency and economic) and liquidity needs into
consideration.
̤ Insurers’ capital management needs to take adverse economic scenarios into account.
Reduced access to external capital leaves insurers with fewer options to address
regulatory/rating pressures should they need to re-build capital quickly in the event of
significant losses. In addition to de-risking of assets and liabilities, as discussed above,
capital management tools can include contingent financing options and capital relief
reinsurance transactions.
43 As of year-end 2021. Source: The Securities Industry and Financial Markets Association.
44 According to Goldman Sachs Asset Management’s Insurance survey 2022, EMEA countries’ respondents
stand out as they recognise TIPS as a strong hedge against inflation. In the Americas and Asia, real estate and
floating rate assets – mainly composed of bonds and debt instruments – are considered the most effective
inflation hedge instrument. Real estate equity and infrastructure equity – instrument linked to underlying
real assets – rank among the top 3 asset classes expected to deliver the highest total return over this year for
respectively 26% and 23% of the respondents.
Appendix
Table 11
Alternative scenarios for key countries and economic variables.
Country/Currency Optimistic – Golden 20s Pessimistic – 1970s-style stagflation Pessimistic – Global recession
2022 2023 2022 2023 2022 2023
Real GDP USD 4.7% 2.8% 1.6% 0.6% 2.5% –1.0%
(%) UK 4.9% 2.8% 1.3% 0.3% 2.0% –1.9%
EUR 4.1% 3.2% 0.5% 0.8% 1.5% –2.0%
RMB 6.6% 6.1% 3.8% 4.2% 4.2% 2.9%
Inflation (%) USD 6.4% 2.9% 13.0% 8.4% 6.0% 2.1%
UK 7.0% 3.3% 13.8% 8.7% 6.6% 2.5%
EUR 5.8% 2.1% 12.2% 6.6% 6.1% 1.5%
RMB 2.7% 2.5% 5.8% 4.8% 1.9% 1.6%
Policy rate USD 2.6% 3.1% 4.5% 3.4% 2.1% 1.4%
(%) UK 2.0% 3.0% 4.0% 3.3% 1.5% 0.5%
EUR 0.5% 1.0% 2.3% 1.3% 0.3% 0.0%
10-year USD 4.3% 4.8% 3.3% 6.0% 2.1% 1.5%
yield (%) UK 3.1% 4.1% 2.8% 5.9% 1.2% 0.8%
EUR 1.3% 1.8% 0.4% 3.2% 0.1% –0.2%
Risk assets USD IG, bps 90 90 235 315 210 170
USD HY, bps 165 235 705 835 655 505
US Equity, % 15% 10% –40% –10% –30% 6%

Published by
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Authors
Hendre Garbers
Dr Thomas Holzheu
Loïc Lanci
Roman Lechner
Rajeev Sharan
John Zhu
The authors would like to thank the following

for their contributions: Livia Bonato, Fernando
Casanova Aizpun, Xin Dai, Caroline de Souza
Rodrigues Cabral, James Finucane, Fiona
Gillespie, Dr Anja Grujovic Vischer, Jessie Guo,
Hao Jiang, Dr Jake Meyer, Charlotte Müller,
Paul Ronke, Patrick Saner, Ayush Uchil, Diana
Van der Watt and Dr Li Xing.
Explore and visualise sigma data on natural catastrophes and the
world insurance markets at www.sigma-explorer.com
sigma editor
© 2022 Swiss Re. All rights reserved.
Alison Browning
The editorial deadline for this study was 19 April 2022.
Managing editor
sigma is available on Swiss Re’ s website: www.swissre.com/sigma
Dr Jerome Jean Haegeli
Swiss Re Group Chief Economist
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No 2 /2022

Stagflation: 02 Executive summary

the risk is back, 05 Low growth and

Euro area UK US China Japan Australia

Stagflation is more cyclical Stagflation turning structural

P&C lines of business Impact Reason

Source: Swiss Re Institute

Profitability headwinds Profitability tailwinds

Downside risk for demand due Heightened demand for protection

Source: Swiss Re Institute

Low growth and high inflation: a challenge

The conflict creates a net stagflationary shock through five channels

Annual global real GDP growth Annual global CPI inflation

Table 1 2021 2022F 2023F

Source: Swiss Re Institute

Table 2 Energy and commodities Direct trade

Food EX, % merch. EX

Food share in cons, %

Merch. EX, % GDP

Ore & metals EX,

Pre-invasion forecast Current forecast

Pre-invasion forecast Current forecast

Arab Spring Conflict in Ukraine

Source: Bloomberg, Swiss Re Institute

Surging commodity prices challenge food security

Euro Area negotiated wages US average hourly earnings

Source: Swiss Re Institute

Cyclical stagflation, not the 1970s

Euro area UK US China Japan Australia

Stagflation is more cyclical Stagflation turning structural

Nominal interest rates rising, but by less than inflation

US 10y Nominal Yield US 10yr Breakeven US 10y Real Yield (RHS)

Three alternative scenarios

Lower Global growth Higher

Scenario Narrative Signpost Series to monitor Assessment

against supply issues

to develop Initial jobless claims

Demand slowdown Real wages

The impact on global insurance markets

P&C insurance: claims inflation the key exposure

Higher inflation to increase P&C claims severity this year

Table 6 Line of business Impact Reason

Source: Swiss Re Institute

28 See Harmonised Index of Consumer Prices (HICP) - Overview, Eurostat.

Commercial rate hardening to go on as claims severities move higher

Rate changes in % Global US UK Europe LatAm Asia China Pacific

Source: Global insurance market index, Marsh

Real-terms premium growth expected to soften

Pre-invasion forecast Current forecast

Inflation headwinds to weaken industry ROE in 2022

Underwriting result Investment result Operating result

economic and insurance market outlook, Swiss Re Institute.

US Europe UK APAC UST10 (RHS)

The impact of economic inflation on L&H insurers

Thematic Impact Reason

Source: Swiss Re Institute

Inflation and growth headwinds to slow L&H premium growth

3% 2.6% 2.8% 2.7% 2.7%

Pre-invasion forecast Current forecast