Andy Souter:

Good morning and good afternoon welcome to PeakRe’s webinar, “The 2022 economic outlook: a year of recovery and transformation”. 2021 was a challenging year. If we look back at continued navigation of COVID-19 and also NatCat events, and on an economic perspective, the increasing spectre of inflation as well. But as we turn our minds to 2022, one of the key topics that will affect the economies more broadly, but also life and health, and P&C.

And here to try and address those questions are two of my colleagues I’d like to introduce. So firstly, opening up will be Clarence Wong. Clarence is our chief economist and has over 20 years of experience within the insurance and reinsurance industry. And secondly this will be followed by Dr. Detloff Rump, who’s director and head of underwriting for life and health. A qualified medical professional, Detloff has had a very longstanding career in the life and health industry. And we’ll be talking about some of the themes around life and health later on.

Then I will close in talking about property and casualty. We hope you enjoy the webinar, and look forward to your questions towards the end.

Clarence Wong:

Thank you Andy for the introduction, I’m Clarence Wong, chief economist of PeakRe. I would like to hear and share with you our view on global economic developments, what are the key growth drivers, and also some of the perspectives that you need to pay attention to.

Today I would like to share with you our views on the 2022 economic outlook, what are the key growth drivers, and also some of risk factors. This is the agenda for today, I will first talk about some of the observation about growth, and how it is going to normalize in coming years. And then I will spend a bit of time on the growth drivers, and also some of the key risk area we should be aware of.

Let me just first up if the growth outlook for 2022, and the year beyond. As we have seen in a lot of the press release, and also forecast by international associations, the growth in 2020 has been good. It came at around 5.9% in 2020, after recession of 3.1%. And in some of the large markets like US, growth has been robust at 5.7%, in China it is 6.1%. But that is just a rebank from a deep recession of 3.1% in 2020.

And in fact, this high level of growth is expected because of the low base for comparison. What is really important is how the normalization or the recovery will grow and evolve in coming years. As we see in the chart on the left-hand side, we expect that the growth in the coming years will come largely in a similar pace as the peak crisis and trend level. That is good news.

In particular, we are expecting advanced markets to grow even a little bit faster than the peak crisis level. In comparison, emerging markets as a whole will be around half percentage point slower in growth compared to the peak crisis trend at home. This is mainly due to the fact that China’s growth is slowing. I mentioned that China’s economic growth in 2021 was a strong 8.1%, but in fact the growth momentum has been slowing for a quarter, moderating to around 4% in the final quarter of last year.

There are structural issues facing the Chinese economy including an aging population, the need to de-leverage the public sector, and also back-reach rate heightening. This means that China’s growth will probably be slower than what we have observed in the last decade. And that is the main reason contributing to a slowdown in the growth of the emerging market universe.

On the right-hand side chart you can see the growth of the emerging markets, plot against historical and projected peer rate. And in fact most markets will be likely growing in a similar place as their key prices trend level, like India, Indonesia, Russia, or Brazil. And China is probably an outlier where the growth will be slower than the peak crisis level.

I think in summary we can say that the world is recovering, there is a kind of a leveling in the gap between the growth of the emerging and advanced market, but the emerging markets will continue to outpace the growth of advanced market past the margin.

I guess that it’s also important to look at some of the major trends or mega trends in the global economy in order to form our judgment on how economic recovery will evolve going forward. This list of mega trends are not exhaustive, and there are many other trends, but I just pick those that I think are most relevant to our discussion today. The first one is supply chain disruption. I think every one of us experiences this disruption in the sense there’s supply of civic goods in short supply, or prices has gone up.

I think it is more important to distinguish the fact that if supply chain disruptions has both short-term and structural ingredients in this. The short-term disruption is mainly a result of pandemic, but even before the pandemic, we have been seeing changes in the global supply chain as a result of for example e-globalization, and the US-China trade war, and also increasing focus on resilience of the supply chain.

And these different factors are important in judging how the supply chain disruption will evolve going forward, how long it will last. Our expectation is still that this year we will still see significant disruption for a long period of time. One reason, a sure way, is US showed that the major manufacturers, they have only five-days’ supply of microchips, or semiconductor chips. And that compared to 40 days of supply in 2019, that’s those extent of these disruptions in the global supply chain.

In the same time, I think really the recovery is also a major trend that needs our attention. It is a risk that it felt in kind of decarbonizing the global economy, or manage this climate change, it will have significant impact on global economy. Some estimates put it that it will trim global economic or GDP growth by 10 to 80% if we fail to transition to a low-carbon economy.

On the other hand, to do this with these huge investments going forward, one reason report by McKinsey such as that the annual investment that is needed for this climate transition will amount to over $9 trillion a year. So we can see that that dispatches the weight heavily in both government and corporate decisions going forward.

Another key differentiation or factors that we need to consider is the changes in interest rate. I guess in the last two decades we have adopted to a low interest rate environment, and there have been talks about lower for longer. But this is no longer true. Recently the Federal Reserve Bank of the US has stated that it will hike interest rates as early as March this year. And the market is also factoring three to four times interest rate hiking in the US.

We are seeing similar trends in other regions in other countries. As a result we have to factor in what the future will look like if interest rate is going to go up. And that ties very closely to a latest trend, which is at that level in the local markets. As a result of the fiscal and monetary support offered by government due to the pandemic, many countries are accumulating higher and bigger debt.

And if we consider situation where interest rate’s going up, it means that the tax servicing burden on all of the countries will increase prices going forward. And what that means to the global economic recovery, what it means to the sustainability of financing in those market, I think this is also a big question we need to consider.

Another key observation is about the government and debt we have been seeing over the last couple of years. To a certain extent this is also because of the pandemic, because governments ask that they need help, a lot of corporation offering of the services. But, given that government managing public or private sector company is vastly efficient, there is also the risk of misallocation of resources. And also how government is going to manage this type of problem going forward, or are they going to, and why this investment in the longer term? This will also impact on how economies will functions going forward.

The last one I think is quite big with all of you, accelerated digitalization. This is not only because of the pandemic, but even before the pandemic, we have been seeing that the adoption of digital systems, ecosystems, that has been increasing at a fast pace across the world. I guess what are the most important and consideration here is upon the onset of the pandemic, this accelerated digitalization is spreading to all the different age segments.

This is no longer the millennial or the generation Zed that are kind of a topic with this trend, but even older generations, they are also buying in and adopting to digitalization. But at the same time we are seeing also the widening of the digital divide. Across countries, across certain segments. And this is also something that we need to consider going forward.

Now, what will drive the growth of the global economy in this year and beyond? I guess one of the very obvious answer is trade, because we have been seeing a very robust increase in global trade, in 2020, and even in 2021. If we look at this chart which is a kind of an index on global trade, it give some very interesting observations. First, we have been seeing that trade has been growing very fast in early period before the global financial crisis. The financial crisis, they will have to vote on the global trade pattern.

What is interesting is that the trade level recover for the PGSC trend level in the years after the global financial crisis. And in fact, we will have stated that globalization, as represented by proliferation of global trade, has peaked sometime before the pandemic happens. The pandemic in 2020, 2021, has a similar impact on the global trade, there is a steep decline in trade.

But what is surprising is that the trade has recovered, and very fast, and even achieve a level that is higher than the peak crisis level. And I think I can explain this because of the disruption to global supply chain, when interrupting manufacturing production in some of the Western market were slowing because of the shortage of labor or the lockdown. And there is the crazy demand for exports, for example, from Asian countries.

And that has been a major factor supporting the growth of a lot of markets particularly in emerging Asia. However, we are also seeing that this is fizzling out, the increases in trade is losing momentum, and we expect that going forward the trade animal will not be as important in driving growth as in the last one or two years. One of the reason is of course if the pandemic begins to subside, and production was shrunk in a lot of the Western markets, there will be less need for some of the products from Asia or from other regions.

This also related to the fact that the global supply chain is still undergoing major changes, and this will impact on trade and investment and production for a long period to come. The drivers for the changes of the restructuring of the post-supply chain is quite context, there are geopolitical reasons, there are reasons still to changing production cost. For example, manufacturing has been constantly relocating out of China to other markets, because wages in China was increasing.

There are also increasing realizations that production need to be more resilience, so companies has been a totally different kind of a hatching strategies like this, diversifying their sourcing to more markets, or adopting the so-called China + 1, or China + 1 + 2 strategies. Which means that apart from the main production facility in China or in Asian market, they will have other production facility in other markets.

I guess it’s more important to look at the resource, because in the past supply chains are kind of hounded to these utmost efficiencies, trying to minimize the cost of production. But going forward, cost is no longer the only consideration in the design and structure of the global supply chain. They will also look at other factors like resilience, like the ability to withstand shock during stress periods.

And what it means is that we might probably see supply chains that are shorter, they are more transparent. We will be seeing more onshoring or reshoring of production, and there will be more redundancies in the global supply chain. The indication is multiple, on first is there will be some winners and losers coming from this global restructuring of the supply chain.

For example, some of the Southeast Asian markets and in Latin America, they will probably benefit because of this restructuring of the global supply chain. On the other hand, the production cost as I said before will no longer be the only consideration. And we’ll also add to the inflationary pressure going forward. So these are some of the consideration that we also had factored in.

During the last two years our government policies both in terms of monitoring and fiscal support has been very important in helping the markets to kind of weather the financial crisis, and this also a pandemic. As we have seen in the chart on the left-hand side there is an increase, a significant increase in governments or central bank balance sheets as a result of these monetary policies.

And the fiscal support from government is also huge. Now the question is, whether this is sustainable going forward, and can be expand similar level of support from governments as one of the growth driver in this and next year. The answer is probably no. I imagine that before that the interest rate environment is changing due to increasing inflationary pressures, and the banks are increasing interest rate. And the quantitative or loose monetary policy is going to end.

I fact it has already happened for some of the central banks, and this means the scale of monetary support from major central banks will shrink significantly going forward. And this also ties to the fact that monetary policy is not as efficient as in the past in filtering through and supporting government activities.

The same fiscal support from government is also not sustainable at such a large scale. Governments have accumulated huge debts because of those large fiscal stimulus in the past, and they will no longer be able to kind of continue with this kind of support going forward, particularly in a scenario where interest rate is increasing, which means that the funding cost for those government services will increase. So we expect that monetary policy will, and fiscal policy will be less of a supporting factor for economic growth going forward.

I would also like to cover some of risk factor which are also closely linked to some of the things I talk about in terms of what are the key growth drivers? Now, inflation is definitely some of the things, or one of the key things that we have to pay attention to, particularly since that major central banks are now kind of giving up their narrative that inflation is transitory, and that’s not true. In fact, they are kind of embracing that inflation is like it lasts for long due.

This is related to a lot of factors, the drivers for inflation as I mentioned is probably due to a number of factors, including their supply chain shock that we have been seeing, a very huge increase in demand as a result of the lockdown and pandemic, which is also financed by government in-house and corporations. And there is also other factors like our transition to a green economy is increasing demand for certain product like some of the metals or batteries, and this is also increasing the demands for commodity as a whole.

So process has been increasing, and this is going to last longer than we previously expected. The response is, yes, central banks are hiking interest rate. On the right-hand side, you can see that a lot of central banks since the last quarter of 2021 has started to increase interest rate in response to this situation. There are exceptions. Turkey is one of the exceptions where it lowered interest rate as late as December last year, but it didn’t help the economy, and their currency has also experienced significant issues.

The other major countries that has bucked trend is China, which lowered interest rate marginally in February. I guess China is more like an exception rather than the norm, because it is facing its unique situation in the sense that there is huge stress in the market due to the equity be leveraged over the market. And also structurally there are also some tracks on economic growth.

As I said, growth momentum slowed it to only 4% in last quarter of 2021. And that is give the authorities some incentive to lose monetary policies in order to support growth. And China compared to other markets has also more leeway to further kind of relax these monetary policies.

Here is also some of the additional point on what it means for insurance because of higher inflation, high interest rate. I guess there is no simple answer to this because it really depends on different markets, depends on the bank of each regions, it depends on the folder composition of the different insurance companies, whether they have more long-term business, they are more sensitive to interest rate changes. Or, they have only a short-term business.

But high inflation, high interest rate generally will increase the operational cost of insurance operation. And factoring in a higher actual interest rate will make a product cheaper, more attractive, but some of the expensive products, for example, in business, will be less attractive if they don’t adjust to being subject to interest rate.

The impact on solvency capital, for example, will also depends on the different solvency banking issues. If it is elastic to interest rate changes, then it will be dependent on whether there are some deliberate liability as a dispatch inherent in branches.

But I think more important is to consider or to think through how and when the inflation or the hyperinflation we are seeing nowadays, like the wholesale price inflation, consumer price inflation, this will filter through into rate inflation, medical inflation, or even inflation. We have been seeing huge increases in wholesale price inflation. In some cases, some of those were stopped by the manufacturers themselves, and the impact on consumer or retail price inflation is more moderate.

It is very important to note whether this will translate into wage inflation going forward, because wage inflation will be much stickier than retail price inflation. And if there is an inflation wage spiral, it means that the situation of inflation will be more long-lasting than previously expected. And of course, if this also impact on medical and other inflations, or other benefit prices, then the impact on the insurance industry will be more severe.

I wouldn’t spend too much time on debt, but I just want to highlight that globally, actually this debt problem is very, very severe. Currently there are markets or countries that are receiving financial aids, or emergency financial assistance from the IMF because of this debt overhang. And given that we are expecting high interest rate in the rest of this year, the debt servicing burden of many countries will probably increase.

And if there is also currency pressure, then a standard debt of this country will be even more significant. So we should have paid much more attention to this burden, and see whether there will be any debt prices going forward. We have been seeing that inflation, supply shock, and all these things are happening. And I think there is a lot of kind of discussion in the markets about what this ultimately means in terms of this supply shock, this inflation, and whether our current effort to work faster, to decarbonize the economy, is adding to this inflationary pressure.

Whether the fact that we have such a globalization trend is also contributing to this trend. I guess the discussion is a little bit off the mark here because we have to set our priority where globalization and decarbonization are some things that are very beneficial to our future, and also for global economic growth. And the risk, as I would paraphrase here, is not that decarbonization or ESG will add to the global inflationary pressure. It is on the other way around, that we might kind of discount decarbonization or globalization because of this short-term negative impact.

So I would like to quote what is written in the Economist magazines, that “The risk now is that strains in the economy lead to a repudiation of decarbonization and globalization, with devastating long-term consequences. This is the real threat posed by the shortage economy.” So I think this is some risk terms that we can learn from these reputed magazines. But at the same time, I think my colleagues Andy and Detloff will talk a little bit more about ESG and decarbonization in their respective presentation.

In order to conclude my presentation here, I would just like to highlight three areas that are to me more important in considering the outlook for this year and beyond. The first one is probably I haven’t touched a point, but is very important is that protection gaps are still very thick in all of markets globally and particularly in the emerging markets, and the pandemic has probably widened this protection gap. The protection gap is in property, pension, medical, mortality, and so on.

And you need to realize that insurance and reinsurance has a unique growth play in helping to close this protection gap. And in fact in the time where protection gap is increasing and peoples’ awareness of the lack of protection is increasing and the risk avoidance has been heightened, it is a good time for us to consider how we can better help the society close the protection gap.

The second is decarbonization or ESG. This is gathering momentum, and this is becoming one of the top policy agenda globally. And it is a threat to insurance because climate change, for example, is a very real issue to both the asset and liability side of our balance sheet. At the same time it also represent a great opportunity for us to bring about where we can offer some innovative product that can help society to better mitigate the risk from climate change and also to have a solid place of decarbonization.

The third takeaway I guess is also that we have been seeing a lot of changes, mega trends, in terms e-globalization, in terms of supply restructuring. I guess we are in a face of global economic system that we are seeing increasing fragmentation, increasing divergencies, increasing focus on idiosyncratic risks of each individual markets and countries. So this will also impact on how we’re going to assess on economic outlook on different regions and markets. And probably it is no longer kind of sensible or very useful to look at regions or global countries as a whole, but increasingly we will have to look at more segmentation of different markets and regions.

My last remark will be on whether we will be facing another economic recession as we have seen in 2020. I guess the threat of recession is never gone, as we have seen we have a combination of high inflation, we have a combination of a high debt, and also increasing interest rate. So naturally people think about whether there is increasing risk of another recession. There is no easy answer to this, and there is no crystal ball to whether we can predict a recession.

But I would just like to refer to this chart which is using the inverted U-curve to predict recession. In fact, the inverted U-curve has been quite successful in predicting all the past economic downturn in the last few decades. As we can see, the upper part of this chart, the U-curve kind of inverted, or tend to be less positive-sloped before almost all major economic downturn, and including the latest one.

So I guess it kind of give a very robust tool to us to kind of engage how thick is the risk of another recession. And to me the surprise is not that we can use this to detect a recession, but the fact that a lot of people just ignored this observation, and a lot did use this to try to gauge the probability of recession.

But let’s turn back to this chart, or the lower part of this chart shows the probability of recession, and currently this is at a very low level, or still a very big low level. So we can say to that, even if all the challenges, I’d managed them before inflation, interest rate, and so on, we are not expecting a recession. We are still expecting a gradual normalization of economic growth, we are still expecting emerging markets to outperform, even though the growth gap between emerging and advanced market will be closing.

We are expecting some relaxation of the lockdown measures, as a result consumption will pay a bigger role in supporting economic growth going forward, relative to trade. And kind of the core company, the supply chain will continue, but gradually reduce over the course of this year. So this kind of concludes my part on sharing with you the outlook on 2022. I hope this, it will give you some food for thought, and with that I would like to pass on to my colleague Detloff to talk about his topic about health insurance. Thank you for your attention.

Detloff Rump:

Thank you, Clarence, that was brilliant, both of you, over the economic situation that we’re facing now in going forward. And I will now talk a little bit about three main aspects that I feel will be very relevant to the health insurance sector. So let’s go right into it. As I mentioned three themes that will be important for the health insurance sector in my opinion, obviously we have to talk about COVID-19, we’re not through this yet. The second point will be medical inflation. The third and perennial struggle with medical inflation. And I want to make a few comments on climate change and how that phenomenon influences what we do in health insurance.

So let us start with COVID-19. Let’s look at the cases first, it’s mind-boggling. Over 350 million currently have had COVID-19, of which well over over 5.5 million people died around it. And compare that to SARS, 2003, you may remember that. We had about 8,000 people infected, probably, and less than 800 people died as a patient. So in comparison, we have a really massive, mass global pandemic around. And as we’ve seen, Omicron came along, and now is spreading wildly in many, many countries.

And although the case fatality rate seems to be lower than with the Delta variant, for example, the more the virus can spread, the higher the risk that we see new variant of this coronavirus. So yeah, for the industry do we have some challenges. And one is that we cannot compare and learn easily from in this country, what happened in this country, and compare apples to apples. Because there seem to be differences in the characteristics of the population, but more so in their public health response to the coronavirus. And therefore, it’s very hard to look at data from, say, India, or America, or Europe somewhere, and use them to price products or to add to a risk buffer to the pricing.

The other challenge that I see is the vaccination stage. If someone today applies for health insurance, should we ask? “Have you had your full vaccination? Have you one dose of vaccination or zero dose of vaccination at this point?” We don’t do this at this point in time, but as we know, but as we know, unvaccinated people have a much higher risk of being hospitalized, of dying from COVID-19. So there is some good reason to ask that question.

Another challenge that we have on our hands I guess is long-COVID. More and more data become available, tell us a story as to how people suffer from quite serious health problems long after they have overcome their original COVID infection. We read in newspapers about top athletes, soccer player, having serious heart problems, that cannot return to their normal training and playing.

And something that we also need to think about in the health space is the collateral damage through COVID. For example, people have not been to the same degree as before COVID, gone through their normal health screening tests, for example. Or sometimes, had no access to healthcare because hospitals before COVID-19 patient. So that aggravates, perhaps, their health status, and particular in the area of cancer, expectations that we see people having their cancers diagnosed at the later stage, and therefore a higher risk of succumbing to that disease.

And as I mentioned before, there might be an experience, there will be an experience, whether this variant will be more aggressive, or more deadly, we don’t know yet. But we also know that there will be a new virus at some stage. Virologists tell us the story that we see these once-in-a-century events probably much more often than once in a century going forward. As an industry, we have to be prepared.

What can we do? I think we have to think about product design, we have to see what we need to exclude, perhaps on the other hand, what are the products we need to create to assist in a situation like COVID-19 pandemic? There are covers around now that cover side-effects of vaccine, for example, that’s a totally new, novel idea. And I believe there is also something as an insurer we can do to assist here is add some services to our normal proposition.

For example, telehealth, so giving people access to a doctor without them having physically to go to a doctor’s practice. And then I remember after SARS there was a discussion across the industry whether we need a loading for pandemic. And I think it was cast aside because we thought maybe it’s only once in a century, and SARS wasn’t so big. But the insurance industry has suffered losses, also the health insurance sector has suffered losses during the pandemic. And perhaps a discussion around a extra loading, a buffer loading, should be resumed.

So I will now switch to a second theme of a short presentation, and that is medical inflation. According to a recent report by Aon, the medical inflation tops the general inflation by roughly 5% on a quite consistent basis. That is a global view, obviously there are differences between different jurisdictions. But overall it’s fair to say that medical inflation outpaces the normal economic inflation quite dramatically. So that brings with it challenges, obviously. Is health insurance sustainable in the long-run, if we have to deal with 5% over normal inflation, medical inflation.

And our players being attracted to the sector, if it is not sustainable, do we have new players? We need more health insurance I believe, but do we have the capacity in the long-run if more and more health insurance players withdraw from the market, and we cannot find new players to enter the market. They had how they do the pricing, and how they can include the medical inflation as is, it is not easy to predict, and it may outpace the normal inflation by even higher margins.

So it is a tricky one. And what is it the industry can do to counter this problem? Well, I think there is scope to increase the efforts to offer programs that improve the health of the insured population. That can be wellness programs, it can be monitoring programs with the Internet of Things, with scanners and devices that measure health in its various forms. But it’s also if we have then someone who has a chronic disease like diabetes, like hypertension, to offer as an insurer, the opportunity to go into a program that monitors and helps with managing the disease going forward.

An important part to curb medical inflation also, improving the provider management. In other words, having programs that allow us to have best prices with providers. Maybe that can be assisted by third-party administrators, but there’s nothing preventing a insurance company to have contractual relationship with providers to improve the claims ratio, improve also on the site the services that are provided to members.

There are also savings to be made with dealing with pharmaceuticals for chronic diseases but also the very expensive pharmaceuticals that are being used for example in cancer therapy these days. And savings can be quite dramatic in this space and should not be overlooked. And for all of that we need, I believe, better data analysis, better data collection but then particularly better analysis so we know at any point in time where we stand and can react to tendencies that we observe while analyzing our data.

Let me come to the last point of this presentation, and this is climate change. This is a recent publication from NASA in the US that tells us the story that of course global warming has brought the changes to the atmosphere, our oceans, our cold space on the Earth and the living individuals, the living creatures on this role have been clearly evidenced now. So what are the challenges that come with it? I think it’s quite enormous challenges that we’ll have to face.

And this is for example the migration of the seas. If climate change leads to the migration of warmer zones on this planet, further north for example, will we see malaria in subtropical areas, rather than tropical areas on the Earth? Will we see that in areas that used to be cold, if you like, we’ll be seeing malaria and other diseases in areas where they were not seen before? And I guess the answer is, “Yes, that is very likely.”

And we will see new or indeed old diseases as we have witnessed now where the permafrost in Siberia is melting, is opening up. And there’s reports telling us that anthrax spores were found, and they were there for many thousand years frozen, and they come back to life as the permafrost disappears. Will the world have to deal with food shortages because of climate change? The answer is probably yes. Water is already in short supply in many parts of the world, and that means in particular drinkable water.

Now, I think as an industry, we can react in two ways. One is to try to prevent further deterioration of climate change, and obviously we all have now these two objectives, but take them seriously, be active, be proactive in that field offers opportunities. And the other area where I feel we could do more is forging private-public partnership, work together with industry, working together with academia, working together with non-government institutions to better deal with the problems that we’re facing because of climate change.

I think that is all I wanted really to discuss with you, and I know in 15 minutes you can’t go into much detail. So let me just quickly conclude, the pressure that is on healthcare systems and health insurance system, is quite considerable and is increasing in my view. But we as an insurance sector can play an important part to deal with this pressure, and manage the underlying risk. But we have to be innovative in our approach.

The unprecedented challenges that come with climate change, challenges to governments and the insurance industry are undeniable. So I believe strategic corporation between the various actors will be more important than ever. So thank you very much for your attention.

Andy Souter:

Well, thanks very much, Clarence and Detloff. Two very interesting sections both about the economy and also life and health. So let me move onto my section. Now turning our mind to property and casualty and the impact on this part of the industry for 2022, as we came into 2022, we expected a number of topics and themes to impact the property and casualty industry. But in essence, we identified at least four major themes that we believe will gather more attention and will influence the industry over the next 12 months. And this really can be split into four parts.

Number one, product demand, the need and the more tension in terms of enhanced products, and also new products as we see emerging economies and indeed mature markets also evolve in terms of technologies. Inflation is a point that Clarence talked about earlier in the presentation. In recent years we’ve been very used to talking about inflation, but of a different kind, social inflation. Particularly its impact on casualty. But increasingly we expect 2022 to be a year where core economic inflation will play its part.

And then finally ESG and climate change, in essence two very interlinked topics. But actually it would be a disservice not to treat them slightly separately in terms of the impact on our industry. If we look at product development, this is really a case of a slight hiatus. If we look over the last one or two years, the distractions for many people at personal level or at commercial level, just to navigate the challenges of COVID-19, has stalled product development and the needs and the push from clients in terms of what products are available.

If we take a look at product development, we really expect product development to come to the fore in 2020. This isn’t a new topic, but certainly over the last two years a focus on product development and product demand has probably fallen by the wayside due to the attention paid to a personal or commercial level to navigate the challenges of COVID-19. And we expect product demands to really come to the fore again both in mature markets but also in emerging markets too.

And this really comes in two parts. Number one, the need for enhancements on existing products. For example, we’ve seen BI come to the fore during the pandemic. But putting pandemic aside, the need and potential demands from consumers in terms of changes to products, whether it’s structure, coverage, or even a distribution mechanism too, particularly as the world economy has become even more digitized over the last two years. Now furthermore, new product development, particularly as we see economies looking to build back better, looking to new technologies, and the demand for new products.

And this is really an opportunity for the industry, and really for both insurers and reinsurers to work symbiotically, to deliver the needs of the consumer. As I mentioned, Clarence covered inflation earlier. But what does it mean for property and casualty? Well, we started to see this manifest itself in 2021. If we think back to the Cat events, we look at the events in the US particularly Uri and also Ida, there’s certainly an impact from inflation on the side of claims, both coming from increased labor costs, and also material costs as well.

And as long as inflation remains elevated in 2022, we continue to see and expect that to have an impact. Furthermore, we would also expect this to happen on casualty as well. Naturally there’s always a concern around the impact of inflation on casualty, and with the long-term exposures. But here we can also end up with confluence of both social and economic inflation. Social if we look at casualty lines particularly in the US, and the continued litigation and the app environment, but also of the impact in terms of economic inflation on juries’ minds, for example.

So if plaintiffs’ bars are proposing higher payouts, the day-to-day field of inflation for each jury member is expected to have a larger impact on the size of payouts, so long as inflation remains elevated. So we do expect inflation to have an impact. And an expectation will be more focused on how the market deals with inflation, both from a pricing perspective, but also an exposure management perspective.

If we look at climate change, well, 2021 was the year where climate change really accelerated in terms of tension, both external to our industry from regulatory, government, and broader private sector attention, but also the number of NatCat events we had last year. Now last year was the fourth-largest NatCat year since 1970. So we would no doubt have an increased focus on how climate change may be impacting our industry in terms of both potentially, frequency, and severity of losses.

And during 2021, and coming into ’22, we do expect continued attention in terms of how climate change may have pricing and may also impact sustainability of capacity, particularly between the reinsurers and the insurers. And finally, a very closely-linked topic, ESG. This has obviously been getting a lot of focus, and a lot more focus on financial services and our industries. And we do see this year as another period of evolution in terms of more publicized ESG strategies, and how ESG will impact underwriting. Both from a defensive perspective, so how do we as an industry adjust underwriting to help move and transition towards zero net emissions.

But also from a proactive perspective, in how we can underwrite to support ESG links and actually develop a product and new ways of supporting both existing but also new industries. We also talk about ESG with a great focus on E. And we expect 2022 also to be the year where we look to the industry to also balance between the E and also the SG. And what we mean here is making sure that environmental issues remain in focus. But also ensuring that social and governance issues are not neglected.

And particularly if we look at emerging markets, that transition in terms of energy usage, sources of energy, doesn’t happen with such a cliff edge that we end up reversing a lot of positive mobility from a social perspective, and many people reaching beyond the poverty line, and just to be pushed back because of energy costs and the lack of economic development. So ultimately, 2022, while it does leave us with challenges, and we do expect these to materialize across both property and casualty, however, this is an opportunity for us as an industry to also take a lead.

We can support our customers and navigate these challenges through product design, through better transparency. And ultimately, making sure that what we do narrows the protection gap, and we don’t reverse some of the benefits and gains made over recent years. So ultimately, this is really an opportunity for the industry to lead the way. Well as we bring this presentation to a close, it’s very clear that there’s a number of themes that will affect us both from a macro perspective, but also those themes will also touch upon both life and health, and also property and casualty. So there’ll be a larger onus on the industry to think about how we can manage these challenges, and ultimately help the end policy-holders navigate these challenges in as smooth and orderly way as possible.

And in fact, from hearing Detloff talk, and also thinking about property and casualty, there are different ways across both P&C and Life and Health we can work together, as well as reinsurers and insurers. And really doing one thing, and that’s just making sure that we as a very sustainable and robust industry can continue to help lead the way. So with that in mind, we’d be very happy to now pass to Q&A, and for the three of us to take your questions.

Mike Ashurst:

Great, thank you Andy, Detloff, and Clarence, for a very interesting presentation. We have a few questions, and I will get straight onto those now. So first of all, Clarence, you mentioned the impact of COVID on the protection gap in advanced and emerging markets. Will access to the vaccine serve to enlarge this inequality, as many countries in the world have not yet been vaccinated, and could this prolong the impacts of the pandemic for many more years?

Clarence Wong:

Yes, the COVID-19 pandemic has kind of helped to widen protection gaps in particular leading of emerging markets. So the reasons is of course due to the unavailability of vaccine to some countries, the laws and jobs in those markets. And also a kind of widening inequality, as we have seen in some of those countries.

I guess as you said if their pandemic is going to last for a bit longer because of another big year of the vaccination program or some first markets, there will be continuous impact on protection gap, particularly on the life and also the health protection gap.

Mike Ashurst:

Thank you. And the next couple of questions are related, so the first one was regarding ESG. So, are you seeing any changes in expectations from your clients with regard to how you apply ESG principles as a reinsurer?

Andy Souter:

Well I can take this one from a P&C perspective. So I would say gradually we’re starting to see ESG fall into the conversation, both in terms of clients asking more about our views on ESG. And we’re certainly seeing more transparency and articulation on ESG strategies from our clients. And I would say that’s both from a mutual and a more mutual side, and across a number of markets.

I think I would also add just to get a perspective from the reinsurer’s side as well is, when we buy retrocession, we particularly at first of January 2022, we found that there were more questions from retrocessioners, and particularly the ILS market around ESG, and of the use of ESG.

Detloff Rump:

Yeah, I don’t think I have much to add from the life health side. Again, this is now the conversational point, and we try to innovate, also lead this discussion because it’s very important.

Mike Ashurst:

Great. Thank you. And on a related turn, with regard to opportunities from arising from ESG, do you have any leading examples from any insurers or reinsurers where this is happening?

Andy Souter:

So on the P&C side, I think it won’t come as a surprise that the main channel of opportunities we hear of and see is in the renewable energy space. So certainty with particular government level, a number of governments pushing renewable energy, offshore energy, solar energy, as core parts of their strategy, that’s filtering through to the insurance companies, and we are seeing more opportunities.

So it’s certainly something that we’re aware of, and it needs further study.

Clarence Wong:

I guess at the same time I think the discussion about ESG is often moving to us, the development of the carbon credit market. And globally there are already a few dozens of those markets trading carbon credit. This is also creating some insurance to protect investors in those are democratic, whether this is high risk or low risk. So this is just another example showing that as we move along the path of ESG as we implement more policies, there will be also more opportunity.

Mike Ashurst:

Thank you. And one final question that just come in, and again it’s related to ESG, so do you think that this, there will be pressure to decrease the level of business trips, and encourage people to carry on with the virtual meetings as we’re talking about moving back to normality in the industry?

Andy Souter:

I think the short answer is yes. If there’s a silver lining from the pandemic in the last two years of logistics around travel, it’s demonstrated that for a large quantity of meetings and engagements such as even today, virtual can replace some of that traffic. And we do, as an industry, we have to show by example, by reducing our carbon footprint. I think on the flip side we also need to ration, but also be careful because our industry also has been built on strong relationships. And I think that particularly talks to the MeToo industry.

So there won’t always be a need, and also an actual commercial benefit, from the face-to-face that we have been used to in the past. But it will be, it should be a matter of balance, and also being aware of and questioning every time someone thinks about a business trip.

Mike Ashurst:

Great, thank you very much Clarence, Detloff, and Andy, for a really good conversation, some good questions there at the end. That’s all we’ve got time for, so thank you very much. Just to remind everybody that this, the recording of this webinar will be available, and it will also be available on the ICMIF Knowledge Hub. And I just wanted to let you know as well that we have the ICMIF meeting of reinsurance officials (MORO) coming up, hopefully in May in Wiesbaden, Germany. So please do look at that, we’d very much welcome as many of you as possible attending our reinsurance meeting.

Detloff Rump:

Goodbye.

Andy Souter:

Thanks everyone.

The above text has been produced by machine transcription from the webinar recording. ICMIF has made every effort to ensure that transcriptions are as accurate as possible, however, in some cases some text may be incomplete or inaccurate due to inaudible passages or transcription errors. Listening to or watching the webinar recording will allow you to hear the full text as delivered during the webinar but this is available in English only. Our transcriptions are provided to enable members to select the language of their choosing using the dropdown menu above.