Reaching out to normality?

New Year predictions have always been laced with caveats, uncertainty and the hope that by the end of the year they do not look ridiculously wide of the mark. The global chaos caused by the Covid-19 pandemic has doubled and re-doubled that uncertainty but are we, at last, reaching out to normality?

Some of the leading lights of the insurance and investment community have been brave enough to offer their thoughts on what lies in wait for us as 2022 unfolds. In the first of two articles, I pick out some of their insights and add a few of my own, writes David Worsfold.

Our pundits

  • Russ Bowdrey (RB) Team Lead, Client Servicing - Climate and ESG Solutions at Ortec Finance and previously Senior ALM Manager at Aviva
  • Tim Carroll (TC) independent non-executive director with Lloyd’s businesses and insurance companies
  • Frank Eich (FE) consultant on economics, financial markets and sustainability and former senior advisor to the Bank of England
  • Con Keating (CK) Head of Research, Brighton Rock Group
  • Dave Matcham (DM) CEO, International Underwriting Association of London
  • Erik Vynckier (EV) Board Member, Foresters Friendly Society & Lay Chair, Institute and Faculty of Actuaries
  • David Worsfold (DW) freelance financial journalist and contributing editor to Insurance Investment Exchange
  • How unpredictable was 2021? What were the biggest surprises – good and/or bad?

EV 2021 has been entirely predictable. It has been an utter repetition of 2020. It was very easy to make money in 2021 by simply continuing to play the trends that established themselves in 2020. The artificial suppression of defaults, ever thinner credit spreads, recovery of the equity market on the back of quantitative easing and ultra-low rates paradoxically reflecting the zombie economy and zombie capital markets, compensated by government and central bank policy.

DM One example of a good surprise was how the market was able to maintain service and innovation during lockdown and hybrid working. Some bad surprises were the continuing high level of catastrophes, revealing widening protection gaps, how Covid implications still pervade the market and how unprepared our industry and clients are for climate change ­ – but they are catching up quickly.

CK Somewhat worse than average – particularly with Nat Cats – but this is a state of the new normal climate. Surprises: the strength of economic recovery and the behaviour of the labour market.

FE The fact that labour markets and banks remained resilient was not guaranteed, similarly that global supply chains more or less stabilised was welcome news but was not necessarily guaranteed.

  • What is the biggest challenge for insurers and their investment portfolios as the pandemic enters its third year?

EV Courage. The wish to break out of the crowd and the courage to find and buy the best assets. Insurers in particular are poor investors. They focus too much on legacy asset-liability approaches and on regulatory capital management to the exclusion of finding attractive assets with good return prospects for well-managed risk.

DM The growth of malicious cyber activity and cost of transition for climate change. Both will likely have a massive impact on investment portfolios and risk transfer products. The pandemic is less of an issue.

TC The impact of inflation and the prospect of further interest rate rises.

RB Staying focused on the long term... There is a far bigger challenge looming... 

DW Finding value. Private assets have grown in popularity but are now coming under greater scrutiny, both factors potentially diminishing their value. Volatility remains a given and is part of the new normal that CIOs must build their strategies around.

  • Inflation: transitory or here to stay for a few years?

EV Inflation picking up in the middle of the year should not have been a surprise. Given the negative productivity shocks implied by the lockdown and the “green new deal”, inflation was all but certain to rear its head. My only surprise was that most investments strategists failed to pick this up in time.

DM I am not an economist but it feels like higher inflation is here for a while especially with supply chains impacted by varying factors. The war for talent is driving up salaries.

TC Here for a year definitely and possibly two. I think it is transitory and will not last much beyond that.

CK Here to stay as central banks will not respond fast enough to hold it down and that suits every national treasury.

FE Transitory but for a while. In hindsight the jump in inflation was obvious but somehow it still took most people by surprise. Some of current inflation reflects a base effect. In particular, energy prices dropped to record lows in 2020 and the return to pre-crisis energy price levels drove much of the acceleration in inflation. The disruption in global supply chains was another major driver though and we do not know for how much longer this will continue. 

RB Oil and power prices will continue to drive prices up... With any luck it will also push faster adoption of green power and transport that will moderate this in the medium term.

DW The jury has to be out on this one. If inflation eases by mid-year then we will probably see it fall away quite quickly in early 2023. If the pressures forcing up prices intensify then we could see a return to the wage/price spiral that has proved difficult to break out of in the past.

  • What are your predictions for interest rates in 2022?

EV Up in US$ to handle rampant inflation and a recovering economy facing man-made bottlenecks, but continuing to be manipulated in negative real, even nominal territory in the Eurozone, where the malaise is now generic following the failure of Merkel to reform the German economy and the installation since of a red-green government pursuing utopic ideals in Germany and for the European Union.

TC The Bank of England continues to increase the base rate slowly.

CK Rising by 1% to 1.5% in the developed world if we do not see an Omicron-driven recession.

FE Central banks will try to "see through" the current phase of elevated price inflation - they are also looking at core inflation etc. They have done that for a while and will study the data carefully, eg factory-floor prices, wholesale prices etc. The perceived risk is that inflationary pressures could de-anchor inflation expectations with wage settlements going up and that we might end up in a wage/price spiral. I think the probability of this happening is quite low though there are of course sectoral labour market imbalances, in the UK also from Brexit. That said, central banks will probably raise interest rates modestly to signal that they have the situation under control and that they still have the tools to act if so required.

DW The big question for central banks is: are interest rates still a potent weapon for managing inflation? The answer will depend on whether inflation is driven by push factors such as rising energy prices, supply chain issues etc, or whether pull factors such as excessive consumer demand and government spending are the biggest factor. If it is the latter, central banks will deploy more interest rates rises; if it is the former, they will be cautious as they will not want to risk exposing themselves as impotent.

Next week we will see what our experts have to say about the impact of climate change and ESG strategies as well as the prospects for hybrid working and business travel.


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