82% of Insurers Say a Recession Is Coming. How Bad Might It Be?

The U.S. economy is primed for a recession in 2020 or 2021, so says 82% of the investment chiefs at the world’s largest insurance companies.
By: | May 3, 2019

The U.S. economy is primed for a recession in 2020 or 2021, so says 82% of the investment chiefs at the world’s largest insurance companies.

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The data comes from a new study by Goldman Sachs Asset Management (GSAM) called “Cautiously Opportunistic,” which interviewed 307 chief investment officers, chief financial officers and senior professionals responsible for $13 trillion in balance sheets at global insurance companies.

By the Numbers

From the report, 35% cited an economic recession is their top macroeconomic worry, up from 24% in 2018. That beat out all other concerns including credit and market volatility (20%), political events (13%) and recession in China (9%).

Only 7% are concerned about rising interest rates (down 30% from last year).

85% said they believe we’re in the late stage of the current credit cycle (up from 34% last year).

38% of insurance investors are most concerned with credit quality deterioration in their portfolios (up from 23% last year).

62% expect the 10-year U.S. Treasury yield to remain in the 2.5 to 3.0% range by year-end, a break from previous years where insurers predicted an upward trend.

46% invest in Insurtech. The most common reason is to improve operational efficiency.

From the Study

Michael Siegel, GSAM’s global head of insurance asset management said: “Insurers predict a U.S. recession is coming, just not this year.

“As a result, they are continuing to commit capital but are more selective in the risks they are taking. Insurers plan to continue the recent trend of allocating to less liquid asset classes including private equity, infrastructure debt and middle market loans.

“Globally, insurers continue to move out of local government debt and into the U.S. and European investment grade corporate bond markets along with allocations to real assets and private equity.”

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Is Anyone Else Predicting a Recession?

Sadly, yes.

The latest survey by the National Association for Business Economics found that half of the nation’s business economists believe we’re headed for a recession in 2020. Three-fourths predict a downturn by the end of 2021. Only 11% say we make it through 2021 without a recession.

Duke University surveyed 1,500 CFOs, finding that 67% believe the U.S. recession will begin by the third quarter of 2020, and 84% say it’ll start by the first quarter of 2021.

Others predict a recession but say it won’t be nearly as bad as the crippling recession of 2008.

UCLA’s Anderson Forecast predicts slower economic growth when “the waning effects of fiscal stimulus combine with the partial normalization of interest rates and weakness among global trading partners.”

UCLA Anderson senior economist David Shulman said, “After growing at a 3.1% clip on a fourth-quarter-to-fourth-quarter basis in 2018, growth will slow to 1.7% in 2019 to a near-recession pace of 1.1% in 2020. However, by mid-2021, growth is forecast to be around 2%.”

Asset-management firm Guggenheim expects the S&P 500 to sink by 40 to 50%, reports MarketWatch.

Guggenheim agrees the coming recession will be milder than past ones because of the lack of lingering problems in the housing market and a well-capitalized banking system, which makes the economy more resilient.

What Does It All Mean?

Insurance companies will certainly be preparing their portfolios and investing in tech solutions.

Victoria Treyger, general partner and managing director at Felicis Ventures, who invests in Insurtech and other Fintechs, told Forbes “a recession would drive faster adoption of financial technology and spur further innovation in the sector.

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“The true Fintech companies have demonstrated that they create significant value over existing solutions. Since this value, captured in lower fraud rates, higher approval rates, better authorization rates drop straight to the bottom lines, the best Fintech companies will do well through a recession while the rest of the market will see consolidation,”she said.

In the interim, insurers plan to continue putting money into private equity funds and infrastructure bonds, according to Siegel.

“Insurers plan to continue the recent trend of allocating to less-liquid asset classes including private equity, infrastructure debt and middle-market loans,” Siegel told the Financial News.

“Globally, insurers continue to move out of local government debt and into the U.S. and European investment-grade corporate bond markets, along with allocations to real assets and private equity.” &

Jared Shelly is a journalist based in Philadelphia. He can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]