Growth markets ‘fraught with greater risk’—Hartwig

But the shift of emphasis to markets such as the Middle East will not be simple as most of the global economy’s future gains will be ‘fraught with much greater risk and uncertainty’ than in the past. This was the key conclusion offered by Robert Hartwig [pictured, right], President and Economist at the Insurance Information Institute (III) in the US during his keynote presentation to the MultaQa conference in Doha, Qatar midway through last month. Mr Hartwig revealed numbers, chiefly from the International Monetary Fund’s latest Global Economic Outlook, that clearly showed why European and US companies are looking to emerging markets for future demand and why the insurers and reinsurers are following rapidly in their footsteps. According to the IMF, world output is forecast to grow by 3.3% in 2012 and 3.9% in 2013.hideAdvanced economies, chiefly Europe and the US, are only expected to grow by 1.2% in 2012 and 1.9% in 2013. But, India is forecast to grow output by 7.1% and 8% respectively, the ASEAN 5 (Indonesia, Malaysia, Phillipines, Thailand and Vietnam) by 5.2% and 5.6% and Sub-Saharan Africa by 5.5% and 5.3%. Mr Hartwig said that gross domestic product (GDP) is expected to grow in the US by 2.2% in 2012 and 2.6% in 2013, much better than the 1.7% in 2011 as the recovery continues. The UK and eurozone will be stuck in recession until the third quarter of 2013, said the economist. The UK is forecast to grow GDP by 0.4% this year compared with 0.9% last year and will finally start moving next year with a forecast rate of 1.8%. The euro area grew GDP by 1.6% last year but will report a decrease of 0.4% this year and return to 1% growth in 2013, he said. Meanwhile China will report 8.2% GDP growth this year and 8.5% next year against 9.2% in 2011 in what Mr Hartwig described as a ‘soft landing’. The MENA region is forecast to deliver output growth of 3.2% this year and 3.6% next year. By GDP the Middle East has outperformed the rest of the world over the last 20 years in growth terms but the IMF expects this to ‘normalise’ over the 2012–2016 period. Qatar is the star performer in the region if one discounts Iraq’s faster rate of growth because it comes on the back of such a low base. Qatar will deliver GDP growth of 6% this year and 4.9% next year against the global average of 4% and 4.9% respectively, according to the IMF. The UAE will manage 3.8% and 4.2%, Bahrain 3.6% and 4.2% and Oman 3.6% and 3.8%. Mr Hartwig compared these economic indicators with insurance premium growth numbers and forecasts and they show an unsurprising link. The world premium growth rate was slightly negative in 2009 according to numbers reported by Swiss Re, said Mr Hartwig. In industrialised countries the growth rate was slightly negative in North America and Europe but grew in Japan and the newly industrialised Asian economies and Oceania. The emerging countries all reported positive premium growth in all but the CEE. Asia led the way with 13% premium growth that year. Mr Hartwig pointed out that non life premium growth in emerging markets has exceeded industrialised nations in 27 of the last 31 years. The average growth rate from 1980–2010 in industrialised countries was 3.8% and in emerging markets 9.2%, against an overall total of 4.2%. Although premium growth throughout the industrialised world was negative in 2009, its share of global nonlife premiums remained very high at nearly 86%, accounting for nearly $1.5tn in premiums said Mr Hartwig.The economist said that the financial crisis and sluggish recovery in the major insurance markets will inevitably accelerate the expansion of the emerging market sector. But don’t get over-excited just yet. The developing markets may now account for 47% of global GDP but they still only account for 14% of global non-life premiums. Swiss Re calculates that in 2009 developing markets generated $248.8bn in premium versus $1,485.8bn in the industrialised economies. Despite the relative size of the premium cake, however, it is no wonder that the big insurers, reinsurers and brokers are investing in the emerging markets for their future growth just as their customers are doing so. But, and it’s a big but, Mr Hartwig reminded delegates at the conference that they need to tread carefully because the simple fact is that the greatest business opportunities are more often than not found in the riskiest of nations. The GDP and output figure for the MENA region may look appealing at first glance but as Mr Hartwig pointed out much of the Middle East and North Africa ‘have experienced and continue to experience political turmoil’. “The fastest growing markets are also generally among the politically riskiest, including east and south Asia,” he said.It was no surprise therefore that the top two of Mr Hartwig’s top ten risks faced by risk managers and insurers into the future emanate in full or part from one of the most attractive of emerging regions for European companies at least, the MENA region. He said that his number one risk is armed conflict in the Middle East that would disrupt oil markets. A conflict between Iran and Israel is viewed by some as ‘imminent’ and an oil price of $200/bbl oil and severe supply disruptions are possible as a consequence. The ‘serious damage’ caused to the global economy by this scenario would kill the fragile recovery, said Mr Hartwig. His second big risk is unsurprisingly rising oil prices. Even in the absence of armed conflict rising oil prices would slow growth. A sustained $10/bbl increase would for example result in a -0.2% impact on global GDP, said Mr Hartwig. The third big concern is sovereign debt concerns in Europe. This was number one in 2011. The fear is that contagion could spread beyond Greece to Italy, Spain, Portugal and the like probably as a result of the Greek and EU political/economic solution leading to a disorderly default. The fourth big risk currently is a hard landing of the Chinese economy. A sharp decline in China’s GDP would damage global economies that are becoming increasingly reliant upon this nation’s growth, pointed out Mr Hartwig. The fifth big risk is that the recent mega-catastrophe trends continue at record pace. Catastrophes trimmed 0.5% off global GDP in 2011 and caused massive disruptions to fragile global supply chains, he said. The sixth big risk is a sudden weakening of the US economy and seventh is the intensification of geopolitical instability, especially in the Middle East. The disintegration of the eurozone through political failure, commodity price inflation apart from oil and a large-scale cyber attack/terrorist attack, including cyberterror, are Mr Hartwig’s last three big risks.

Growth markets ‘fraught with greater risk’—Hartwig

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