I think that was it.
Okay. So I think we can begin, so everyone's ready. So good morning, everybody, and welcome to this year's Global Insurance Outlook. As some of you already know, I'm Alexa Winick from the Media Relations Department at Re. There's some familiar faces here and some new ones, but certainly welcome to everybody that came this year.
Today, our Group Chief Economist, Jerome Hagley as well as our Chief Economist, Americas, Thomas Holsoy will be discussing both review of the major trends in the sector as well as the macro economy for 2019, but also importantly the outlook for the next couple of years. There will also be a publication of the Sigma report as well as the press release and the presentation, all of which will be available online at noon today GMT and 1 pm Central Eastern Time. Following the presentation, we'll have time for Q and A both in the room and also on the line. But if there are any follow-up questions, certainly after you've been reviewing the materials, please don't hesitate to contact either me or the media relations department and we'll certainly get back to you. So I don't want to take up too much time now that we have the fire drill.
Jerome, would you like to begin?
Absolutely. So first of all, also very, very warm welcome from my side. I'm Jerome and from Thomas, it's great that you found your way here today and also about the topic that we have 2020, 2021. There's a lot of very exciting things going on, both on the macro and in strong market fronts, and we would like to take maybe half an hour to walk you through the key highlights of our latest analysis and the outlook. I will go through the macro part, hand over then to the insurance perspective to Thomas.
And then we also have a few key themes, really important themes for the insurance sector as well as potential market stability and architecture, which we're going to go with you at the end. And these are all covered also in the Sigma report, which, as Alexis just mentioned, will be released at 12 If I shift maybe to what is the magic number for 2020 2021, what is the magic number? To remember, it's 2, unlikely, unfortunately, below 2. What do we mean with that? We mean with that that we expect below 2 percentage growth in the U.
S. For 2020 and 2021. As you will see shortly, this is below market consensus, And we have good reasons to believe that growth will not increase as many people expect yet again, but that growth again will rather disappoint, one reason being trade war. For us, trade war is the number one risk and will remain the number one risk. And it has had already major repercussions.
We'll talk about that shortly. 2% is also very important for an insurance company because 2% also relates to how much you can earn on the interest rate front. If 10 year rates are going to be below 2%, yet again challenging for the savings industry, definitely challenging for the pension industry, I think challenging for financial markets. We are not saying that the global bull market has in rates is coming to an end. We have yes, we have lower interest rates, but we are close to the end, but we do not expect interest rates to increase.
We do not forecast mean reversion yet again. And also on the interest rate form that we see shortly, we are below consensus. 2, I think it's also interesting to think about 2, where have we been 2 years ago? Well, 2 years ago, if you looked at the IMF forecast, fact was global growth was accelerating in 2 thirds of the economies that we track globally. The IMF also tracks globally.
Fact is today, if you look at our forecast, if you look at other forecasts and the incoming data shows you 90% of the economies are decelerating. So risks are definitely the upside rather than to the downside. Low for longer, that's our topic. And for the Sigma outlook and in the low for longer environment, the key question also is, how can we sustain resilience? And there, we are very positive on the insurance part, but the insurance part has a lot to offer in supporting resilience.
Let's first talk about the global outlook into more depth. Global growth continues to slow. Interest rates remain low for longer. Top number 1 risk is the trade war and yes, 35% likelihood of the U. S.
Recession. Now 35%, that's 1 in 3, that also means to be clear, it's not our baseline that we have a U. S. Recession. However, we see the risk also as been elevated.
If you were to look at 35%, how does that compare historically, it's maybe about double the historical rate of recession. So definitely, we are late cycle. 35% it's also nothing new. We have been expecting this figure is unchanged. We have had this expectation of 35% now since a while.
What do we monitor in order to gauge how the 35% and how the recession likelihood is evolving? I think it's really important to look at both the global CapEx picture, the global capital expenditure picture, and you see that on the left hand side with traditional indicators, actual figures in blue and now costs which are higher frequency, more big data like capital expenditure data with Orange. You see a sharp decline in capital expenditure, which has started in 2018, but you also see a somewhat stabilization, which is good news, which also means we shouldn't be alarmist and we shouldn't expect a recession. Nevertheless, there's a higher risk. There's a higher risk because of the what you see on the right hand side.
You see Global Purchasing Managed Indices for the Manufacturing sector, and this is again global. It holds through very much for Europe, unfortunately, as we know, but it also holds through for the U. S. And to some extent also to China. Purchase and managed indices have come down really considerably, and we can think about manufacturing sector globally in recession or at least in big parts of the world.
Key question is, is the service sector or sentiment in the service sector, is it catching the flu from the manufacturing side. You see part of it. It is also trending down the orange line. Nevertheless, there's quite a big delta, big difference. So we are putting we are facing a lot of emphasis and watch very closely whether the troubles that we are seeing in the manufacturing sector is being spilled over to the service sector.
We see some signs of it, but it's definitely premature to expect the service sector also to go into recessionary territory. Where are we today? U. S. Expansion.
U. S. Expansion is 124 months old. That's lot 124. Now when I relate this to my children, 1214, 124 months, it's longer than Instagram, right?
Instagram didn't even exist when the expansion started. Now an expansion doesn't die out of old age, it doesn't. But our analysis also clearly shows analysis that we have done previously. It's really important to have enough buffers, fiscal buffers and monetary buffers to withstand the shocks. And by definition, most of the time, shocks are unanticipated.
And what we see is that on the monetary side, they hold true not just for the U. S, but for the Europe and also for most economies. The monetary policy options are largely exhausted and there's more options on the fiscal front. I will talk about that clearly shortly. What is while business cycle doesn't die out of old age, definitely, the uncertainty is the enemy of the business cycle, uncertainty.
We don't know how Phase 1 of the trade war will look like. As the name says, Phase 1, there's likely to be a Phase 2, maybe Phase 3, maybe a Phase 4. The big question is the enforcement rules. The big question is what's going to be next in terms of the U. S.
And China trade war. And the elephant in the room remains knowledge transfer and intellectual
it remains
it remains hanging over in terms of the effect on global economy. It's really interesting. If you look at the effect so far of the trade war, U. S, China, it has taken about a 1 percentage hit globally for global growth. And the direct effects are maybe 1 quarter of it and the rest, the indirect effect is the effect of the uncertainty on the sentiment.
And that means for us that as long as it's not resolved and you don't know the end game, it's unresolved and uncertain and the hit will remain in place. But we also think besides monitoring what's happening on the hard and soft macro front with the global CapEx and sentiment in these, it's also really important to track the level of negative yields and also have an assessment where are we going in terms of the extent of negative yields environment. Unfortunately, we have become used. This is a chart I don't like at all. We have been really used to see now upward revisions in terms of the amount of negative yielding debt.
Now at least we have seen new records at about $15,000,000,000 $16,000,000,000,000 even $17,000,000,000,000 Now it has come down to around $13,000,000,000,000 This is for the global amount of negative yielding debt outstanding and fact is that about 25% of all outstanding bonds, and we think that's very negative, 25% of all outstanding bonds have negative yields. That's negative for a number of reasons. We speak more about that shortly. If you think about the amount of negative yielding at that, it's not just that it leads to asset price inflation on the equity market front, but it also leads to lower earnings on household savings. And it's not that EU households or pensioners need to save less because of asset price inflation on the equity market front.
Now rather the contrary, and that's what we also see in the figures, We see in the figures that actually the savings rate in the EU has come up. So all that we are saying is the negative rates are negative, full stop. And it is backfiring, especially in Europe because in Europe, we have a bank banking financed system. 80% of our loans are financed by the banking system and banking sector is under strain also because of negative yield environment. I think it's also interesting if you look at the latest OECD studies, which shows that low income groups have still not recovered fully after the financial crisis.
And maybe the level of negative debt and the level of the low level of interest rates in Europe is making the situation much more difficult for low income groups to recover from the financial markets of 2008. Last but not least, also interesting to note, I think, even though we have this record level of interest rates globally, if you look at the interest rate that credit card companies in the U. S. Charge and the Federal Reserve is tracking these status in about 25 years. This year, the interest rate of credit card companies on average are at all time high, 17%.
So again, this low interest rate environment that you would think should be seen all across the economy is not really feeding through the economy, and it's really difficult to get out of it. Monetary policy definitely is in a black hole, and getting out of it will be a major, major challenge. We also speak about that shortly. Maybe a little bit less abstract. Let's see the forecast, point forecast.
What are our point forecasts for growth and yields? Bottom line and key message, they are below mark consensus. Already, if you look back at our to ones who have been here in this room last year and if you looked at our forecast relative to consensus, already last year, we were below consensus. And during 2019, right, consensus also came down considerably. And I think that our forecast beginning of the year has become more or less kind of consensus.
It's a healthy economic backdrop for the U. S. At about 2.3% for this year. A number of factors, especially in the first half, has this second half much more difficult in the U. S.
And much more importantly, 2020, we expect the cooling of in the U. S, but also further very difficult challenging environment in Europe. We have 1.6% for the U. S. Growth rate in our books that compares to the consensus of 1.8% for next year and to the forecast of the IMEFO, 2.1%.
For the euro area, we're also a little bit below consensus at 0.9%, consensus being at 1.1% and for China, more or less close to 6% at around 5.9%. You see it also with the charts where our forecasts are relative to consensus. If you look at interest rate front, I think it's maybe even more interesting what's happening on the interest rate front. Who would have thought year to date, we try to track the number of interest rate cuts year to date. Year to date, we had 58 interest rate costs.
And beginning of the year, including us, we wouldn't have expected that the central banks make this policy a U-turn. They have made the policy U-turn, a very significant one from quantitative tightening to quantitative easing, and they are staying on that course even though we are closer to the end. So 58 interest rate cuts and still a little bit more to come. We have still one more in our book from the Fed in Q1 2020. How does it translate into the 10 year interest rate forecast, which is the forecast which is more important together with the activity forecast for insurance companies.
We have 1.4% as our forecast for 10 year interest rates and in the U. S. And for the EU area, minus 0.6%. Consensus is about 1.9% for 10 year interest rate in the U. S.
And minus 0.4% for German bonds. So definitely a very subdued and still fragile environment, which we are projecting. Last words on Europe, then I talk about the risks. On Europe, if you look at globally, as you I mean, at the aggregate euro area, fact is half of Europe is stagnating all in a recession. You're going to get now soon the latest euro area GDP growth figure.
In our view, we see Germany being in a recession and the 1st country within the G7 context being in recession. So when we are saying 35% likelihood for a U. S. Recession, we should also bear in mind that the U. S.
Is still a much more resilient economy than many other economies in a G7 context, and especially relative to Europe. U. S. Still looks much, much better. I think key global team, if you look at our forecast here on macro and then on the insurance market front, is that the pivot from the west to the east will continue.
Again, we expect China to be the largest insurance market 15 years' time or less. And we also expect China's market within emerging market Asia, but insurance markets want to be by far the most important marketplace. 60% of premiums in Asia is likely going to come from Asia. And you also see it at the more global level if you look at global growth contribution. China already today, at least in PDP terms, in purchasing power terms, is much more important than the U.
S. In terms of adding for growth. So these are pockets of growth, which we are also at Swiss Re looking for. They are in Asia and also more specifically in China. Now point forecast is only interesting when you also relate them to what is distribution around them and what is the risk how does the risk landscape look like?
U. S. Global recession, 35%, mentioned that already. Why? Trade war.
Trade war of number 1 risk global economy, we attach a LIFO of around 30%, that it again escalates to such an extent that becomes global. And global for us would be that the European auto sector, for example, is also going to be included. And already today, if you look at the effect of the U. S.-China trade war, it's much larger than what economists at large have expected. That's why we are pretty confident that unfortunately, the soft patch that we have seen over the last few quarters is likely going to be a team again for 2020.
Another downside risk factor definitely is also Central Bank policy error, not small at 20%. I think the risk of the Central Bank policy error, something we shouldn't forget. The question there is also is inflation maybe return is one thing is inflation on the asset prices, asset price inflation. The other thing is inflation on the consumer prices. I'll be underestimating is the Phillips curve suddenly nonlinear, it's not impossible.
And then if inflation would be just a little bit more than expected, I'm definitely a big believer in the fact also as a former central banker that the central banks would adapt and change the course, and that would have major, major repercussions on assets and market prices. So with this, maybe very quickly, quick summary of our core macro views. Our core macro views, we think they are our loyal companions for the government. Years. What are they?
Number 1, that's the lower negative rate I hear to say, and they do more harm than good in Europe, more harm than good. It punishes the savers. It incentivizes some bifurcation. It makes it more difficult for companies to get rid of bad debt because it makes it too easy to keep bad debt on the books. And third, and also that's also part of the research that we have done with London School of Economics, low rates doesn't incentivize structural reforms as data shows.
And last but not least, I think it's really problematic having negative rates in Europe, given Europe is a banking based origination of credit and it hurts the banking transmission channel. Number 2, yes, if you look at our macro picture, it's not a super rosy one. Definitely, it isn't more fragile and the weak one. However, we shouldn't forget bad macro doesn't mean bad markets. And we put it here in cursive.
This is the case as long as inflation remains moderate. Our expectation is inflation will remain moderate. Nevertheless, there are pockets of increase in inflation pressure, wage inflation being 1, medical inflation in the U. S. Being the order.
Number 3, global economy, we see the global economy as being less resilient than 2,007 and 2,008, and I think that's a very important assessment. Three factors: debt has increased EUR 70,000,000,000,000 2nd, productivity or economic trend growth is today lower by about 2 percentage points. And number 3, we have used a lot of monetary policy and the very fact that we have such amount of negative yielding debt. That's the fact that we have such amount of negative yielding debt, we have used fiscal expansion and we don't have economic trend growth back to its previous trajectory, case of that global economy is less resilient. You will see later on as a key theme, We also believe Europe is more at risk of Japan integration than U.
S. And last but not least, U. S. Yield curve is probably one deep recession away from negative territory. And what is next, we have to watch out also for helicopter money, but it will come a different form, and we'll talk about that later on.
With this, happy to pass over to Thomas. Thank you.
Yes. So thank you for setting the scene. And one of the goals of the annual outlook signal is to show how the economic backdrop is shaping the outlook for the insurance industry. And so we have seen this increased macro risk and a picture of a slowing global economy. Against this backdrop, the insurance outlook is actually is stable.
So this is good news adding to resilience and that relates to growth, to profitability of the insurance, and we'll go into detail here. So it's a busy slide at first glance. And to make it easy, we put up these the candy dots. So instead of drawing numbers at you, let's just the imagery and the colors. So we expect growth to be steady somewhere around trend, and that applies to life and to non life.
And if we go through this chart here with the numbers data for non left on the top. So we do expect that premium growth is somewhere around 3% looking forward. That is where it is right now, estimate for 2019, and that is also where we have been for the last couple of years. But it's the competition is a bit different. So where we have what we see right now as a trend is that in mature economies and in the U.
S, we actually see some additional growth impetus from hardening commercial rates. And so there's a bit of a a tailwind there. On the other hand, there are headwinds from with regards to profitability from rising claims inflation. So if you look at the sideways outlook for premium growth, You see a green dot here for the in terms of underwriting profitability, and this is relative to the past couple of years. And two reasons there, as I mentioned, some rate improvements on the commercial side and but then also we had severe cat losses in prior years, and we don't expect this going forward.
So the first half of twenty nineteen, the cat loss burden for NASCAT was about average. We did see though in the second half a couple of tropical cyclones in Asia and also the wildfire losses will probably push the claims burden up a little bit for the remainder of the year. But going forward, we would expect a more, obviously, an average cat loss burden. We cannot predict catastrophes beyond that. And we had a heavy burden in 2017 2016 as a benchmark, for example.
On the investment side, we see the outlook, there is obviously, as Jerome mentioned, the impact of low interest rates, which are the key driver of investment returns for insurance companies, mostly invested in fixed income instruments. We had so far a relative good year on year to date in 2019 if we look at GAAP returns because there were capital gains that show up there and boosted the reported, at least in GAAP accounting, reported returns. Going forward, low interest rates are a challenge, and that's for Non Life. And then also, of course, for Life Industry, Insurers invest their own money. They invest life insurers invest money for their policyholders and returns are tied into that.
So a bit of a mix of composition. You see green for underwriting results. We see yellow orange for on the investment side. So the mix is sideways on the profitability against this backdrop of the slowdown in the global economy. And then on the Life side, we see premium growth to pick up compared to past years and move more towards trend growth, and that will be somewhere closer to 3% on a global basis.
And we'll go a little bit more into detail for our 2 sectors, Non Life and Life, how this adds up and how this shapes up on a regional view globally. So if you look at the left side of this chart here, which shows growth rates for Non Life, The outlook, these are the solid bars, about 3%, which is pretty much close to where we have been or where we estimate 2019 to be, but then also close to the average of the past couple of years. If you look at the composition, the storyline of tuning into what Jerome outlined before is very much a story of continued very strong growth in Asia. And we see this here, these are the in this chart, these bars on the right side, strong growth, expect some around 9% here. And in terms of future growth And China and India are very strong contributors to this growth story.
In the mature economies, we expect lower growth. We have and so this is slightly below 2%. And this is all real terms, so inflation adjusted. And so we have positive impact, as I mentioned, from stronger rates in Commercial Lines. But this is only part of the market.
It's not happening in Personal Lines, and it's very much focused. A strong push comes here out of the U. S. And doesn't translate in the same way in all other regions. So we have the story of stronger growth for Asian for emerging markets, but particularly coming out of Asia and China being the main contributor of additional growth.
And if you look at the right side of the chart, this story very much holds true also for the Life side. And so while we have a little bit of a stronger forecast there in the overall numbers, we have at the moment, the mature economies in 2019 are expected to almost stall, just 0.5% of real growth. And we expect very slow, below 2% growth going forward and very solid on the other hand, 8% to 9% growth coming out of the emerging markets and China much, much higher than that over 11% going forward. So we have particularly strong demand there coming out of critical illness types of products. But then also in the non life buckets, we have private health insurance in China.
It's a big pocket of demand. And this is also some an extra topic that we write up or that chapter on that in that segment. And that's we're getting to the special topics, and I'm handing back to Jerome to cover the first one.
So very quickly, but maybe most importantly, key teams what are the key teams that we think are important for the insurance industry and for the environment we operate in. We talked about them a little bit already. Negative interest rate, number 1. Number 2, what about Japanification? Is it what we see in Japan happening more globally?
If yes, where and where should we be more concerned about? And what does it mean for the insurance industry? And then also how would it how would the recession what are the recession dynamics for the insurance company? And their conventional wisdom is not the good guidance. Thomas will speak about that.
Right on the first team, rates are negative and here to stay. We mentioned it already. Just wanted to maybe highlight 2 points. Number 1, if you look at the graph on the left hand side, this shows you the life insurance situation. 1 axis, the y axis shows the duration mismatch.
Duration mismatch, how much longer liabilities than assets from a duration perspective. And the x axis shows the spread between the guaranteed rate of return and investments. And the red circle, that's not a nice circle. These are where these are the jurisdictions and the market place where it's more problematic. Very fact is Germany definitely stands out with a duration gap of about 13 years, meaning their liabilities on average, 13 years longer than the asset space and also has a quite large spread between what is being guaranteed to policyholders and what they earn on investment front.
This has been happening now for a while, for quite a long while. And if you look at our forecast and interest rates front doesn't we don't have the expectation that this goes away anytime soon. This may be a situation in some places of in Europe, which is more of a concern, but it's not just in Europe, but also some places in Asia. On the other hand, and this is the graph on the right hand side, if you look at the overall duration from benchmark indices, be it the U. S.
Treasury Benchmark Index or the euro area dominated sovereign benchmark. Very fact is that these instruments that are out there in the marketplace, it's not just being held by insurance company or pension funds, it's also being held by mutual funds. They have become much, much, much longer in terms of duration. Now average duration is about almost 9 years of a euro sovereign bond, and that has increased from about 6 years in 2,008, 2009. What does it mean?
It means that if you were suddenly to have a sharp rise, a sudden sharp rise, increase in interest rates, let's say, of around 100 basis points according to our calculations. For total return investors and the marketplace at large, it would lead to very significant mark to market losses, at least accounting losses in the order of around $1,200,000,000,000 And that if you compare that to the subprime crisis, it definitely is larger than direct cost of U. S. Subprime prices and means it's big. It also means in case you would have a sharp increase in interest rate, probably it was something more temporary, which leads us to support now thinking that low interest rate is also a team to stay with us for longer.
Helicopter money likely come in different shapes and likely at next recession. We think if fiscal expansion can be positive, it doesn't have to be all negative, it can be positive if it's used for increasing sustainable infrastructure or also green investment. The whole idea of expanding on the fiscal front it is important that it leads to an increase in productivity growth. So far, we have missed seeing spending in the right place. That's why we are engaged in policy discussion and also engaged in how actually our framework they operate in would best look like.
We would want to see more infrastructure investment, sustainable infrastructure investment and also green finance or green sustainable investment. Hague Optimumica have different shapes. Probably at some point, haircuts on Central Bank held debt is not unimaginable and is probably even more likely. We think number 1. Number 3 is coordinated QE and fiscal expansion as well as held Continental Bank Health Debt could come at some point, especially in Europe, not today, not tomorrow, but at the next crisis.
Why? Because monetary policy of Bockford is exhausted. We have gone beyond the limit, especially in Europe on that front. I won't spend too much on that slide. It's very packed and colorful.
It's 30 years of economic history in one slide. So I'll leave it up to you, but we'll just wait on. I just wanted to highlight 2 things. What we highlight in bold as the key macro parameters is often overlooked labor productivity, real GDP per capital. These are important macro objectives and often overlooked.
Japan doesn't do badly. Actually, it does quite well on labor productivity front. It also does quite well on real GDP capital in the G3 in the context compared to the U. S. And to the Eurozone, if you look at the various time horizons.
If you look at GDP growth per se, yes, GDP growth per se is a bit much lower and we have the economic contractions and we have deflation years. We believe, however, it's much more important, again, to track productivity and to have policy outcomes, which has improved labor productivity and has improved real GDP per capita income growth levels. In our assessment also, Europe is much more at risk to face Japanification. What's the downside? Japanification is probably not even the worst case for Europe, right?
Because Europe could dream of having the labor productivity and the real GDP, the cap being core that Japan has. So yes, we think Japan educations are important lessons to be drawn. Also important lessons drawn if you think about what insurance market have been doing over the last 20, 30 years, what they have done very shortly. Asset allocation front increased illiquid instruments. They also increased much their exposure to foreign assets.
You see it 25% in foreign security, 2018, 2019, it was about half 13%. And this is also trends that we expect we're going to see more European insurance landscape. 2nd, the product mix, switch to unit linked products to reduce insurers investment risk. If you looked again at the negative spread in Germany and other places, also something which I would expect to continue happening, especially in Europe. And industry structure, the consolidation, M and A activity, I think we can also expect more on that front.
And last but not the least, expansion to overseas markets. Fact is Japan is the 2nd largest insurance market in terms of M and A activity. They have good reasons because they need to look for growth somewhere else. And I think global companies are going to increasingly look for growth in emerging markets like us looking for growth also in Asia. With this, the most important topic at the end is Thomas, recession scenario.
Thank you. All right. Thanks.
So Jerome mentioned before, we have a probability of 35% for U. S. Or a global recession within the next year. And so the question is, what does it mean for insurance industry? And there's a couple of transmission mechanisms how the insurance industry is affected.
So first, on the investment side, all insurance companies would lose from investments on the investment side and from lower interest rates going forward. Then there is an impact on demand. Demand would be growth. Premium growth would be more moderate due to slower exposure growth, lower incomes due to weak labor markets
and so on. And there are
certain lines of business that are more affected like trade credit or marine transport types of lines that are more tied into the economy and particularly if you have a trade war scenario that triggers this recession, then these marine related or export related lines of business would be affected even more. But then there are also for non life insurers, there are impacts on the claims cost side, and that's quite interesting. So there is an impact on frequency, and we showed it here the right side of the graph. Credit and surety will be affected. And for example, to some more insolvency during a recession, you will have more claims on that side.
And
D and
O lines might actually also be affected through more securities fraud class actions that relate to stock market meltdowns. But the other we showed that on the left side chart is a very interesting story and that relates to the claim severity. And we see that for a lot of lines of business, particularly casualty lines, recessions will actually result in an easing of claims escalation. And so there is disinflation that follows or is a result of slack in an economy during recession will actually benefit these lines of business through a lower claim severity going forward. So this is an important counter effect benefit that will actually play out through a couple of years.
And this is what this chart on the left side shows. This is the combined ratio. And we see the dotted line is the beginning of a recession. And so we see these are 2 relevant U. S.
Recessions from the past. And we saw a run up of claims inflation or combined ratios before the recession and then for a couple of years, a disinflationary benefit on the claims side. And how would this translate to the current picture of profitability? Last year, we did an exercise where we looked at try to estimate what is the profitability level of the Non Life industry worldwide if we iron out some of one off items and we had this look at these bars here. This is the profitability gap.
We see that 6% to 9% of premium are missing just to achieve a 10% target ROE in most of these markets, largest insurance markets, North America, Europe and Japan. That's if we so if we take out unusual cat losses and reserve release and so on. And so this is the it shows the weak situation of profitability at this point. Now if we have a recession scenario and we assume that interest rates drop further and we assume here a 50 basis point drop across these markets, realistic at the current low interest environment, we will see that another 1% to 1.5% of premium or of profitability GAAP would widen or would open up more as a result of this. Then there would be some offsetting benefit from what I mentioned in a prior slide, the story of disinflation, which is would be a slow moving benefit that will play out a little bit over time.
So this is additional stress from the investment side. We don't think that this would be a moderate recession. It would pressure profitability. We don't think this would be a capital event in that respect. There are benefits on the claims side, but then there's also and that's something we have there are worries or concerns about what we call social inflation, non economic rises of claims through the changes in the legal system, and that's something that's playing out in the U.
S, particularly in the moment. And we also mentioned this separately in the Sigma and there's also a slide in the appendix to cover this. With that, let's do the wrap up and hand back to Jerome.
Thank you. We'll wrap up very, very briefly and we have good 10 minutes for Q and A. Number 1, global growth low for longer, below consensus growth forecast, interest rate forecast likewise, below 2%, 1.4% 10 year rate in the U. S. And 20 20, economic growth about 1.6%.
2nd, insurance market premiums remains at a trend growth, thanks also to Asia and the power of economies and the strength of the Jones markets in Asia. So it is a good story for Jones markets looking ahead. And point number 3, if you think about the key things that have been with Basel in the last few years, they will remain with Basel in the next few years as well. Japan education will be important to watch and watch and also get the right lessons. It will mean for insurance companies more overseas investments, more growth overseas, especially for European investor.
And in terms of negative rates, negative rates are going to stay with us. And probably, the level of negative yielding debt is the lower amount that we can expect going forward. And last but not least, you think about our U. S. Recession likelihood, 35%.
What does it mean for insurance company? As Thomas just explained, at least for the Non Life Sector P&C side, it doesn't have to be as negative as one might think. It might actually even have some upside at least from a profitability point of view. That's it from my side. And in terms of the outlook, I know we took a little bit maybe longer than we usually take, but we had a lot to say.
A lot is happening. And yes, more than happy to open up for Q and A. Thank you.
And just a quick note, for those in the room, and we'll start with those in the room and you in particular. Just make sure the mic is on because we want to make sure that those on the line can hear your question and of course the response to the question first.
Alexa, in terms of time, you still have 10 minutes?
Yes. We
still have 10 minutes. So make sure to press the button. Go.
I haven't had the B word at all. Why is that? Brexit. So your new question was? I haven't heard the word Brexit mentioned at all.
Why is that? Is that not a concern at all? Well, for me and for us, from an economic point of view, in the way we look at U. K. And the Brexit, less of a concern.
Why? Because it has to act on for a long time, meaning you can you see the negative effects already on the UK economy of the track down process. That's number 1 answer. Number 2, if you think about the time line, it's so well flagged Brexit in terms of and it's so drawn out as a process that you see Swiss Re, but also many other insurance companies haven't taken actions already. So if you look at how Swiss Re is positioned in terms of Brexit, we have taken actions to be well positioned for worst case scenario.
Why? Because U. K. Is a super important and strategically important market for us. And there's no luxury for inaction on that front.
Now is Brexit a global systemic risk? I think much less so than I would have judged it would be 1 year ago because it's drawing out and it allows policymakers to make preparations even for a worst case. So not having mentioned Brexit doesn't mean that the likelihood of a hard Brexit is nil or is very low. It doesn't mean, but it rather means that it wouldn't be a top risk from our front in terms of global markets and global financial market stability because it's so well drawn out. Thank you.
Thank you.
Barbara Schurr, Limestree Publications, but I'm as well a member of Lloyds, still one of the few names left. My question is on interest rates and that is, what do you think is the new normal? Is the present one new normal? And if you said, we go back to 5% as an average, when and how would that be achieved?
I do think, from my perspective, yes, what we see today is a new normal, which doesn't mean it's a good normal. It's not. Interest rates globally are depressed. They have been artificially depressed. And the Swiss Re and our research, we have been quite outspoken on that in the past and on the record.
I don't believe you're going to go back anytime soon to 5% interest rate levels. It will take decades to get back to 5% interest rate levels. I don't think it's likely because we cannot digest 5% interest rates. If you would have if we were to know that 5% is possible as an interest rate environment next year, Just think about the amount of debt, which is outstanding, dollars 70,000,000,000,000 increase in global debt since 2,008. Now if the interest rate you were to pay would be 5% and not 2% or lower, just think about in terms of mathematics, you would lead to major insolvencies and back countries.
I don't think we are we can digest it. That's maybe a financial market explanation. The economic explanation is, if you were to return to 5% interest rate level, that also were to mean that the level of natural interest rates or the level of productivity were to be much higher and we don't see in the numbers either. So bottom line, I don't think we are going to go out anytime soon from the lower interest rate environment. Now if end year is going to be 1.4% or 1.6%, I think difference there is not so important, but likely going to be below 2%.
That's our key outlook and one of our core view. Thank you.
Okay. I'm Mark Gagan. Don't have a publication at the moment, but watch his face. You mentioned social inflation at the end. Obviously, big story for all of us at the moment is there was an event at the Insurance Insider last week, as Stephen Catlin mentioned a potential $100,000,000,000 to $200,000,000,000 casualty reserving deficiency.
So I wonder what is your view on that potential claim or that as a potential shock to industry profitability going forward?
Yes. I mean, I don't want to second guess or comment directly on this specific number. We it's clear that social inflation, we see higher frequency of large claims of this nuclear verdict. And the this will have potential impact on some of the prior year business claims. It is not widespread through all lines of business.
So I think this is important. It's not all cash flow lines are equally affected from that. So this is large commercial, large corporations that are particularly under stress here on this focus. So it is a worry. There's reserves might be deficient coming from that.
There are other factors that play a role as well as these economic factors. So we don't have our own quantification for that. It's I think it's the uncertainty around these trends are so large that it's probably not prudent to do this at this point and to come up with a specific number. But it's a risk to watch out for.
I think we have time for one more question in the room. I think you were raising your hand. It's
Pascal Mags, Swiss publication, you predict a strong growth and from 2020 and beyond, slower growth. Why is that? So we have in U. K, right, we have 1.3% in terms of growth, consensus 1.2%, 1.2%. I wouldn't make much that's for 2019 and then for 2020, a little bit lower.
In terms of our difference with 2020, it's a little bit relating also how we view the U. S.-China trade war in terms of global growth. The very part that we don't have certainty what's going to happen on Brexit. And thanks for having asked before, right. Don't know when it's going to happen, which form it's going to happen.
These indirect effects are often even larger than the direct effect. Brexit and on top of global trade war, that's why we have a UK growth being lower than consensus and especially also lower than the IMF. The very fact that global growth is being impacted 4 or 5 times more by the indirect effect and the direct effect of the trade war tariffs, I think, is telling and is something which is not going to go away 2020. Thank you.
Okay. So if anyone has questions to follow-up, as I mentioned, please feel free to e mail me. I mean, many of you have my e mail mail, but if you don't, also you can e mail media relations. We'll make sure to get those answers to you as soon as possible. It seems we don't have any questions on the webcast, which is a blessing because it is actually noon right now or yes, it's 11 noon.
My computer is still on. It's very kind. So it hasn't gone on in 2 hours. So many thanks to everybody for coming. And for those that are doing some interviews afterwards, let's go out there and then I'll slowly bring you to the room to do the interviews with Jerome.
Thank you.
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