Geopolitics and recession were the two risks most cited by the audience in a poll at Insurance Risk and Capital Americas 2024 event in New York this week (16 September).
The conference, hosted by Insurance Asset Risk and sister publication InsuranceERM, tackled these two issues head-on in the first two panels of the day.
Recession
In a rather contradictory sentiment, a second audience poll on the day found 66% of respondents thought a rare 'soft landing' was achievable by the Fed, while 34% said it wasn't.
Thomas Liebi, managing director and head of US & UK market strategy at Zurich Insurance Company, agreed with the result and the 66/34 split.
"[It] means there's still a significant risk of no soft-landing – here are a number of challenges: geopolitics, banking sector...," he said. "And we should not forget that going from 100,000 feet to 500 feet is the easy part, the last part of the landing is where it gets difficult."
One problem the Fed is facing is that households have been somewhat shielded, having locked in low mortgage and credit rates, Liebi argued. Which will work against the Fed: even if rates are cut, they will remain higher than mortgage rates, and "people will still be reluctant to refinance".
Asked by the audience about the impact on the economy and insurers' investments of the US's growing fiscal debt, which currently stands at $35trn with $3bn in daily interest costs, he said that it's definitely one of the big issues.
"You probably heard the statistics that the government is spending more on servicing interest costs than on defense, which is telling us something, obviously: by spending more and more on servicing, there's less and less money for other things," he continued. "Will it change after the election? I don't think so. Probably both [presidential candidates] will not really focus on reducing the fiscal deficit. So this probably doesn't look sustainable and, at some point, it will have an impact on interest rates. It really will have an impact on government spending. So that's another risk."
Thomas Holzheu, chief economist Americas, deputy head of group economic research at Swiss Re, agreed that the situation wasn't sustainable and that neither candidate had it on their agenda.
"In the medium term, it will affect the funding cost of the long-term government debt and that's something that will obviously influence insurers, [as it] is the largest holding of fixed income on their asset portfolios," he said. "By kicking the can down the road, it will quickly become an issue after the election if, [as seems] most likely, we will have a split congress, as we will again see debt ceiling and budget fights."
Thomas Sullivan, Sullivan Strategy and Advisory Services, pointed out that this issue has a lot less to do with the outcome of the presidential election and a lot more to do with Congress.
"The appropriators of the federal budget are members of Congress, and as long as they continue their evil ways, and ignore it and not do anything about it, [it will continue to be an issue]," he said. "You would need a substantial change in the congressional makeup where you would need a lot of fiscal hawks, and I don't see that happening in the next election, taking over and being the new appropriators who would have an attitude of real belt tightening about them."
Back to the question of a possible soft landing, Holzheu argued that, left to economic factors alone, a soft landing was achievable, "but then we have of course the risk factors, and the geopolitical risks are a much greater stressor".
The wars in Ukraine and in the Middle East could escalate he said, and although they haven't impacted the US economy yet, escalations created a risk of that.
"It is clear that politics has been much more of a driver of the economy for the last four or five years than it was before," he said, offering a nice segue to the second panel of the day on geopolitics.
Geopolitics
Because geopolitical implications are not equal across geographies and sectors, and therefor "heightened geopolitical risks require deeper and more granular [analysis] at geography and sector level," Roman Halfin, head of investment risk at Enstar, highlighted. "You cannot come up with a single conclusion through entire economy."
Carl Groth, chief risk officer at Legal & General Retirement America (LGRA), said that LGRA is cognizant of "what's going on around the world and how that may impact some of the investments that we have – we've definitely dialled a lot of those investments back".
LGRA sold off some of its publicly traded credit holdings, and for private credit investments, where there is less off an ability to get out, it turned off the tap when it had "concerns about the market where the issuer is located".
Reacting to an audience question about President Trump's comments around ending the Ukraine conflict in a day, panellists argued that little credence could be given to these types of statements by any politicians.
Paul Bianco, US chief risk officer at Aspen, argued that, approaching the US election in an analytically agnostic way, he believed that a Kamala Harris win would lead to similar policies to the Biden administration.
"Conversely, if it did go to Trump, you would certainly see more of a focus on the energy side, probably away from green energy more towards fossil fuels," he said.
Another audience question noted that emerging markets have avoided contagion shocks, despite the Ukraine war, China tariffs, and Middle East volatility, and asked if EMs have evolved away from correlated shocks.
Bianco said he almost saw the question as multiple choice: "Have they become more resilient and therefore avoided it? Have they been pretty lucky and they've avoided it? Or somewhere in the middle? At the end of the day, the answer is probably somewhere in the middle."
He continued: "I don't know that there's an emerging market out there, in my opinion, that's got the blueprint for how to avoid correlated shocks of what's happening around the world. It's a question of concentration risk: are they completely concentrated on certain aspects of their economy within certain geographies? Probably not [in] today's global economy. So, it's more of a function of a global economy that increases some level of resilience and probably a certain amount of luck that's involved."
There is not a one-size-fits all for EMs, which means that different countries fall into that bucket and each has a different investment opportunity set, Groth argued.
"LGRA has been getting more comfortable with some EM countries," he said. "I don't think it is necessarily a change in risk appetite but it's a change in the actual underlying economy."
