Rising protectionism to hit marine, trade credit insurance

Protectionism is on the rise and could result in a global recession if current actions morph into a fully-fledged trade war, Swiss Re has warned. A longer-term decline in trade will hit marine and trade credit insurance premium growth hardest, the reinsurer noted in a report titled “Protectionism on the rise, and here to stay”.

The decade-long trend of falling global tariffs, facilitated by the formation of the World Trade Organization in 1995 and China's accession in 2001, has stalled, Swiss Re explained. Instead, recent years have seen a return of explicit tariffs. By pursuing unilateral protectionism (ie, "America First"), the US no longer promotes the global multilateral trading system it helped build and protect, the report stated.

Once the recently announced tariffs (an additional 10-25 percent tax on $200 billion of imports from China) come into effect, tariffs on imports into the US would rise to levels last seen in the 1970s. Tariffs on US goods exports to the EU and China are also rising as these countries retaliate, the report noted.

Swiss Re attaches a likelihood of 30 percent to the development of a global trade war scenario with a significant global growth impact. A severe scenario with a 10 percent tariff on all goods trade could lead to global recession, with a cumulative loss of global gross domestic product (GDP) of up to 1.5 percent-2.5 percent over the next three years.

With respect to insurance premiums, to date the impact of higher tariffs has been negligible, the report noted. In the short term, rates are the most important driver of premium volumes but over time, Swiss Re believes global premium growth will be negatively hit by higher tariffs, particularly in marine and trade credit lines.

Sigma finds that a 1 percent decrease in world trade reduces marine cargo premium growth by 0.89 percent, and for marine hull premiums by 0.80 percent. For trade credit, a 1 percent drop in trade would reduce premiums by 0.67 percent. Controlling for domestic demand and other factors, this declines to 0.32 percent. An area of potentially stronger demand as a result of rising protectionism is political risk protection, Swiss Re noted.

In addition, the current trend towards bilateral rather than multilateral trade agreements fragments regulation internationally, the report noted. This poses challenges for international re/insurers by making cross-border transactions more costly and reduces the benefits of diversification of global companies, with detrimental implications for re/insurers' ability to close protection gaps, Swiss Re added.

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