‘Zombie’ firms more likely to maintain business insurance coverage charges rising -Swiss RE By Reuters
© Reuters. FILE PHOTO: The brand of insurance coverage firm Swiss Re is seen in entrance of its headquarters in Zurich, Switzerland February 12, 2019. REUTERS/Arnd WIegmann
By Alwyn Scott
NEW YORK (Reuters) – The expectation that a whole lot of so-called zombie firms will fail over the subsequent few years and drag on the financial system is among the many main issues prompting insurers to scale back threat and cost increased premiums, a pattern more likely to proceed as failures enhance, Swiss Re (OTC:) AG mentioned on Tuesday.
Zombies – which lack the money circulation to cowl the price of their debt – are “a ticking time bomb” whose explosive results shall be felt as governments and central banks withdraw measures which have helped maintain these firms alive in the course of the pandemic, Jerome Haegeli, chief economist on the Swiss insurer, advised Reuters.
The sober prediction comes as inventory costs hit information and the U.S. financial system seems headed for six.5% progress this yr. But these strengths are illusory, Haegeli mentioned, as a result of they’re based mostly on non permanent fiscal and financial assist.
Haegeli mentioned the proportion of firms which might be zombies actually elevated in the course of the pandemic, as central banks flooded markets with cash and governments offered reduction. On the identical time, U.S. firm bankruptcies fell 5% in 2020, Swiss Re mentioned in a report on Tuesday.
Earlier than the pandemic, about 20% of listed corporations in the USA and UK had been zombies, and 30% in Australia and Canada, the Financial institution for Worldwide Settlements mentioned in September. By comparability, zombies constituted about 15% of listed firms in 14 superior economies in 2017 and 4% earlier than the 2008 monetary disaster.
Insurers are being cautious as they forecast the place the financial system shall be in a yr or extra, Haegeli mentioned. They’re reining in underwriting threat, being extra prudent about funding portfolio asset allocations and even taking precaution on insuring operations and supply-chain threat.
“They don’t seem to be getting fooled by the short-term image,” Haegeli mentioned. “Should you have a look at the market at the moment, the whole lot appears nice. Nevertheless, it is illusionary to assume that this atmosphere can final” as “life assist” is withdrawn in coming months. And that may convey a rise in long-overdue bankruptcies.
“I am involved that you’ll see a sudden spike in defaults as a result of the default charges are so low,” he mentioned.
Insurers are also more likely to proceed elevating costs to make sure they’re adequately pricing the dangers forward, he mentioned.
World business insurance coverage costs began rising in 2017 and have climbed since, together with an 18% rise within the first quarter of 2021, in line with information from Marsh & McLennan Firms Inc (NYSE:).
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