Column: Here we go again?
The economic environment was sensitive to even minute changes in monetary or fiscal policy. We had become used to the cheap capital which fueled potentially unsustainable business growth, with some companies at risk of not being able to pay their debts if the pressure to do so was applied.
The financial crash of 2008 was fading in many global memories, replaced by attention being diverted to other emerging events in a chaotic, complex, and fast-changing world.
The combined effects of the pandemic and the war in Ukraine exposed financial weaknesses in supply chains and energy prices which paved the way for a financial correction. The rapid rise in interest rates along with an inflation-led slowdown has now resulted in a domino effect on global financial health.
We know a great deal about “connected risk”, but in the present financial crisis we seem to have overlooked joining the financial dots.
So here we are in 2023 staring down the barrel of a financial shock largely stimulated by recent rapidly escalating – too rapidly some are now saying – interest rates. The economic shock has created a scenario that many working in the financial sector have never experienced. Now fingers are pointing at who might be to blame.
Following announcement of the deal by UBS to take over its troubled rival Credit Suisse, which included some of the riskier Credit Suisse debt being written down to zero, there are likely to be ongoing repercussions in the banking sector globally.
However, one dynamic which has changed since 2008 is the increased sophistication of banking technology and the power of social media to underwrite disasters without anyone leaving their home or office to visit a bank. Combine this with some regulators apparently stunned by the brightness of the headlights, there are the components of a financial crisis if not managed quickly, carefully and with global banking collaboration.
The “coordinated action” by six of the world’s biggest central banks demonstrates how seriously the fragility of the global banking system is being taken. Whether the deal involving Credit Suisse will be enough to allay fears which might lead to the ignition of a global financial melt-down remains to be seen.
In 2008 and 2009, insurers like other financial firms, took losses on investments in debt and mortgage-backed securities. CDOs backed by pools of mortgages or other assets plummeted in value as investors fled all but the safest forms of debt. Some familiar names failed to be bolstered by governments.
Putting blame to one side and whether or not sophisticated forecasters should have seen this coming, we might remember two things: first, that the financial sector is more resilient today than it was in 2008 and second, in 2008 the insurance sector generally weathered the financial storm better than many other sectors – and today, the insurance sector is more resilient than it was back then.
However, the insurance sector is still not immune to the effects of high interest rates and inflation. They are winners and losers in this game. On the upside there will be benefits and a buffer to results from higher investment returns, but on the downside there will be impacts on the value chain including business acquisition costs, claims expenses and payments. People costs will be felt from the “race for the right talent”.
We are now waiting to see how this latest crisis will unfold – but we’re watching, not panicking.