Modelling Deglobalisation - Lessons for Actuaries

Modelling Deglobalisation's Insurance Impacts

Joseph Hoang-Luu, a property and casualty actuary, presented in an Insights session in April on the topic of “Deglobalisation - Modelling the impacts of the insurance industry”. He examined several historical macroeconomic trends and explored trade openness of financial superpowers such as the US and China, exploring their effects on Gross Domestic Product (GDP), and related them to the actuarial profession as a second-order impact.

What Are the Scenarios for Global Trade Deglobalisation?

Joseph studied imports and exports as a proportion of GDP from a wide range of historical periods, from the Bretton Woods Collapse in the early 1970’s, through to the Global Financial Crisis (GFC) in 2008, assessing key goods and the trading patterns of both the US and China, then analysed the future global market under different scenarios such as escalation, regionalisation and bifurcation.

Escalation was “a continuation of current trends”, where the output of the US remains stable while China’s output continues to grow, relative to global GDP. This scenario also saw trade between the US and China decreasing as the US traded more heavily with Mexico and Canada, with machinery and electronics especially increasing. It also understandably saw emerging markets playing an increased role between the two major trading powers.

Regionalisation represented the US and China strengthening trading ties with their neighbours. It was, for this reason, quite similar to the escalation scenario. In this scenario, however, the increased trade between the US, Mexico and Canada occurred at an increased rate. It also saw China strengthening its ties with emerging markets, while the US would decelerate its own trade with them.

Bifurcation, finally, represented a future where trade is split between the two factions headed by the US and China. It was noted as being the most extreme, and would result in a decrease in global GDP and a steeper decrease in trade.

How Could Deglobalisation Affect Insurers and Financial Services?

Risk Insights Working Group Key Takeaways

One of the key takeaways from the session was that second-order impacts really matter. Deglobalisation may sound like a topic that sits outside normal actuarial work, and more like something for economists. However, the session showed that changes in global trade can quickly flow into areas risk professionals like actuaries deal with every day. For insurers, deglobalisation could disrupt claims costs, when it comes to products related to the transport, construction and energy industries. It could also rapidly change the risk profile of the insured assets due to supply delays or business interruption. For financial services more broadly, the impact may also flow through to investment portfolios, especially where complex asset-liability management strategies are involved.

What Skills Do Actuaries Bring to Uncertain Environments?

The Insights session was a good reminder that actuaries have highly transferrable skills in uncertain environments. Joseph emphasised that he was not an expert in the field in particular, but that actuarial principles can be applied alongside extensive research. The key goal of actuarial analysis is not about getting the “right prediction”, but rather the ability to help our stakeholders to understand the drivers of the environment that the business operates in. While we may not be able to predict exactly how risk will unfold, we understand where emerging risk may come from, test key business assumptions and develop risk management strategies that respond to the external environment dynamically.

View the Insights session recording here .