Fault lines in ‘new economic regime’ challenge re/insurers

The global economy is no longer being driven primarily by demand cycles. Instead, a series of structural supply shocks - including geopolitical, demographic, technological and policy-driven - are redefining the operating environment for businesses and capital providers.

That is according to Greg Daco, chief economist at EY-Parthenon, who told attendees of the Business Development Agency Risk Summit, held in Bermuda this week, that “We are in what I’ve described as a ‘new economic paradigm’. Supply shocks are increasingly driving economic activity, and this is very different from the environment of the past 10, 20, 30, 40 years, where demand shocks were the key drivers.”

For risk-bearing industries such as re/insurance, the shift is not merely macroeconomic colour. It alters how volatility propagates through markets, how capital behaves under stress and how firms structure resilience.

Several of the shocks reshaping the global economy are unfolding simultaneously. The speaker pointed to geopolitics, trade policy and demographic changes as structural forces altering the supply side of the global economy.

“These are the very shocks that we’re living through on a day-to-day basis,” he said, citing “geopolitical developments that we’re currently seeing in the Middle East, the ongoing war in Ukraine, or the trade tensions, tariff policy and export controls that we’re seeing around the world, or the immigration developments, policy and demographics.”

Unlike demand shocks, these disruptions produce a more difficult economic combination: lower output alongside higher inflation.

Daco explained that: “If you have a positive supply shock, it increases your potential output, but it decreases inflationary pressures. Conversely, a lot of the negative supply shocks that we've been seeing over the past few years have an effect that reduces economic output but lifts inflation.” Energy volatility provides a clear example, with Daco pointing to dramatic oil price swings tied to conflict risks in the Middle East.

Trade fragmentation is another key fault line. “The cost of doing trade with the US has been multiplied by about six over the course of 2025,” the speaker noted. The average tariff rate jumped around 2.5% at year end 2024 to 16.5% by year end 2025. “We had not seen such a high rate of tariffs since the 1930s,” Daco said.

Daco explained the significance of this: “it’s very hard for businesses to plan in this environment. You don’t know what the tariffs are going to be over the course of the next month or the next year.” He cautioned that uncertainty may not yet be fully visible in headline data. But it is already shaping corporate behaviour. “That’s a restraint on economic activity that we’re not necessarily perceiving well in the data, but that is certainly restraining investments and hiring decisions.”

Daco acknowledged that AI capabilities have the potential to increase GDP growth significantly, but while technology expands productive capacity, demographics are moving in the opposite direction.

“Two thirds of the population live in economies where the fertility rate is below 2.1 children per woman, and that’s the replacement rate,” Daco noted. That shift will reshape labour supply and fiscal pressures over the coming decades. “The share of people over 65 around the world is 10% right now. Over the next 25 years, that will double.”

For governments, that means rising fiscal burdens as working-age populations shrink.

In a world dominated by supply-side shocks, the strategic response changes. Businesses cannot simply rely on forecasting demand cycles. They must build structural adaptability.

“I think it’s very important to focus on resilience and robustness,” Daco said.

Resilience means operational agility: “It’s the muscle memory to react quickly when shocks occur with pricing flexibility and modular operations that allow you to be nimble.”

Robustness requires stronger balance sheets and technological integration: “A strong capital position with strong liquidity buffers to withstand these shocks.”

And ultimately, a coherent approach to technology adoption: “how do you integrate AI in a holistic manner to produce these goods and services in a more efficient way?”

With increasing interconnectivity of risk and economic stability, re/insurers need to embrace agility and a proactive approach to risk management to better withstand disruptions and capitalise on emerging opportunities in an increasingly uncertain environment.

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