The Rise of Zombie Companies: A Threat to Economic Recovery

The Zombie Company Phenomenon

Swiss Re's chief economist, Jerome Haegeli, recently warned that the failure of hundreds of 'zombie companies' over the next few years could significantly impact the global economic recovery. These companies, which lack the cash flow to cover their debt, are often kept afloat by government and central bank support measures introduced during the pandemic. As these measures are withdrawn, the risk of corporate failures is expected to rise, prompting insurers to reduce risk and increase premiums.

The Illusion of Economic Strength

Despite record stock prices and predictions of 6.5 percent economic growth in the U.S. this year, Haegeli cautions that these indicators are based on temporary fiscal and monetary support. The Bank for International Settlements (BIS) has also highlighted a pre-pandemic increase in the number of persistently unprofitable firms, or 'zombies,' which are particularly vulnerable to economic downturns. Before the pandemic, about 20 percent of listed firms in the U.S. and U.K. were zombies, and 30 percent in Australia and Canada. This trend, combined with the ongoing impacts of the pandemic, suggests a higher likelihood of corporate collapses in the near future.

Implications for Insurers and Policyholders

As the risk of corporate failures increases, insurers are taking a cautious approach by reining in underwriting risk, being more prudent about investment allocations, and taking precautions on insuring operations and supply-chain risk. This trend is likely to result in higher premiums and reduced coverage limits for policyholders. In light of these developments, it is crucial for businesses and individuals to reassess their risk management strategies and consider purchasing insurance policies that offer comprehensive coverage against a range of potential threats, including corporate failures, natural disasters, and cyber-attacks.