Setting the context: The fundamentals and forces shaping the market
Low interest rates, stagnant growth and the growing likelihood of a global recession define the challenging economic reality for insurers around the world. These dynamics place real pressure that insurers feel not only on their bottom lines but also in their strategic plans, transformation programs and new product launches.
Low interest rates are the biggest challenge to growth, especially for life insurers. While we believe that these conditions are the new normal, the latest round of monetary easing is increasing the pressure and negative yields are now appearing in both government bonds and the corporate market. Weakening GDP growth, political uncertainty and trade tensions further complicate the macro outlook for insurers. The increasing likelihood of the next financial crisis as investors hunt for yields may push them toward increasingly riskier asset classes.
All of these forces add up to a major challenge for insurers, especially given that they derive the vast majority of their profits from investment income. The erosion of investment returns from low interest rates, tightening spreads and inverted yield curves will not only undercut this critical source of profitability but also potentially put ratings at risk.
In many mature markets around the world, penetration across both life and non-life segments has dropped during the last 10 years and the number of policies sold has fallen. In Europe and some other markets, there has been a pronounced shift toward fee-based products, which have provided a boost to new business. Consequently, in-force life contracts are decreasing across various European markets, though these liabilities must be monitored carefully by management. China has delivered the strongest growth of any insurance market worldwide, but that growth is also expected to slow.
In this environment, it’s no surprise that insurers would turn their attention to cost optimisation measures and on telling a compelling investor story. At the same time, insurers can’t afford to cease investments in innovation or lose sight of the transformation imperative. The timeless business wisdom that you can’t cut your way to growth certainly applies to the insurance industry circa 2020.
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