Library: Swiss Re – Global insurance premium volumes to reach new high in 2022

November 2022 featured report:

The optimism which buoyed the world economy as we left behind the misery of COVID-19 has dissipated over the past six months.

Though we expected a degree of difficulty as supply chains eased and businesses got used to standing on their own two feet again, rocketing inflation – driven not a little by Russia’s invasion of Ukraine in February this year – is casting a shadow across the global economy.

This paper from the Swiss Re Institute looks at how the economic slowdown and inflationary environment are likely to impact the insurance industry. Because if growth is down, so, too, is demand for insurance.

It will be hard, but not without hope

Despite the choppy waters facing the global economy, the paper’s authors estimate that total premiums of both life and non-life will grow by 6.1% in 2022. In real terms, that’s practically level growth of 0.4%. Yet despite this flat market, they also expect global premium volumes to break the US$7 trillion mark for the first time ever later this year.

This is largely as a result of hardening of premiums in non-life to protect against inflation, but it is supported by a growing demand for insurance in emerging markets. This places volumes 17% higher than before the COVID-19 crisis began, further reinforcing the view that insurance has been incredibly resilient through the pandemic.

Developed markets like North American and Europe will see relatively low premium growth – the authors suggest 0.8% this year and 2.2% in 2023, with growth coming from hardening across commercial lines. They also anticipate considerable growth in emerging markets of 3% this year and 4.2% in 2023. This is largely driven by the increase in demand for short term health insurance since the pandemic.

Return on equity will reduce, particularly for the non-life sector profits while the economic slowdown will reduce income and push up claims costs.

One positive note from rising interest rates is that insurers will see their long term investment assets, such as their bond portfolios, generating high yields.

A new focus offers insurers opportunities

If nothing else, the pandemic has brought a sharp focus on to risks – both existing and ‘new’ – for many consumers and businesses. This is driving demand for protection products across both advanced and emerging markets.

Ultimately, just as we’ve been in a period of lower for longer in terms of interest rates and inflation since the great financial crisis of 2008, so we are entering an inflationary period where interest rates will remain higher for longer.

Economies are desperate to avoid a period of high inflation with low growth as a stagflation environment is destructive to wealth and to prospects.

The slowdown will be most pronounced in emerging markets in 2022, seeing growth of around 3.5%, less than half the 7.2% os 2021. But they have already had almost a year of monetary policy tightening applying the brake in order to prevent the inflation overheating the economy.

Developed markets are expected to see 2.6% growth this year and 1.7% next, say the report’s authors, compared to a figure of 5.4% from 2021.

Asia, the growth engine

Taking China out of the equation, Asia will be the main driver of global growth (average 6.2% in 2022 to 2023) with an aggregate growth rate of 3.9%. This is almost double that of the 2% the author’s anticipate for the advanced markets.

The report goes into some depth about the specific impact of monetary policies on insurers and the trends likely to dominate the insurance markets.

While the positives effect of inflation and interest rises on investment returns reverses the negative rate environment seen for many years, it won’t be quite enough to mitigate the increased costs that will be experienced over the next couple of years, says the report. But it will assist with funding the underwriting gap. So instead of the 6% to 9% improvement of underwriting margins needed to hit long term return on equity targets, the authors believe they will need to rise by ‘just’ 4%.

A firm hand on the tiller

The paper says that in order to mitigate the wave of rising claims costs, insurers must be on top of the inflation drivers and take steps to modify their balance sheets and reserve management.

This includes repricing risks to reflect increased cost of claims and diversifying and focusing new business towards products with lower risk profiles, while using CPI to index cover and deductibles will avoid onerous repricing.

Beyond underwriting, the authors recommend reserves are reviewed regularly on a best estimate basis and that claims inflation trends are identified. A special review of reserves should also be planned in order to respond to any projected inflation spike.

Asset liability management should be used to directly hedge financial market exposure. Portfolios should then be translated into investable financial market positions. And where it is deemed necessary, insurers should reassess asset allocation strategies and make changes.

Ultimately, the global economy is in for a rough ride, but insurers have it in their power to not only cope with economic volatility, but leverage the advantages identified through the pandemic to grow while supporting their customer base.

Naturally, continued process improvement and digital transformation remain important milestones for the continued sustainability of any insurance operation.

For more, see the full report.

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