Global Premiums To Top $7 Trillion, Though Economic Risks Persist

A gold arrow follows the upward growth of a bar graph and a gold dollar sign supports the tilt of a globe of gold continents

July 20, 2022 |

A gold arrow follows the upward growth of a bar graph and a gold dollar sign supports the tilt of a globe of gold continents

Global insurance premiums will top $7 trillion for the first time this year, as the market continues to recover from the COVID-19 pandemic, rates for non-life lines continue to harden, and emerging markets demonstrate strong premium growth, Swiss Re says in a new report.

Still, high rates of inflation present various challenges to insurers, while also raising the prospect of an inflationary recession, according to the Swiss Re sigma report, titled World Insurance: Inflation Risks Front and Center.

"Insurance remains a growing industry—and reaching the USD 7 trillion mark for global premiums is a major milestone. However, these are not easy times and the insurers will need to keep a close eye on inflation and economic growth," Jerome Jean Haegeli, group chief economist at Swiss Re, said in a statement accompanying the report.

The sigma report (no. 4/2022, July 13, 2022) suggests that slowing economies coupled with the high-inflation environment will weigh on insurance markets, noting that slowing growth typically results in reduced demand for insurance.

The main impact of inflation will come in increasing claims costs, Swiss Re says. "We expect property and motor to be most impacted in the near term," the report says. "In construction, supply disruptions and labor shortages have led to an increase in repair and rebuilding costs, and in turn higher claims. In motor, claims costs have risen as shortages of parts have kept the prices of new and used vehicles historically high."

Accident, auto liability, and general liability lines will also be affected, Swiss Re says, with high inflation making its way into bodily injury claims.

"To counter the negative impact of rising claims costs on earnings, insurers need to understand the drivers of inflation, and action balance sheet and reserve management steps accordingly," Swiss Re says.

In the non-life insurance sector, Swiss Re says it expects the combination of inflation of exposure values and rate hardening to boost premium growth, particularly in North America and Europe. In real terms, premiums will increase 0.8 percent this year, Swiss Re estimates. The real premium increase will grow to 2.2 percent in 2023, Swiss Re says, largely as a result of rate hardening in commercial insurance lines.

Premiums will grow faster in emerging markets than in advanced economies this year and next, according to the report, with estimated real growth of 3.0 percent this year and 4.2 percent next year. "A main driver will likely be strong demand for short-term health insurance, this on the back [of] increased awareness of health security in the wake of the pandemic experience," the report says.

Swiss Re suggests that non-life sector profits will face pressure this year. The reinsurer expects the sector to experience a 5 to 6 percent return on equity this year, down from 6 percent in 2021, before rebounding to 6.6 percent in 2023 as underwriting results and investment yields improve.

"Economic slowdown and multiyear high inflation will reduce premium income in real terms and increase claims costs," the report says. "However, a silver lining to the inflation crisis is that interest rates are heading up. This will boost investment returns over the longer term as non-life insurers' bond portfolios gradually roll over into higher yields."

The Swiss Re report notes that soaring inflation has been the main macroeconomic development for most major economies over the past 12 months. "We expect high inflation to remain for longer, and forecast higher rates of inflation for the 2020s decade than in the previous 10 years," the report says. "In the case of China, we believe structural factors such as increased productivity and rising digitization, among others, will lead to lower trend inflation relative to the previous decade."

The global economy faces a heightened risk of inflationary recession, the report notes, with financial conditions tightening and inflation at multidecade highs. The reinsurer says it expects a recession in a number of G-7 countries over the next 12 to 18 months, resulting in lower annual growth in the United States and the euro area.

"Central banks are prioritizing price stability over economic growth, even if it leads to recession," the report says. "Emerging market central banks have been tightening policy for a year already and their economies will likely bottom sooner than in advanced markets."

Swiss Re says it also expects to see inflation pressures continuing for some time. "The cost-of-living crisis facing many households has been accentuated by the conflict in Ukraine, notably through higher energy and commodity prices," the report says. "We expect the US Federal Reserve (Fed) and the European Central Bank (ECB) will continue to tighten policy for the rest of 2022, which will provide footing for bond yields to rise, a silver lining to the current crisis conditions for both the global economy and for insurers."

Swiss Re suggests that it sees the United States as most at risk for a possible economic "hard landing" as central banks tighten monetary policy to curb inflation.

The "silver lining" for insurers of higher bond yields and investment returns as central banks tighten policy will help offset claims and reduce pressure on underwriting, according to Swiss Re.

"The low-rate environment of the past decade meant that non-life insurers' underwriting results have been under pressure, even though the industry profited from mark-to-market gains in risky assets and fixed income investments," the Swiss Re report says. "For 2023, the anticipated increase in interest rates will ease pressure on [the] underwriting side."

July 20, 2022