Despite a looming recession, insurance premium growth will rebound in 2024 as interest rates rise - sigma
Inflation continues to be the key concern for insurers according to Swiss Re Institute’s latest sigma. The effect of inflation on the global economy has led to total global insurance premium falling slightly by an estimated 0.2% in real terms in 2022.
For insurers, inflation is a challenge because it erodes nominal premium growth, impacts global demand, and creates higher claims costs in non-life lines.
But there are some ‘silver linings’ moving forward. The dynamics creating a hardening insurance market are likely to remain for the foreseeable future, given the scarcity of capital, catastrophe losses and lack of new entrants coming into the market.
Meanwhile, interest rate rises are “good news” for the industry and any asset holders. “I’m really pleased we are leaving the negative interest rate environment behind,” said Jérôme Haegeli, Swiss Re Group chief economist, speaking during a media briefing.
Recovery will take time
The benefits from rising interest rate will take some time to work their way through, however, with global insurance premiums shrinking in 2022 and expected to remain below trend growth through 2023.
Swiss Re Institute forecasts that non-life real premium growth will recover to 1.8% in 2023 and 2.8% in 2024 after weak 0.9% growth in real terms in 2022.
Shocks on both sides of the balance sheet during the year have contributed to the contraction in 2022 and Haegeli does not expect the benefits of rising interest rates and hardening premiums to result in bullish premium growth until 2024, at which point he expects emerging markets to see most benefit.
“For non-life the return on equity will halve in 2022 but rebound to a ten-year high in 2024 as interest rate tailwinds take effect,” he said.
Commercial lines are expected to benefit most from rate hardening and expand more than personal lines (excluding health) in the coming years. Swiss Re Institute estimates 3.3% growth in commercial premiums in 2022 and a 3.7% increase in 2023.
By contrast, global personal lines insurance premiums are expected to shrink by 0.7% in 2022, primarily due to underperformance in motor insurance in advanced markets, and then recover to 1.8% growth in 2023.
In Europe, the expected rebound reflects improving economic conditions as the region recovers from the forthcoming downturn.
In addition, potential insurance rate increases and easing inflation in the US, as well as more favourable real growth in Asia are expected to support stronger premium growth in those regions.
China, which represents 60% of emerging market non-life premiums, can anticipate 4% real non-life premium growth in 2023 and 5.8% in 2024.
Eurozone struggles to shake off inflation
In the Eurozone, inflation is likely to be a factor for longer, in part due to the ongoing energy crisis but also as a result of less decisive action taken by the ECB. The central bank is forecast to increase interest rates to 3.5%, significantly lower than in the US where rates are already above 5%.
Major economies in Europe are likely facing inflationary recessions in the next 12–18 months amid higher interest rates. Meanwhile, global GDP growth is forecast to slow to 1.7% in 2023, from 2.8% in 2022.
Looking forward, Swiss Re Institute expects the insurance industry to return to premium growth of 2.1% annually on average in real terms in 2023 and 2024, supported by a combination of easing inflation, market hardening in property and casualty lines, as well as stronger life insurance demand.
Haegeli concluded: “In our view, the global economy will cool down noticeably under the weight of inflation and interest rate shocks. The repricing of risk in the real economy and financial markets is actually healthy and a long-term positive.
“Higher risk-free rates should mean higher returns for investing into the real economy. During today’s challenging times – and for the economic recovery period ahead – the insurance industry can show its value as it provides financial resilience at all levels of the community.”
Differing scenarios in an uncertain world
Haegeli was keen to stress that the current economic outlook is uncertain given the unpredictable nature of the global risk landscape, in particular the macro geopolitical situation.
“In this environment, with uncertainty so high, it is important to monitor alternative scenarios,” said Haegeli. “Risks are skewed to the downside. There is macro volatility ahead and we cannot deal with the next crisis with the medicine of the past. The great moderation period has ended.”
Among the scenarios that should be considered are a 1970s style stagflation scenario and severe global recession. A severe recession is “still the one to watch with the highest likelihood,” he thought.
“Inflation needs to go down and we expect that to happen pretty rapidly but we should be under no illusions - it will take time and it will hurt.”
No comments yet