Non-life insurers’ profitability to lag behind cost of capital in 2023 – Swiss Re Sigma study

Non-life insurers’ profitability is expected to lag behind the increased cost of capital in 2023, according to Swiss Re, despite “adjusting rapidly” to higher interest rates.

In its latest Sigma report, published 9 September for the start of the Monte Carlo RVS event, the reinsurer said that this environment was likely to presage “further rate hardening and constraints on capacity” throughout 2024.

This is not to say, however, that the general insurance sector’s profitability is under threat. Indeed, the report added that the effect of the current higher interest rate environment was overwhelmingly positive for insurers’ bottom lines, given their investments in longer-term fixed income investments.

Jerome Jean Heageli, Swiss Re’s group chief economist, explained: “Our analysis shows that non-life insurers’ profitability is set to improve strongly in the coming years as higher interest rates and rate hardening more than offset higher claims costs from persistent inflation.

“This will be vital to enable industry resources to grow at a rate that will match global demand for insurance protection.”

Persistent disequilibrium

Despite an optimistic profitability outlook, the reinsurer added that it expected the “disequilibrium in demand and supply of non-life insurance to persist and thus a continuation of current hard market conditions, especially in property catastrophe lines”.

Increased demand for insurance protection has been a feature of the sector since 2017 – driven largely by increased natural catastrophe activity and inflation – with higher replacement values resulting from growth.

However, Swiss Re added that “higher growth in industry capital” was needed to “narrow large protection gaps worldwide”.

The Swiss Re Institute, for example, noted that property and casualty insurance capital has grown by an average of 5% annually over the past decade.

Across the same time period, the natural catastrophe protection need has grown by around an average of 7% annually, with protection gaps widening as a result.

Globally, the value of unprotected risk exposure has risen steadily in the past five years, with Swiss Re Institute estimating the global protection gap for natural catastrophe, crop, mortality and health insurance to be around the $1.8trn mark in 2022 premium equivalent.

Working in tandem

Swiss Re’s latest Sigma report said that both primary insurers and reinsurers had a role to play in closing the growing protection gap.

It noted that more efficient use of capital by primary non-life insurers would be vital in this, especially given higher demand, elevated risks and limited available capacity.

Gianfranco Lot, Swiss Re’s chief underwriting officer for property and casualty reinsurance, said: “In the current capital-demanding environment, reinsurance can enable to primary insurers to write new business more efficiently, provide certainty for legacy liabilities and support the growth of new business.

“The elevated risk landscape calls for more frequent adjustments to underwriting practices. Focusing on portfolio quality and margins as well as contractual clarity in the whole industry will be key in this respect.”