Swiss Re Institute looks at world insurance premiums in 2017

In the latest edition of sigma, the Swiss Re Institute examines the development of premiums in the global primary insurance industry, measured by direct premiums written, for the life and non-life sectors. The report, “World insurance in 2017: solid, but mature life markets weigh on growth,” also analyzes profitability trends and provides an outlook for the sectors within the context of industry trends, the global macroeconomic environment and financial markets.

For purposes of this study, health insurance is allocated to non-life insurance, which is according to standard EU and Organisation for Economic Co-operation and Development conventions, even though health insurance may be classified differently in the individual countries.

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According to the report, the global economy improved considerably in 2017, with real gross domestic product (GDP) rising 3.3%. At the same time, the expansion of total direct insurance premiums dropped to 1.5%. Global non-life insurance premiums increased 2.8% to $2,234 billion in 2017, down from 3.3% in 2016, but that was slightly above the 10-year average of 2.1%. Premium growth in emerging markets slowed to 6.1% in 2017, down from 9.8% in 2016, while growth in advanced markets remained steady at 1.9%.

The report expects the global non-life sector to improve, supported by advanced markets, due to “a solid economic environment,” especially in the U.S.

Globally, there were fewer catastrophes in 2017 than in 2016, but the damage in 2017 was significantly higher. Total economic losses caused by the catastrophes were estimated at $337 billion in 2017, nearly double the $180 billion total from 2016.

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The report also noted that the downward trend of overall profitability of property & casualty insurance continued for the third consecutive year. The overall combined ratio for the eight major markets deteriorated from 99.4% in 2016 to 101.8% in 2017.

What does it all mean?

PropertyCasualty360 spoke with Daniel Staib, senior economist, Swiss Re, to put the data from the report into perspective.

Staib: The report looks at premium growth trends for the most recent years and also provides an outlook for the next two to three years. Generally, premium growth is very volatile from year to year, so sometimes it is hard to read out the longer term trends from the short-term noise. In this context, the strong contrast between life and non-life premium development since the financial crisis is astounding.

PC360: What are the most important global takeaways for Property & Casualty insurers?

Staib: The recovery of the non-life segment in advanced markets is very much along the line of the general economic recovery, also supported by strong growth in motor business, for example, in the U.S. or some Western European markets. This can be nicely seen in the chart below.

Among advanced markets, growth is now above a (depressed) long-term trend. Emerging market growth rates are much higher, but, in terms of contribution to growth, advanced and emerging markets are equally contributing as the market share of advanced countries is still close to 80%. Nevertheless, the gradual shift to emerging markets, particularly in Asia is continuing and will continue over the next decade.

PC360: Are there any U.S.-specific takeaways for P&C insurers?

Staib: U.S. non-life premium growth remained stable at 2.6% in 2017, although firming inflation masked a stronger upswing in nominal terms. Motor market developments fueled growth, with auto insurers increasing rates to catch up with rising claims costs. Since 2015, U.S. motor pricing has increased, but more is needed to close a large profitability gap, especially because the commercial business was significantly underpriced in the years immediately following the financial crisis.

Profitability has also been under pressure for other commercial lines, impacted by rate declines over several years. Furthermore, high natural catastrophe losses from Hurricanes Harvey, Irma and Maria, a number of tornadoes, convective storms and the California wildfires all adversely impacted profitability in 2017.

The combined ratio was estimated at roughly 104%, and a -5% return on equity (ROE) is likely to result.

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Digital is key

PC360: Based on your findings, are there any steps that P&C insurers can take to improve premium growth or to better withstand catastrophic events? Should they be thinking about leaving specific geographic areas, changing their risk model or revising underwriting guidelines, for instance?

Staib: Never new, but risk adequate pricing will be key in the nat cat area as well as for P&C overall, and, as mentioned previously for motor business and in commercial lines.

Although this is not directly from the sigma, in terms of generating additional demand in personal lines, it will be key for insurers to offer relevant products for digitally enabled consumers in the 21st century, particularly among the younger generations. Digital sales and distribution strategies and covering the relevant risks of the consumers are key. How can insurers help to insure intangible assets, smart homes or household assets that are also used as production assets in the sharing economy? The regulator in China, for example, is actively supporting this move to digital forms of distribution.

Related: Developments in engineering insurance: Swiss Re Sigma report

Looking ahead

PC360: Do you have any global predictions for the next year, three years, five years?

Staib: Swiss Re Institute expects that the global non-life sector will continue to improve, supported by advanced markets, which will contribute more than half of the additional premiums in absolute terms. Premium growth in advanced markets will be driven by the U.S., where the solid economic conditions and firming prices in some lines should lead to rising premiums.

Although the natural catastrophe events toward the end of 2017 triggered some rate hikes, price increases have remained below expectations in the non-affected lines of business. Premium growth in Western Europe is expected to remain more moderate despite a comparably strong economic recovery in Continental Europe. In advanced Asia, where a planned lowering of rates in Japan for voluntary motor will affect premium growth adversely, recent earthquakes in South Korea could increase risk awareness and demand for insurance. Premium growth in Oceania is expected to be solid in 2018‒19, driven by continuing rate increases in motor, home and commercial lines.

We predict that non-life growth will remain robust in emerging markets, although slightly lower than in the recent past. In emerging Asia, growth will be weaker due to less strong economic growth and ongoing soft rates. However, government policies (such as those promoting digitization, market liberalization, agriculture and health insurance) aimed at increasing insurance penetration should lend some support.

Underwriting profitability of non-life insurers will continue to be affected by soft premium rates, particularly in commercial lines, and deteriorating claims experience. On the other hand, increasing interest rates should gradually support investment returns.

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PC360: Do you have any U.S.-specific predictions for the next year, three years, five years?

Staib: We expect U.S. non-life premium growth will improve in 2018 and 2019, supported by a solid economic backdrop and strengthening prices in some lines. Assuming a normal cat loss burden and a gradual improvement of investment results, non-life ROE for the region could be 7% to 8% for the next few years. Rate and premium growth for commercial auto is robust, supporting profitability. However, general underwriting conditions are still soft, and support from reserve releases is fading.

The large nat cat losses from 2017 set the stage for a potential industry-wide price correction, but rate increases for non-affected accounts and lines of business have thus far been below initial expectations.

Competition has remained fierce because of insurers´ strong capitalization and the availability of alternative capital. Additionally, U.S. tax reform is expected to have a significant long-term impact on growth and structure of the re/insurance market. The viability of the current Bermuda business model is in question, while onerous base erosion tax rules level the playing field between domestic and foreign-owned U.S. carriers.

The full report, with charts and data, is available on the Swiss Re Institute website.

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