2017/8: Emerging markets to lead insurance sector growth
Written by staff reporter
The global economy is expected to grow moderately over the next two years, supporting continued growth in insurance premium volumes, according to analysis from Swiss Re.
Its 'Global Insurance Review and Outlook for 2017/18' forecasts growth in global non-life premiums to fall slightly from 2.4% in 2016 in real terms to 2.2% in 2017, and accelerate to 3.0% in 2018. Meanwhile in the life sector, global premiums are expected to grow by 4.8% in 2017 and 4.2% in 2018. The emerging markets, in particular emerging Asia, will be the main driver of premium growth in both sectors.
Of the major economies, the US is expected to grow by slightly more than 2% in inflation-adjusted (real) terms annually over the next two years. The election of Donald Trump as president-elect was not explicitly incorporated into the US forecast, but Swiss Re says this is unlikely to have a major impact on insurance markets over the next two years. The Euro area and the UK are forecast to grow by about 1.0% and 1.5%, respectively, while Japan should grow by less than 1.0%. China is expected to grow by around 6.5%. Monetary policy will remain accommodative for the next two years, even as the US is expected to gradually raise rates. Other central banks are expected to keep their policy rates and quantitative easing policies intact. With the Fed raising rates, US 10-year government bond yields will likely rise, pulling yields in Europe slightly higher.
"The insurance industry faces headwinds, with moderate economic growth, and still ample capacity in the markets creating a challenging pricing environment," says chief economist at Swiss Re, Kurt Karl. "Nevertheless, premium volumes continue to grow, in both the advanced and emerging markets along with economic activity and an increase in the insurance penetration rate, particularly in emerging markets."
Non-life insurance sector premium volumes are expected to increase by 2.2% in real terms in 2017, after 2.4% in 2016, and by 3.0% in 2018. The emerging markets are expected to drive the improvement. Premium growth in the emerging markets is forecast to increase steadily from an estimated 5.3% in 2016 to 5.7% in 2017 and 6.7% in 2018. An improvement in commodity prices and strengthening economic activity will stimulate increased demand for insurance from the emerging regions. Emerging Asia will likely have the strongest growth in non-life premiums, forecast to be nearly 8% in 2017 and 9% in 2018. A contributing factor will be the investment opportunities presented by China's One Belt One Road program, which is expected to generate an increase in demand for commercial insurance.
The pricing environment in the global non-life sector remains challenging. Pricing in commercial lines continues to deteriorate across all regions, but at a slower pace. In contrast to many other commercial lines, however, rates in cyber insurance continue to harden but at a slowing pace and could level out soon. Increased awareness of the risks associated with cyber attacks and data breaches is boosting demand for related insurance solutions, and represents a significant growth opportunity for the non-life sector. To date, profitability in non-life has been sustained by low natural catastrophe losses and reserve releases. Assuming average natural catastrophe losses and shrinking reserve releases, return on equity is forecast to decline from 8% in 2015 to around 6% in 2016-18.
In non-life reinsurance, global premium growth is expected to be 2.7% in 2017 and 2.9% in 2018, based on increasing cessions from emerging markets.