Growth prospects in emerging markets have moderated in recent years as they have faced structural and cyclical headwinds. A diverse set of challenges such as deteriorating demographic gains, trade dependence, financial volatility, stagnating productivity growth and high indebtenedness, have all weighed negatively one way or the other. In spite of the challenging outlook, emerging markets remain an attractive proposition for insurers — especially relative to advanced markets. But a selective approach is warranted as the prospects of a given market are increasingly driven by idiosyncratic factors and the degree of economic resilience.

The overall emerging market story remains positive irrespective of growth moderation, in particular relative to the advanced markets.

Since the early 1990s, emerging markets have been a key source of growth for the global economy. Aided by a strong performance in developing Asia — most notably China, but also India — the emerging market share of global output has risen steadily.The countries' young demographics, urbanization, population size, and lower income contributed to more rapid growth. However, as emerging markets have moved up the production value chain, and the external environment has become increasingly more complex, rapid growth has been difficult to sustain. The ongoing maturity process suggests — per the beta convergence hypothesis — that as income levels in developing countries catch-up with advanced markets, the speed is naturally set to slow. The silver lining is that the slower growth rates can come with a more stable performance evidenced by lower growth volatility — a shift from quantity to quality of growth — given the right set of economic policies. Firms and governments respond differently depending on whether the challenges they face are cyclical or structural in nature. Firms may choose to be patient in the face of cyclical challenges, but may opt for a change in strategy if the challenges in a market are structural. Governments may use monetary and/or fiscal policy to stimulate the economy, when faced with cyclical challenges. If governments determine that the problem is more structural in nature, they may need to opt for deeper reforms, since cyclical-oriented policies may be inadequate. Firms need to reconsider whether the expected performance of their markets is aligned with their business strategy, while policy makers need to re-evaluate existing economic policies to ensure resilience and sustainability. Governments that are willing to undertake the right structural reforms to promote long-term sustainability — occasionally at the expense of short-term economic success — can achieve stronger economic resilience. It requires political commitment and long-term planning, which we believe will be a key differentiator among emerging markets. When looking for the likely winners, in our view those emerging markets that favor policies that promote fiscal prudence, monetary policy independence, economic liberalization, trade diversification and higher productivity will find themselves better prepared to face the structural and cyclical challenges that lie ahead. Such has been the case through the past decade in Latin America, where the market-friendly Pacific Alliance countries (Chile, Colombia, Mexico and Peru) fared much better against a challenging global environment compared to more intervention-prone countries like Argentina and Brazil. The challenge is clear, and investors will increasingly favor those economies that are better positioned to demonstrate resilience amidst increasing external adversity.

Prospects for the insurance industry in emerging markets remain strong.

Insurance demand has a strong positive relationship with economic growth. However, the economic slowdown in emerging markets in recent years has not translated into a proportional slowdown in premium growth. This supports the idea that the recent economic performance was dominated by cyclical factors since the underlying consumption momentum — in this case, of insurance — was not fundamentally eroded. Another explanation is that the growing middle class in many emerging markets is creating a growing number of insurable assets for individuals. It is a development sweet spot for insurance take-up that gives premium growth a greater degree of persistence in spite of the broader slowdown. The Swiss Re Institute's sigma expects growth in insurance markets in Latin America, Central and Eastern Europe, as well as Asia excluding China to accelerate in the coming years. We expect the emerging market share of global premiums to increase by about 50% over the next 10 years. In China, insurance market growth is expected to be roughly unchanged, as advancements in economic development are making it harder to achieve the rapid growth rates of the past. Still, growth is forecast at about 1.75-2 times real economic growth. While growth is slowing in China, it would be misleading to talk of a slowdown there. The average annual real growth rate in China was close to 16% in non-life insurance over the last five years, and 17% in life; we expect this to decelerate to 10% and 11%, respectively. This is still a substantial growth rate, about 2% faster than the emerging market aggregate, and dwarfing growth in any mature economy. In terms of premium volumes, China will grow more than the aggregate African market on an annual basis and is set to overtake the US as the largest insurance market at some point in the mid-2030s. The outlook for insurance markets in emerging economies remains strong, even as cyclical and structural factors weigh on overall macro growth prospects. The share of global premiums from emerging markets lags their share of world economic output, indicating upside potential for insurance demand. Many key emerging markets (eg, China, Mexico, Brazil, Russia, and Turkey) currently have a level of GDP per capita associated with an elasticity of demand for insurance that is much higher than in the advanced markets. Additionally, several industry-specific factors will encourage industry growth in the emerging markets, most notably introduction of best practices in regulation, improvements in market access and the early stages of technology adoption. Ongoing urbanisation and the drive to widen financial inclusion will further support development of insurance business.

Emerging markets remain an attractive proposition for insurers but a selective approach is warranted.

We remain cautiously optimistic about the near-term macroeconomic outlook for emerging markets. The economic health of advanced markets should support external demand and the recent stabilisation of commodity prices should decrease financial volatility. However, the still uncertain global trade outlook could prove challenging. Idiosyncratic circumstances are also at play. We hold the view that for the long-run, global growth will continue to be bolstered by emerging markets and that the shift in economic power from the west to the east continues. Diversification by line of business and geography will add to strategic resilience given the heterogeneity of risks that emerging markets face. Insurance firms that take a longer term view stand to benefit most from the growth opportunities that the emerging markets provide. Fernando Casanova Aizpún ([email protected] ) is a senior economist at Swiss Re based in New York, and currently covers Latin America & The Caribbean. His research focuses in macroeconomic and insurance-related topics in emerging markets. Prior to joining Swiss Re he worked as an economist in the Monetary Policy and Economic Research department of the Central Bank of the Dominican Republic. These opinions are the author's own. See also:

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