Regional Growth Forecasts Shift, With North America Leading The Way

As an industry, we are in many respects blessed, in that we dont have to make the same types of long-term capital investments, such as building new manufacturing plants, as do other industries.

Our task, instead, is to remain abreast of economic trends, ready to offer the solutions our clients need.

In that respect, however, we are also cursed, as the decisions we make and the risks we assume today, may not manifest their full impact and results for several years. Those decisions, therefore, must be based on the best long-term analyses possible.

St. Paul Res earlier analysis (see NU, Nov. 30, 1998) predicted that, by the year 2010:

Growth would slow in North America and Western Europe.

The biggest growth, in both percentage and dollar terms, would occur in Asia, mostly in China.

Eastern European markets would emerge and grow significantly.

Latin America would enjoy high growth rates as economies develop and Brazils state-run reinsurer loses its monopoly. The high growth rates have not occurred, and some observers today question whether they will.

Developments in the reinsurance market are tied to the gross domestic products of countries and regions. Growth in GDP–purchases of automobiles, homebuilding, new business formation and economic growth–fuels demand for insurance, which, in turn, determines demand for reinsurance.

Other factors influencing reinsurance purchasing are property-catastrophe potential and market restrictions by government.

St. Paul Res first report estimated the size of the worlds total reinsurance marketplace at $100 billion. We predicted that by 2010, the world market would grow to nearly $220 billion. The ultimate total, the report said, depended on whether market restrictions would be lifted in such markets as Japan and Eastern Europe.

The overall forecast is down, but not dramatically–to a total world market of $195 billion by 2010. For this type of projection, thats not a significant overall difference.

But although total premium projections are similar, the differences by region are quite large. In general, the projections for North America are up, while just about everywhere else they are down.

Changes in projections for economic growth and development in each region–the principal determinants of growth and development in insurance and reinsurance–are changing our projections for 2010.

Five years ago, we forecast that North Americas reinsurance market would grow from $40 billion in 1995 to $60 billion in 2010.

Today, we predict that by the end of this decade, that total instead will be closer to $85 billion. In the years since our first analysis, the U.S. economy exhibited much stronger-than-anticipated growth. The GDP projected for 2010 in North America is 13 percent higher than what was projected previously.

When we look, however, at the second largest reinsurance market–Western Europe–we begin to see a dampening of earlier expectations. A few years ago, we believed this market would grow to $62 billion by 2010. Today, however, our outlook for 2010 puts this market slightly lower, at $56 billion–again, due to lower GDP projections.

A striking result of this analysis is that we saw growth slowing in all Western European countries, save one–the United Kingdom. Better than expected economic prosperity in that country portends continued strong demand for insurance and reinsurance.

One region where we found the biggest decrease in our forecast for long-term growth, in contrast to our earlier study, is East Asia, which includes China, Japan, Indonesia, Singapore, Malaysia and eight other markets.

Our earlier analysis of this region forecast that, by 2010, the region would grow from a 1995 total of about $10 billion to a total reinsurance market of more than $50 billion. Now, as we review all the factors, we estimate the total for the end of this decade at about half that–$26 billion.

Without question, the Asian financial crisis of 1998 had a dramatic impact, not only on the economies of Eastern Asia, but on currency exchange rates as well. Since our projections are in terms of U.S. dollars, the decreased expectation is more pronounced than it is in local currencies. Still, its a much lower expectation.

The projections for the reinsurance market in China, while down from the prior analysis, are still significant. The prior analysis projected a 20 percent annual growth rate in Chinas gross domestic product. The current projection is for 9.3 percent growth per year–more realistic, and certainly robust annual growth. Still, it lowered our forecast for Chinas 2010 volume from $26 billion to $10 billion. The growth potential of the Chinese economy is high, but how soon that potential will be realized is not certain.

In several other regions, our revised forecasts are lower than before, but not dramatically. For example, three years ago we forecast that Latin Americas reinsurance market would triple in size from $5 billion to about $15 billion. Weve lowered that forecast to about $13 billion.

The largest projected premiums are in Mexico, whose gross domestic product, primary insurance premiums and reinsurance premiums are all up slightly from prior projections. Free trade agreements and other factors will continue to spur economic growth here.

The next three largest countries are Brazil, Argentina and Chile. Brazils inability to privatize its state-run reinsurer, Instituto de Resseguros do Brasil, has dampened our expectations in that country, and added uncertainty to the future. Premium projections for Argentina and Chile are up slightly.

Although regional forecasts have been revised downward, the projected world market breakdown for 2010 is similar to our initial research. Over one-third of world reinsurance premiums will emanate from North America, and about a fourth from Western Europe. Almost a fourth, however, will come from East Asia, with much of that coming from Japan as that market continues its liberalization.

I dont expect those proportions to change, but individual regions still merit continued monitoring and scrutiny as the decade progresses. Several factors still could change the outlook for the future of this business.

For example, just as reinsurance premiums are a factor of insurance premiums, insurance purchasing levels vary because of environmental, regulatory, cultural and judicial differences, as well as the distribution of wealth.

A case in point: Japan has a high level of gross domestic product per capita, but observes a level of insurance purchasing (2 percent of GDP) that would be typical for a nation one-third as wealthy.

Japan has also been characterized by market restrictions in the purchase of insurance and reinsurance, as have two other Asiatic giants–India and China. Those three countries are keys to the future of the Asia-Pacific insurance and reinsurance marketplace. If market restrictions are removed in those markets, we may be revising our forecasts upward.

The lesson to be drawn from these revised forecasts? Perhaps a combination of conservatism and flexibility.

As we cautiously allocate capacity to individual markets, we must be willing to take a "long view" through uncertain economic events. The successful reinsurers of the future will be those who can gauge and monitor these trends in support of the overall objective: to provide the capacity, innovations and services that our changing client base will require in the years to come.

Jim Duffy is chair of St. Paul Re in New York City. He also is chairman of the Reinsurance Association of America in Washington, D.C.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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