The global economy is expected to strengthen modestly next year, according to Swiss Re's latest publication, “Global insurance review 2014 and outlook 2015/16.”
Non-life insurance premiums are expected to grow 2.8 percent in 2015, supported by strong economic activity in emerging markets. The life insurance sector will be notably stronger in both the advanced and emerging markets, and global in-force premiums are forecast to increase by 4.8 percent this year and by around four percent in 2015 and 2016. The low yield environment remains a profitability challenge, in particular for life insurers, according to the report.
The report showed that global economic activity is expected to improve next year as growth rates increase in the U.S., the Euro area, and many emerging markets. Other countries, such as the U.K., Japan, and China, will slow.
The U.S. and U.K. are very likely to tighten monetary policy and raise their policy rates next year. The combination of growth and rising rates will push government bonds higher, particularly in the U.S. and the U.K. However, investment returns for reinsurers will continue to weaken because companies are expected to be rolling over maturing fixed income paper into lower yielding, more-recently released bonds, according to the Swiss Re report.
“Stronger economic activity will improve insurance premium growth, particularly in the emerging markets,” said Kurt Karl, Swiss Re chief economist. “But profitability will still be challenging because of the low investment yields.”
Overall emerging market non-life premium growth is forecast to return to around eight percent next year and more in 2016, with emerging Asia in the lead. Advanced markets premium growth slowed to 1.7 percent this year and will remain near that pace into 2016.
In casualty lines, loss ratio data from the U.S. and U.K. indicate that reserve releases are unlikely to continue for long. Swiss Re said that this is a good indicator that pricing prospects are expected to improve over the next couple of years.
For reinsurers, premium growth is expected to be lower than in the primary non-life sector mostly due to reduced reinsurance buying in China and softening property catastrophe reinsurance rates. Catastrophe reinsurance pricing will likely remain under pressure at the 2015 renewals. Thereafter the pace of decreases is expected to slow down, Swiss Re said.
Over the long term, demand for nat cat capacity is expected to continue to increase. For casualty and special lines, significant differences in pricing developments by market and line of business are expected. Aviation rates are expected to improve as the market reacts to recent loss activity.
Premium growth of in-force life premiums in the advanced economies is expected to be nearly four percent this year and about three percent in 2015, rebounding from a 1.5 percent decline in 2013. Emerging market life premiums are forecast to grow nine percent this year and 10 percent in 2015 after a sluggish 4.5 percent advance in 2013, driven again by a robust 13 percent premium growth in Emerging Asia.
Despite low investment returns, life reinsurers have improved profits over the last year with a return on equity of about 12 percent from 10 percent last year. This stems from their focus on new products, increased market penetration, improved distribution techniques, and cost-cutting.
Swiss Re found that there have been stronger profits in the U.K. market, and also a pick-up in North America and Continental Europe more recently. A key factor in new business growth in the major markets has been robust sales of savings products.
Global real life reinsurance premiums are expected to grow by less than one percent this year after shrinking 0.3 percent last year due to weakness in the advanced markets as the market adjusts to changing regulations in the U.S. and U.K.
In this environment, life reinsurers will seek non-traditional or less-developed areas of growth in the coming years, including taking over large blocks of business and providing major capital relief solutions. Life reinsurers are also providing solutions to take longevity risk from primary companies with annuity business. Momentum in this market remains strong and a record amount of longevity liabilities were transferred to reinsurers in 2014, according to the Swiss Re report.
Learn more: www.swissre.com.
Victoria Spears
Victoria Prussen Spears is senior vice president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. A graduate of Sarah Lawrence College and Brooklyn Law School, Ms. Spears was an attorney at a leading New York City law firm before joining Meyerowitz Communications. She may be contacted at [email protected].