Stronger profitability will enable the non-life insurance industry to increase capital and capacity to match growing demand as risks evolve, according to a new study by Swiss Re Institute.
The non-life insurance sector is swiftly adapting to a new era of higher interest rates, driven by the most significant monetary policy tightening since the 1980s. Research indicates that 2023 is a transitional year characterized by an enhanced global profitability landscape in non-life insurance.
This transformation results from ongoing adjustments in pricing to address an elevated risk environment, coupled with increased portfolio yields that augment net investment income.
Even though profitability prospects have strengthened, the reinsurer expects non-life insurers to continue to face profitability challenges in 2023, with returns below the heightened cost of capital. Consequently, the trend of rate hardening and capacity limitations will likely persist throughout 2024.
Despite the enhanced profitability outlook, the Swiss Re Institute also foresees a persistent imbalance between non-life insurance demand and supply. This imbalance indicates that challenging market conditions will continue, particularly in property catastrophe lines. The surge in demand for insurance protection since 2017, propelled by increased natural catastrophe events and inflation, has resulted in higher replacement values.
The industry requires substantial capital growth to bridge the considerable protection gaps worldwide. Swiss Re Institute estimates that in the United States, property and casualty insurance industry capital has averaged 5% annual growth over the past decade, while the need for natural catastrophe protection has increased at an average of 7% annually during the same period.
The global value of exposed risk has steadily risen over the past five years. Swiss Re Institute assesses the global protection gaps for natural catastrophes, crop insurance, mortality coverage, and health insurance at US$1.8 trillion (AUD$2.8 trillion) in premium equivalent terms for 2022.
Both the primary insurance and reinsurance sectors play crucial roles in closing these protection gaps, Swiss Re explained.
In an environment marked by heightened risk awareness, reinsurance’s role in providing peak capacity to the primary insurance sector is more important than ever.
Swiss Re said property re/insurance, the segment that covers a significant portion of natural catastrophes, has grown, with primary insurance witnessing 4.3% premium volume growth and reinsurance experiencing a 5.9% increase over the last decade.
Given the heightened demand, elevated risks, and limited capacity, primary non-life insurers must also optimize their capital utilization. Reinsurers can offer primary insurers access to their balance sheets at costs lower than insurers’ capital expenses, thanks to their diversified portfolios spanning various geographies and risk categories.
The study also asserted that the insurance industry’s profitability and risk management are intricately linked to interest rates, given the asset leverage and duration inherent in its business model.
The industry invests underwriting cash flows in a diverse array of securities, particularly longer-term fixed-income investments, before fulfilling claims obligations. Consequently, higher interest rates significantly enhance the industry’s profitability.
“Our analysis shows that non-life insurers’ profitability is set to improve strongly in the coming years as higher interest rates and rate hardening more than offset higher claims costs from persistent inflation," Swiss Re Group chief economist Jérôme Jean Haegeli said. "This will be vital to enable industry resources to grow at a rate that will match global demand for insurance protection."
In a recent IB Corporate Risk interview, Swiss Re head of L&H reinsurance for APAC ex. China Daisy Ning explained the importance of digital trust in managing risk, especially amid higher levels of digitalization.
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