Global Economic and Insurance Outlook

The global economy is improving

The global economy is improving, with the latest indicators supporting the view that the economic growth in the US and Euro area continues to strengthen. Emerging markets are growing at a slightly slower pace, in part due to a steady moderation in growth of China since late 2012 (Figure 1).

Figure 1 Real growth in GDP is expected to improve into 2014

Source: Swiss Re Economic Research & Consulting

Growth in the US is expected to strengthen in the fourth quarter of 2013. Real GDP grew strongly by an annualised 2.5% (originally estimated at 1.7%) in the second quarter. In the third quarter, growth will remain restrained by the sequestration budget cuts, but some strengthening is expected later in the year supported by sustained gains in consumer spending and business investment and the continued expansion in home construction. The tapering off of Fed's asset purchasing program is likely to start late this year and end by the middle of 2014, thus the yields on the 10-year Treasury are projected to be 3.0% by end-2014. Real GDP growth is expected to be 1.5% in 2013 and 3.0% in 2014, revised down solely because of the data revisions.

The uptrend in European sentiment continues. The PMI manufacturing for the Euro area climbed above 50 for the first time since July 2011. Since second quarter growth was positive, this supports the view that the recession in the Euro area has ended. Nevertheless, the recovery is likely to remain weak due to ongoing fiscal tightening, tight credit conditions in the periphery and elevated uncertainty.

Real GDP in the UK grew by a robust 0.6% (qoq) in Q2. Also, the PMIs for both the manufacturing and the services sectors rose strongly to 54.6 and 60.2 respectively in July. If the strength in economic indicators is sustained, real GDP growth will be higher than current forecasts of 1.0% for 2013 and 1.7% for 2014. For example, the British Chamber of Commerce has recently upped its GDP forecasts to 1.3% for 2013 and 2.2% for 2014.

Meanwhile, the BRICs slowdown has been sharper and longer than many expected, but growth should stabilize soon. China needs to address its various internal imbalances, especially for debt and financial sector liberalization and shift towards consumption driven growth. India must build infrastructure and accelerate government decisions. The heavy dependency on commodities and energy of Brazil and Russia will need to be lessened. Without these improvements and more rapid economic reforms, there is an increasing risk that the growth of key emerging markets will weaken the growth of the global economy.

Other risks include rising oil prices, a key risk for US growth, a hard landing in China and – further in the future – the risk of rising inflation from a policy decision to reduce real government debt. From an oil price perspective, due to supply disruptions in Iran, Sudan, Libya and sometimes Nigeria, the price of Brent oil has risen to about USD 115 bbl from about USD 95 bbl at the end of 2010. Further rises in oil prices could abort the US economic recovery. In China, there is a large overhang of housing debt and local government debt. So far, the Chinese government has managed these debt problems effectively. Inflation in most major economies is currently tame, but governments face rising debts which provide the incentive to inflate the economy to lower the real value of debt, making it easier to pay it down. Such an inflation scenario is at least a few years away, however, because economies are too weak to generate much inflation.

Focus on Asia: Economic outlook remains sanguine; challenges vary across regions

Emerging Asia remains the fastest growing region in the world with strong fundamental indicators (Table 1), while challenges vary across countries. Growth in 2013 and 2014 will be bolstered by stabilising trade performance and government stimulus policies. However, inflation is steadily accelerating and this could lead to monetary policy gradually returning to a neutral position, unless growth falters. In addition, there is also a rising realisation that fiscal consolidation is needed. As a result, fiscal and monetary policies will slowly become less aggressive. Many markets are thus focusing on structural reforms to improve efficiency and productivity. Furthermore, capital outflows and rising current account deficits are highlighting the external vulnerability of some regional markets.

Table 1 Fundamentals of Asian economies remain strong




2013 forecasts by IMF


Policy Rate

2012 CPI

Current account as % of GDP

Government budget balance as % of GDP

Government gross debt as % of GDP







New Zealand












South Korea






Hong Kong

0.23% (1-year exchange fund bill fixing)












0.18% (overnight repo rate)






Base 1-year lending rate: 6.00%






Repo rate: 7.25%
























Overnight borrowing rate: 3.50%






Base rate: 8.00%





Source: IMF, Swiss Re Economic Research & Consulting.

Although emerging market economies and assets deflated slightly during the most acute phase of the global financial crisis in 2008 and 2009, they quickly recovered with the unprecedented loose monetary policies of global and local central banks. This overheated property markets in many emerging economies including Brazil, India and China. In response, governments have tried to dampen these markets for the past two years.

The government cooling measures, however, have had little impact on prices, though construction activities have slowed in some markets. In China, prices have fallen since the second half of 2011 upon the implementation of tougher credit policies, but re-accelerated towards the end of 2012. This led the government to rollout further tightening measures in early 2013. In many other emerging markets, high credit growth and low interest rates have supported investment demand.

Figure 2 Property prices in emerging Asia

Source: CEIC

Non-life insurance market: Weak profits for primary insurance

Primary non-life insurance 

The current P&C insurance market is characterized by an unusually high degree of uncertainty about future developments. After a long period of rate softening, the market is looking for direction – moving sideways, with some segments and lines up slightly in price and others down. Weak profitability from low investment yields and fairly stable prices is being offset by reserve releases. Profitability is too high to harden the market, but too low to derail overall underwriting and capital discipline.

The extreme macro environment causes this unusual situation. Low interest rates simultaneously cause low profitability and high GAAP capital levels. Low increases in claims severity allows for reserve releases and supports the long period of soft rates. Actuaries are looking for a new framework for pricing and reserving parameters.

Primary insurance has been generally characterised by weak profitability since 2008 due to negative underwriting results and depressed investment yields.

Emerging markets’ share of global non-life premiums increased further to 17.4% in 2012 (2011: 16.3%). By 2023, the share is expected to rise to 28%.  Emerging Asia is expected to have the biggest share, 15%, of global total non-life premiums by 2023 (2012: 7.1%). In absolute terms, emerging Asia will contribute almost USD 350 billion in additional non-life premiums between 2013 and 2023, representing one-quarter of the global increase.

Non-life insurance market outlook

  • Based on rising insurance rates and strengthening economic activity, revenues and profits of insurance companies are expected to improve over the next few years, although only moderately. Investment returns will continue to be depressed even after central banks begin raising interest rates.
  • The primary insurance industry will therefore be trapped in a low profitability environment for a while. To improve profitability, primary insurers must aim for efficiency gains on all fronts: improving business models, cutting distribution costs, enhancing asset management and improving capital management.
  • In the longer run, operating profitability will benefit from rising investment yields. A return to normal interest rate levels will particularly benefit long-tail casualty insurance.

L&H insurance market: premiums fell, but there are differences across markets

Primary life insurance: premiums stagnated in 2012

Global premium growth stagnated in 2012 at about USD 2'465 billion. In advanced markets, premiums declined by 0.1% (after inflation) to USD 2'089 billion. Premiums fell by about 2.4% in North America, 3.6% in Western Europe, and 5.9% in Oceania. On the positive side, growth was strong in Japan and Hong Kong (8% and 6.6%, respectively).

In emerging markets, premiums increased by 3.6% to USD 376 billion. Growth was very strong in Latin America (17.7%) and improved in Africa and Eastern Europe (3.5% and 3.3%). In emerging Asia, premiums declined by 0.1%, as China and India contracted by 2.0%.

Profitability has slowly but steadily declined since end-2009. Return on equity (RoE) is now below 10% on average for a sample of global composite and large life insurers (see Figure 4) due to weak premium growth and low investment yields.

Figure 3 Return on equity (left panel)  Shareholder equity (right panel)

Note: large life insurers with life business (IFRS/GAAP data).

Life insurers' capitalization recovered after the crisis as a result of improving financial markets and also due to regulatory support in many countries (US, Netherlands, Denmark, Sweden, Italy, Spain and Switzerland). In addition, low interest rates, which inflate the market value of assets while liabilities are often at book value, have temporarily increased shareholder equity on an accounting basis.

The protracted low interest rate environment, regulatory constraints, and earnings pressures have led many life insurers to explore divestiture of non-core or underperforming segments. Some companies in saturated markets have divested certain operations in order to concentrate on core markets and/or fund strategic investments in high growth emerging markets.

Because of the challenges and risks stemming from the European sovereign debt crisis and low interest rates, rating agencies last year downgraded many insurers in troubled peripheral countries in Europe and changed the outlook to negative for a number of European, US and Canadian companies.

Life insurance outlook

In industrialised countries, premiums are expected to increase 2.4% in 2013, with growth strengthening to about 3% in 2014 and later. In emerging markets, premium growth is expected to recover in 2014 and then stay around 8-9% through 2018.

The life insurance industry is at a crossroads:

  1. Product mix: Low interest rates, regulatory changes with higher capital requirement for long-term guarantees, increased hedging costs and demand side reactions to lower guarantees have accelerated the retreat from guaranteed investment products. Life insurers will continue to shift away from savings/accumulation business and:
    • focus more on protection and health business that is less dependent on investment income as a source of earnings;push unit-linked products that are capital efficient substitutes for traditional savings business;
    • push unit-linked products that are capital efficient substitutes for traditional savings business;
    • provide new products with shorter and more flexible guarantees that can be repriced when market conditions change.
  2. Market structure: More consolidation and divestitures can be expected in mature markets in the future, while expansion in high growth markets is bound to continue. Also, European companies with US operations may face competitive disadvantages from higher capital costs under Solvency II and may exit the market if US regulation is not deemed "equivalent."

  3. New asset classes: Insurers are looking for new asset classes that fit their long-term liabilities and are capital-efficient in an economic/risk-based solvency framework. Long-term infrastructure investments are more attractive today since banks have withdrawn and governments are under strain to finance infrastructure.1) The insurance industry with USD 25.5 trillion of investments in 2011 could expand its role in the future, provided that capital charges for infrastructure are not too high.

  4. Profitability: It is unlikely that profitability will improve markedly in the near to mid-term. Pressure from low demand, low yields and regulation will continue to weigh heavily on life insurers' operations.

Primary life insurers face a challenging future, but the case for private insurance solutions remains intact. There will be ample demand for private savings and retirement products against the backdrop of global population aging and the shift of responsibility for retirement financing to individuals. Risk products, such as mortality, disability and long-term care protection, also remain in high demand. Thus underlying fundamentals are solid for nimble and smart companies to turn challenges into opportunities.


1) The Group of 30 estimates additional need to fund infrastructure investment of USD 7.1 trillion by 2020.

Published September 2013