While current conditions are gloomy, Swiss Re's Chief Economist sees brighter prospects for insurance industry into 2013

Unveiling the company’s latest Global Insurance Review and Outlook publication in London today, Swiss Re's newly appointed Chief Economist, Kurt Karl, says that low interest rates and the euro debt crisis are proving a headache for the insurance industry. The only bright spot is ongoing robust growth in emerging markets although, here, too, momentum has slowed somewhat. Looking forward to 2013, however, Karl is more optimistic, forecasting a pick-up in investment yields and premiums in the wake of a modest improvement in economic prospects. Filling Karl’s shoes in the Americas, Thomas Holzheu has been appointed Chief Economist, North America for Swiss Re.

Political developments bad news for economic stability

According to Karl, the most serious threat for economic stability stems from political developments in Europe and the U.S. He commented:  “In Europe, these could result in disorderly sovereign defaults or even exits from the euro monetary union. In addition, there is the political stalemate in the U.S. which is preventing necessary fiscal adjustments which could support growth and bring down the deficit.”

While emerging markets have also been negatively impacted by faltering growth in the developed economies, Swiss Re says that tighter monetary policy on the part of several emerging countries has also slowed growth and is keeping the lid on inflation.

Non-life likely to pick up towards the end of 2013

On the non-life front, the economic weaknesses in the U.S. and Europe have dampened premium growth. However, this will improve in 2012 and further in 2013 when it will likely accelerate to 3%. During the same period, premium growth in emerging markets will be between 7 and 9%.

High catastrophe losses over this year will depress profits, but this situation has led to a hardening of reinsurance rates in property cat lines. Low interest rates and government bond yields will squeeze profits throughout most of 2012 and 2013, but an improvement in casualty rates, expected late next year, will help profits.

Life’s difficult road

Both global in-force and new business life insurance premiums fell in 2011, although growth will recover in 2012 and return to its long-term average performance in 2013. In the short term, factors such as low investment returns, higher hedging costs and more onerous capital requirements will prevent a return to pre-crisis profitability. Growth in industrialised countries will be driven largely by longevity and large block transactions. All that said, the life industry’s capitalisation has improved markedly, so it is in better shape than before the 2007 crisis and is well placed to cope with a challenging future.

Emerging markets still a growth engine

Despite a slowdown in 2011 due to regulatory changes in China and India, the coming two years will see life insurance business in emerging markets returning to its long-term trend of around 8%. Non-life business has benefited, among other things, from rising car ownership and sustained spending on infrastructure. Interesting to note is that the series of natural catastrophes in Asia may have raised risk awareness and encouraged firms to seek adequate insurance coverage. Swiss Re’s Chief Economist for Asia, Clarence Wong, expects that the ongoing liberalisation in key emerging markets such as India, China and Russia will hasten the globalisation of emerging insurance markets.

Published 1 December 2011

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