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Life insurers in Canada enjoyed a relatively positive 1H18, with moderate growth in net income and a 10.7% annualized ROE. Although new premium growth at home continued to lag, including in the individual segment, and net investment income (including realized gains) added little, global net premium income and fee income both saw a rate of advance in mid-single digits. Together with a slight improvement in the benefits ratio and a benign period in terms of changes to actuarial liabilities, net income amounted to CAD 6.2 bn, up 4.9% yoy. Furthermore, the industry's balance sheet remained strong under the new capital regime effective as of January 1, 2018.
Every year, around 100 million people around the world, mostly in low-income countries, fall into poverty on account of having to pay for healthcare treatment. Stakeholders have attempted to better protect individuals and households from the financial fallout of large and often unexpected spending for medical care and services. To date, however, efforts to this end have been stymied by a lack of reliable estimates on the size and characteristics of the “health protection gap“. Researchers have tried to estimate the gap using different methodologies but most fall short of offering a comprehensive and consistent view.
The health protection gap in 12 Asian markets was estimated at USD 1.8 trillion in 2017. This represents the potential stress that households in Asia were exposed to as a result of unpredictable direct medical expenses. In emerging Asia, the gap stood at USD 1.4 trillion, roughly 8.1% of GDP and 10.7% of net household income. In mature Asia, the health protection gap was estimated to be USD 433 billion, approximately 5.9% of GDP and 7.7% of net household income.
The sturdy 4.2% annualized pace of GDP growth in 2Q18 is expected to mark the peak, though the US economy remains on solid footing. Forward looking indicators including consumer and business confidence, as well as manufacturing and services PMIs remain at unexpectedly high levels, and support our forecast of continued above-trend growth for the rest of 2018 and into 2019. The trade dispute with China remains in high gear. We expect this front in the trade war to escalate further in our baseline scenario, with additional tariff action in 2019, and no clear trigger for a near-term de-escalation, particularly as some of the drivers of the action are geopolitical in nature. However, the currently-estimated roughly 20 bps per year growth drag from the US-China spat is offset by sturdier-than expected confidence indicators, so our baseline GDP projections for 2018 and 2019 are unchanged.
Global growth remains above potential, but the peak is behind us and regional divergence is rising. Risks remain tilted to the downside, particularly amid intensifying trade tensions between the US and China. Monetary policy normalisation, inflation pressures and emerging market contagion risk remain in focus, too.
The Canadian P&C industry's operating performance was weak in 1H18. Although premium growth accelerated strongly on a direct basis, elevated weather losses drove up the net loss ratio to 71.1%, and resulted in a sizable underwriting loss. Furthermore, the net investment result fell sharply yoy. In all, net income after tax declined to CAD 530 million, from CAD 1.5 billion a year ago. The ensuing low 2.6% industry ROE was the same as the 2H16 result, a period which included Canada's largest cat loss – the Fort McMurray wildfire.
We estimate that the aggregate mortality gap in the US, a measure of life underinsurance, was close to USD 25 trillion in 2016. On a per-household basis, the gap averaged USD 495 000 or, in other words, 45% of households’ income replacement needs. The protection gap has narrowed since 2010 but remains larger than before the financial crisis of 2008‒09. We forecast that the gap will widen in the coming years if current economic and insurance market trends continue.
The Canadian economy continues to operate at or near full capacity, with a trend-like advance of 2.0% expected in 2018, followed by a slightly slower 1.8% pace of growth in the next two years. Although job growth has decelerated compared to the rate of advance in 2017, some moderation is expected at this point in the cycle. Elevated oil prices have continued to push up headline inflation this year, but this is expected to be transitory, and core readings remain right around the midpoint of the Bank of Canada's (BoC) target range. Meanwhile, capacity utilization rates remain at decade highs and inflation expectations in the latest Business Outlook Survey continued to move up moderately. Thus, the BoC is projected to continue on a gradual path of rate hikes, with the next move in October, followed by three hikes in 2019. Risks to the forecast emanate mainly from trade and geopolitical developments.
Super-typhoon Haima struck China's Guangdong province in October 2016. Already within a week, insurance companies were able to make a pay-out to the city of Shanwei. It was the first payout associated with the innovative Swiss Re-led index insurance programme launched in China in the same year.
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