sigma 04/2015: World insurance in 2014: back to life
The global insurance industry gained momentum in 2014, even though the economic environment improved only marginally, says Swiss Re's latest sigma study. Total direct premiums written were up 3.7% to USD 4 778 billion after having stagnated the previous year. The life sector returned to positive growth, with premiums up 4.3% after a 1.8% decline in 2013, and non-life premium growth accelerated to 2.9% from 2.7%. A notable feature of the renewed momentum across the insurance industry was a significantly stronger performance in the advanced markets.
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Advanced markets provide impetus
Life premiums in the advanced markets were up 3.8% in 2014, continuing a volatile pattern of growth and contractions since 2010. There were considerable variations in growth rates across different regions. For instance, very strong premium growth in Oceania and solid results in Western Europe and Japan more than offset another year of contraction in North America. In the emerging markets, life premiums grew by 6.9%, up from 3.6% in 2013. The rise was driven mainly by China, where new distribution channels and a recovery in bancassurance boosted sales.
Premiums in the non-life sector have been on a gradual uptrend since 2009, although at a slower average annual rate than in the pre-crisis years. In non-life too, last year's growth was driven by a substantially stronger performance in the advanced markets. In North America, premiums were up 2.6% and in Western Europe, premiums returned to positive growth (+0.6%) after years of decline and stagnation. In the emerging markets, non-life premiums grew by a robust 8.0% in 2014. The key drivers were solid gains in China, mainly in the motor, credit & guarantee and agricultural lines, and in India where an improvement in business sentiment and economic growth boosted premiums.
The S-curve revisited …
Economic growth and wealth are the most important determinants for insurance market growth. The relationship between economic and insurance market development can be illustrated by the Swiss Re-developed “S-curve”. The S-Curve plots economic wealth, measured by gross domestic product (GDP) per capita, against insurance market development, based on insurance penetration (share of insurance premiums in GDP). The fundamental premise of the S-curve is that spending on insurance rises faster than the level of overall growth in countries where GDP per capita is in the region of USD 5000 to USD 35 000. In countries with lower and higher income levels, premium growth is about the same as or slightly higher than GDP growth.
… in the context of Western Europe
This sigma looks at the S-curve relationship in the context of what has happened in non-life insurance markets in Western Europe since the financial crisis. GDP per capita declined since the crisis in advanced European Markets. As would be expected by the S-curve relationship, with high incomes most advanced countries in Europe are on the flat section of the S-curve, meaning that insurance premiums declined more or less in line with GDP per capita. In the peripheral countries of Europe (Spain, Italy, Portugal, Greece and Ireland), where GDP per capita declined strongly, premiums have declined also the most.
However, there have also been significant variations in premium growth rates across major lines of business since the crisis. For example, private medical insurance premiums, which are classified as part of non-life in sigma terminology, have risen unabated by 2% per annum since 2007, while property insurance has followed a cyclical growth path. Casualty lines, meanwhile, were hard hit by the financial crisis, with premiums down 10% in real terms between 2007 and 2014. It was only the strength in the private medical insurance segment that prevented total non-life premiums in Western Europe falling below their level in 2007.
This sigma assesses these variations and also concludes that the past seven years cannot be taken as a good guide for non-life premium development in Western Europe in the coming years. The economic environment, while still weak, is expected to continue to improve and once unemployment falls notably, premium growth should be much stronger than it was in the 2007-2014 period.