This is how the insurance industry will fare after the pandemic
The insurance industry is set to recover faster than the wider economy in the wake of the global pandemic, despite the fact that the two generally move in parallel over the long term.
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Personal insurance is dependent on disposable income, while commercial insurance lines are sensitive to changes in turnover and employment, lower wages, cancelled events and reduced travel and trade.
This means that demand for insurance is expected to suffer a sharp shock in 2020, with the overall volume of premiums in advanced economies set to fall by 4% (all growth figures are in real terms, adjusted for inflation).
However, the latest analysis from the Swiss Re Institute’s sigma report World Insurance: Riding out the 2020 Pandemic Storm suggests that the sector will bounce back to pre-crisis levels by the end of 2021. The recovery will be underpinned by both hardening rates in non-life and the growth potential of Asian markets, particularly China.
This shows the impressive resilience of the sector, given the unprecedented depth of the global recession that is forecast.
A manageable shock
Life insurance has been especially hard hit during the slump of 2020, with global premium volumes expected to shrink by 6% over the course of the year.
Although some non-life lines such as transport insurance, aviation insurance or travel insurance have also been severely hit, these are relatively small lines of business, whereas the need to insure automobiles, property and staff has held up. Overall non-life lines are predicted to be almost flat during 2020.
However, these changes come against a backdrop of an industry that has enjoyed annual growth over the past decade. The volume of global life premiums grew by 2.2% in 2019, while the non-life sector grew by 3.5%.
In addition to the decline of volumes, low interest rates and the prospect of corporate defaults are also likely to subdue investment returns.
Nevertheless, the shock is still a manageable one thanks to the fact that the industry was well capitalised ahead of the pandemic.
Absorbing the losses
The claims burden is still highly uncertain, but the mid-point of a number of external estimates is USD 55 billion. That is well below recent peak-year natural catastrophe losses. For example, Hurricane Katrina led to losses of USD 90billion in 2005, and in 2017 hurricanes Harvey, Irma and Maria caused a similar scale of losses.
There is another layer of added uncertainty around claims due to a dispute over the policy exemption to business disruption losses. In the US, several states are proposing legislation that would require insurers to cover claims relating to the pandemic, regardless of policy wording, while the UK’s financial regulator has brought a court action to seek legal clarity on business interruption insurance.
If these cases were to rule against the insurance industry, the losses would be considerably higher. However, given that no insurer could afford the scale of such losses – and that a healthy insurance sector is essential to protect against future shocks – this is not seen as a likely outcome.
The road to recovery
Despite these uncertainties – and the sharp contraction of 2020 – the Swiss Re Institute believes the insurance industry is set for a strong rebound in 2021.
In fact, it is predicting a V-shaped recovery – as shown in the graph below – that is likely to be notably quicker than the recovery of the wider economy and of the sector recovery after the Global Financial Crisis (GFC) of 2008-9.
One of the reasons for this is that COVID-19 has hit at a time when rates were already hardening in commercial lines such as property and casualty. This trend is expected to continue, given the potential losses from COVID-19, the scarcity of capital and lower insurance supply.
This is in sharp contrast to the situation ahead of the GFC, when rates were softening, meaning that profitability is likely to be higher than during the aftermath of that shock.
The other key factor driving a strong recovery is the growth potential of emerging markets in Asia. China, for example, is on course to become the world’s largest market for insurance in the 2030s, if medical insurance is excluded.
Furthermore, the Chinese government has moved swiftly to implement supportive policies on investment and consumption, boosting demand for insurance. Increasing risk awareness is also buoying demand for health insurance. There has also been a recovery in economic activity that was put on hold during the crisis. In fact, premiums in China for the year to May are already up against the previous year by more than 5% in nominal terms.
Such evidence leads the Swiss Re Institute to predict premium growth in emerging markets will remain in positive territory in 2020, before demonstrating strong growth of 7% in 2021.
And while the business environment is tougher in advanced markets – with some countries such as Italy expecting a much longer road to recovery – the total premium volumes in advanced markets will return to positive growth of 2% in 2021.
Life insurance, however, will struggle to fully recover, with an annual average contraction of 1.5% predicted in 2020 and 2021.
The pandemic is also creating new opportunities for growth of premiums.
Although the industry alone cannot protect the world’s population at large against such a wide-reaching catastrophe, the pandemic does provide the chance to work with governments to find innovative insurance products that are based on public-private partnerships and akin to some of the terrorism-related products that already exist.
The heightened awareness of risk is also likely to spark both increased innovation and increased demand. The new reality of health risk, for example, may prompt more demand for medical insurance in countries without a national health service.
“A crisis as big and drastic as this one when whole countries are locked down allows you to reassess the risk landscape on both a personal and company level – making sure any gaps are covered,” explains Staib.
The significant business disruption created by the pandemic is also opening up new premium pools, for example in property and engineering: as global supply chains restructure and diversify to avoid over-reliance on a single region, new factories and infrastructure will be built in new locations, while new shipping and trade routes provide further opportunities.
Finally, the acceleration of internet transactions that has been prompted by the enforced and necessary lockdowns will also accelerate the industry’s own move online, for example in digital claims handling, creating new efficiencies and streamlining its processes.
This digitisation in both personal and work life may also speed up the delivery of insurance products and services.
By doing so, the sector will both position itself for success and help the world protect against future shocks.