4 ways the insurance industry will weather the choppy waters of the COVID-19 storm
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As of the publishing date of this sigma, the world remains in the midst of an unprecedented crisis due to the COVID-19 pandemic, with a wide variation of virus peaks and curve flattening across the globe. Some countries are reopening their economies after COVID-19 related shutdowns and lockdowns; some are experiencing the worst of the crisis; others are slowing their reopenings or reversing course due to increasing viral rates. The pandemic is expected to spark the deepest recession since the Great Depression of the 1930s, with global gross domestic product (GDP) likely to contract by around 4% in 2020.
This macroeconomic backdrop will lead to a slump in demand for insurance this year. But despite a challenging road ahead, the Swiss Re Institute's latest sigma report World insurance: riding out the 2020 pandemic storm highlights why and how the sector will emerge resilient, with recovery based inn non-life, commercial Property & Casualty lines acting as the main drivers of the comeback as well as the emerging markets.
The following four trends illustrate the road to recovery:
1. A reason for some optimism: premiums will reach above pre-pandemic crisis levels by the end of 2021.
While the COVID-19 crisis will lower global premium growth by around 3 percentage points from the pre-recession growth path, combined life and non-life direct premiums written will recover to above pre-pandemic levels in 2021. In relative terms, we aren't in entirely unchartered waters: the declines in life and non-life premium growth in 2020 will be of similar magnitude to that seen during of the global financial crisis (GFC) in 2008-09, even if this year's GDP contraction will be much more severe.
Real premium growth during COVID-19 crisis (t=2020) vs GFC (t=2008)
2. Unsurprisingly, the life sector will be the hardest hit.
We were already seeing comparatively slower premium growth in the pre-pandemic era: In 2019 the Life sector growth slowed to 2.2% (still stronger than the 1.5% average of the previous 10 years). However, the COVID-19 crisis will slow life premium growth by 4.5 ppt this year and next, with an aggregate 1.5% contraction of the market. We'll see a slowdown in demand, affected by macroeconomic considerations like rising unemployment and falling incomes; individual mortality business should be more stable. For companies with diverse business lines, this can be mitigated by a more positive picture in the non-life sector. Non-life premium growth in 2019 was 3.5%, and due to the pandemic, we only estimate a 1.1 ppt pullback in premium growth, making for aggregate sector expansion of 1.6% over 2020-21. Personal lines will lead the way, and in particular, growth in emerging markets.
Global insurance premium growth
3. Despite the challenging macroeconomic conditions and continued low rate environment, the industry is well-cushioned by sufficient capitalisation
There's no question: 2020 will be a difficult year for the insurance sector. There will be challenges to profitability, and investment returns will remain subdued as interest rates are set to stay low for longer now given the macroeconomic pressures, impacting life and long-tail lines in non-life. Meanwhile, rising corporate defaults could lead to losses on invested assets. In life, falling sales and fee income due to restricted in-person interactions on account of the lockdown measures imposed to contain virus spread will also weigh on profits this year. However, an essential element to the sector's resilience is that it was well capitalised ahead of the pandemic and we believe it will absorb the COVID-19 earnings shock.
Long-term government bond yields data and forecasts
4. Beyond capitalisation: a future of hardening rates and new revenue opportunities
Rates were hardening in non-life in the pre-pandemic period, and we expect that trend to continue, particularly in commercial lines. This, and the expected bounce-back of insurance demand following the nadir of the pandemic will support earnings over the longer term. Further, as the sector has often observed, shocks like this year's health and resulting economic crisis will raise risk awareness and demand for risk protection across many lines of business, including for pandemic solutions that may mean co-partnership opportunities with local governments. The pandemic may also cause deeper changes like a restructuring of global supply chains to mitigate future business disruption risks, giving rise to new possibilities to close the protection gap through premium pools in property, engineering and surety insurance. In addition, the effects of shutdowns and lockdowns have led to a reinforcement of digitalisation trends in both personal and work life, which will speed up the delivery of new insurance products and services.