How insurance markets are bucking the global recession trend

A hardening insurance market is on the way, and that's not the only thing making the global P&C insurance segment more optimistic about 2021.

2020 will mark an inflection point in our history books. We are continuing to experience a global health crisis caused by the COVID-19 pandemic. There is still no "V"-shaped economic recovery in sight. And global economic resilience, already fragile before the pandemic, has declined even further, according to our research.

Even before the COVID-19 crisis, low interest rates were severely undermining the profitability of the insurance industry. Further rate cuts to help shore up the economic recovery are only going to exacerbate the challenges. And it's clear that without significant price increases the insurance industry will not be able to meet the growing need for insurance protection in a commercially viable way.

But after years of low prices and below-average profits, there are signs that insurance markets may finally be turning the corner, driven by commercial insurance lines.

Premium growth

Compared to the global financial crisis in 2008-09, the decline in global insurance premiums in 2020 is of a similar magnitude. This is significant because this year's estimated economic contraction of 4% is much steeper than the 1.8% contraction seen during the GFC. From this perspective, when looking ahead to global insurance premium growth, insurance markets are more likely to bounce back quicker and harder than what global economic indicators would currently seem to imply.

Such a recovery should boost overall growth in non-life insurance markets in 2021, even if the segment is weathering the pandemic unevenly. On the one hand, premium growth will be negatively impacted by declines in lines linked to business activity. On the other hand, prices in commercial insurance have been hardening, providing a tailwind to premium growth in the current year.

Overall, we expect a moderate reduction in global non-life premium growth due to the COVID-19 crisis, and then a strong rebound in global P&C premiums by 3.8% in real terms in 2021.

Higher prices

Another reason to be cautiously optimistic about the future of insurance markets is that we're finally seeing rising prices. A number of lines – including credit and surety as well as liability – are likely to experience higher claims this and next year. And rising claims tend to trigger higher rates.

We're therefore expecting strong rate increases in credit and surety and moderate rate increases in other affected lines of business and portfolios, including D&O and medical malpractice. In addition to the need for prices to cover increasing loss trends, the low interest rate environment is likely to drive up prices in commercial insurance markets.

As table 1 shows, non-life insurers in G7 markets had to improve their underwriting margins in 2019 by 6-9 ppt to close the profitability gap (Row B). The predicted drop in interest rates will widen the gap further (Row D). Estimated profitability gaps would widen to 7–11% of premiums earned (Row E). Even with recent rate hardening in commercial lines, our analysis suggests more work on the underwriting side is needed to offset the effect of low interest rates.

Growing momentum in commercial insurance

Non-life commercial insurance providers have reported double-digit price increases for a variety of lines of business across all major global regions for 2019. Prices have been rising, as peak losses and accelerating claims inflation have forced the industry to respond. Some insurers have increased prices drastically in loss-affected lines. Others have even decided to withdraw completely from certain lines or geographies, pushing up pricing further in light of reduced underwriting capacity.

These various actions have had a positive impact on the overall rate environment, and we expect the trend to grow stronger in 2021. According to the quarterly Global Insurance Market Index issued by Marsh, global commercial insurance pricing increased for the eleventh consecutive quarter in the second quarter of 2020, a proprietary measure of global commercial insurance premium pricing change at renewal season (Figure 1).

Following rate improvements in many markets, and particularly in loss-affected segments, Swiss Re expects further rate hardening across all lines of business based on market trends (Table 2).

Overall, our analysis shows that the non-life insurance market is set to grow further, driven primarily by exposure growth across the world, especially new risks emerging along with rapid growth in Asia. Against the backdrop of ensuring pricing adequacy, underwriting fundamentals such as risk selection and costing, portfolio steering, appropriate terms and conditions, and contract wordings will be critical to writing future business.