Investment returns helping drive improved insurance outlook

Swiss Re Sigma report says better investment is proving more profitable for the industry but market issues remain.

Jérôme Jean Haegeli, Group Chief Economist, Swiss Re Institute.

A leading report from Swiss Re says that with investment returns increasing and hard market conditions continuing, the insurance industry will further improve profitability.

In its latest Swiss Re Sigma “Global Outlook”, the reinsurer specified that investment results were increasingly a “more important component of industry returns”.

“In the Property & Casualty insurance sector, a significant repricing of insurance risk in 2023 will result in an estimated 3.4% global premium growth this year and is forecast to soften to 2.6% growth in 2024 and 2025. The impact of economic inflation on claims is forecast to ease further over the course of 2024 and 2025. Non-life insurance profitability will improve to around 10% return on equity (ROE) in both 2024 and 2025, well above the 10-year average of 6.8%," said the report, according to findings.

"While the sector will continue to strengthen its profitability it is not yet
expected to earn its cost of capital in 2024 or 2025."

The improvements in profitability are driven by higher investment returns given the higher interest rate environment, as well as better underwriting results due to more commensurate premium rates in both commercial and personal lines. Current investment returns in the non-life segment have surpassed 3.3% in 2023 and will further rise to around 3.7% in 2024 and 3.9% in 2025. Underwriting is also being supported by disinflation and improved terms and conditions, which are expected to increasingly mitigate the effects of inflation on claims costs.

Market conditions still volatile

“Fading economic tailwinds and geopolitical uncertainties reinforce the primary insurance industry's essential role in risk transfer,” said Jérôme Jean Haegeli, Swiss Re's Group Chief Economist. "While the sector will continue to strengthen its profitability, mainly driven by improved risk-adjusted pricing as well as higher investment returns, it is not yet expected to earn its cost of capital in 2024 or 2025 in most markets as economic inflation will continue to have a negative impact on claims costs."

The investment growth was having effects on the combined ratio and narrowing the protection gap. “100 basis points (bps) [of] additional investment yield is roughly equivalent to 250bps improvement in the combined ratio for the average non-life business,” said the Swiss Re in its report launch. “In the US, the 250bps rise in reinvestment yields, from 2.8% in 2021 to 5.3% in 2023, is translated to roughly 625bps of combined ratio (CR), which indicates the US P&C industry can cover additional $50 billion claims.”

Geopolitics will also continue its dominant role in driving the economic environment with global real GDP growth at 2.2% for 2024, down from a 2.6% estimate for 2023, before a revival to 2.7% in 2025.

“Core inflation is falling but still stubbornly high."

Despite many Central banks now holding steady with interest rates rises, inflation and interest rates in developed markets are expected to stay higher in the next decade with global inflation forecast to moderate to 5.1% in 2024 and 3.4% in 2025. Inflation was also seen as largely won; annualised inflation was down year-on-year at 4.6%, the lowest rate in two years, largely thanks to a fall in energy prices.

UK Chancellor Jeremy Hunt, ahead of this week’s Autumn Statement floated the idea of tax cuts, despite fears from some they could restart rapid inflation, as the issue was now seen as under control.

Others agreed with Swiss Re’s findings that inflation was long from gone from the headlines. “Core inflation, which measures domestically generated inflation rather than moves caused by swings in global commodity prices, is falling but still stubbornly high,” said Nicholas Hyett, Investment Analyst, Wealth Club.

“Some of that is probably down to lingering effects of higher energy and food prices earlier in the year – as it can take time for those pressures to make their way through the system,” he added. “Until core inflation starts to show sustainable falls, we’re not completely out of the woods and central bankers will have their fingers poised over the interest rate trigger.”

Backing this, Swiss Re said that the cost-of-living crisis was not over in the UK, with another “winter of discontent” adding to stagflation risks.

Premium growth

Swiss Re said that the insurance industry premium growth was in positive figures and was seeing higher numbers than during the COVID-19 years. “Total premium growth is forecast at 2.2% annually on average for the next two years, higher than the average of the past five years, which was 1.6% for the 2018–2022 period,” it said.

“Superior results were achieved through early engagement with
insurers and robust, and lessons learned from past claims.”

Underwriting discipline has taken on an added importance in the current volatile environment. In its “Q3 2023: Global Insurance Market Overview” released last week, AON said that “across all risk types, the underwriting environment was disciplined and focused on risk differentiation.”

It continued, saying that “superior results were achieved through early engagement with insurers and robust, differentiating submission details including valuation methodologies, risk control practices, improvements implemented, and lessons learned from past claims.”

This could be part of the reason for expected rebounds in premium growth. Swiss Re said that life premium growth was just expected to outstrip that of non-life (2.3%), bringing the 2024-2025 forecast to 2.1%. However, non-life was expected to seep positive growth rates across the board, while life was expected to shrink in several markets in 2023 estimates.

Unsurprisingly, emerging markets saw the biggest gains. China was estimated to see a 5.6% growth rate in non-life until 2025, 10% estimated growth life for 2023, and 5.7% forecasted growth for 2024-2025.

This shows that investment returns are becoming ever more important to insurers as the economy continues to fluctuate.