A disequilibrium in demand and supply of non-life insurance is expected to persist, and with it a continuation of current hard market conditions, especially in property catastrophe lines, according to Swiss Re Institute.
Driven by increased natural catastrophe activity as well as inflation, demand for insurance protection has risen since 2017, which is resulting in higher replacement values, analysts explain.
At the same time, a higher growth in industry capital is needed to narrow protection gaps world wide. For example, in the US, property and casualty insurance industry capital has grown by 5% annually on average for the past 10 years. During the same time, the need for nat cat protection has grown at about 7% per year on average.
Globally, the value of unprotected risk exposure has risen steadily in the past five years. Swiss Re Institute estimates the global protection gaps for natural catastrophes, crop, mortality and health insurance at $1.8 trillion in premium equivalent terms for 2022.
“Both primary insurance and reinsurance sectors contribute to closing the protection gaps. In an environment where heightened risk awareness prevails, the role of reinsurance in providing peak capacity for the primary insurance sector is becoming increasingly relevant. This is also reflected in the fact that property re/insurance – the line covering the largest part of natural catastrophes – has seen premium volume growth of 4.3% in primary insurance and 5.9% in reinsurance over the last decade,” analysts stated.
With increased demand along with eleveted risks and limited capacity, it is key for primary non-life insurers to use capital more efficiently, the Insustitute highlights.
Reinsurers can offer primary insurers access to their balance sheet at costs below insurers’ capital costs as their portfolio is diversified across a broader range of geographies and risks., also noted.
Gianfranco Lot, Swiss Re’s Chief Underwriting Officer P&C Reinsurance, said: “In the current capital-demanding environment, reinsurance can enable primary insurers to write new business more efficiently, provide certainty for legacy liabilities and support the growth of new business.
“The elevated risk landscape calls for more frequent adjustments to underwriting practices. Focusing on portfolio quality and margins as well as contractual clarity in the whole industry will be key in this respect.”
According to the sigma study “Raising the bar – non-life insurance in a higher risk, higher return world”, despite the stronger profitability outlook, non-life insurers’ profitability is expected to remain lower than their increased cost of capital in 2023.
Further rate hardening and constraints on capacity are likely to continue throughout 2024, at the same time, as the industry continues to adapt prices to an elevated risk landscape, the Swiss Re Institute expects 2023 to be a transition year – with improving profitability for non-life insurance globally.
Jérôme Jean Haegeli, Swiss Re’s Group Chief Economist, said: “Our analysis shows that non-life insurers’ profitability is set to improve strongly in the coming years as higher interest rates and rate hardening more than offset higher claims costs from persistent inflation. This will be vital to enable industry resources to grow at a rate that will match global demand for insurance protection.”