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Non-life insurance profitability to improve on stronger investment & underwriting returns: Swiss Re

21st November 2023 - Author: Saumya Jain

Property and casualty (P&C) insurance premium growth is expected to soften next year and in 2025, but the sector’s profitability is poised to improve on stronger investment results and a better underwriting performance, according to Swiss Re’s latest sigma report.

Total insurance premium growth is forecast at 2.2% annually on average for the next two years, which is higher than the average of the past five years of 1.6%.

Within P&C specifically, Swiss Re notes that a significant repricing of insurance risk this year will result in 3.4% global premium growth in 2023, although this will soften to 2.6% growth in 2024 and 2025.

However, with the impact of economic inflation on claims projected to ease over the next two years, Swiss Re’s analysis finds that non-life insurance profitability will improve to around 10% ROE in both 2024 and 2025, which is above the 6.8% 10-year average.

“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,” says the sigma report.

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In fact, the report finds that 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.

At the same time, 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, according to Swiss Re.

On the life insurance industry, the report says that premium growth is on a “robust recovery path” with 1.5% total real-term global growth in premiums in 2023. This is driven largely by emerging markets with an increase of 5.1%, supported by advanced markets with growth of 1.3%.

This year, Swiss Re forecasts that savings premium will grow to $4 trillion, a 2.7% average annual growth rate in real terms.

While the outlook for the global insurance sector is positive in terms of profitability, more broadly, Swiss Re estimates that the world economy is expected to slow to 2.2% real GDP growth in 2024. The report highlights a growing US, stagnating Europe and growth challenges in China, while the conflict in the Middle East heightens risks to the macroeconomic outlook.

Jérôme Jean Haegeli, Swiss Re’s Group Chief Economist, commented: “Fading economic tailwinds and geopolitical uncertainties reinforce the primary insurance industry’s essential role in risk transfer.

“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.”

Charlotte Mueller, Swiss Re’s Chief Economist in Europe, added: “The full impact of higher interest rates on the real economy is still to filter through. For corporates, a higher cost of capital and labour input costs will increasingly erode profit margins and could induce layoffs. Europe’s economy will be the key underperformer over the next two years, with some large economies like Germany already in contraction.”

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