Global Non-Life Insurance Industry 2023

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. This suggests that further rate hardening and constraints on capacity are likely to continue throughout 2024 (see TOP 10 Opportunities & Megatrends for Insurance Industry by 2030).

Swiss Re Institute expects the disequilibrium in demand and supply of non-life insurance to persist, and thus a continuation of current hard market conditions, especially in property catastrophe lines.

Demand for insurance protection has risen since 2017, driven by increased natural catastrophe activity as well as inflation, which is resulting in higher replacement values.

The impact of monetary policy on the insurance industry

The most intense monetary policy tightening since the 1980s is profoundly affecting non-life insurance. Almost 95% of central banks have hiked policy interest rates since 2021 due to high inflation post-pandemic.

This is generating strongly higher investment yields for invested assets, but has raised the cost of equity capital for the non-life industry to the highest level for more than a decade.

Higher growth in insurance industry capital is needed to narrow large protection gaps worldwide. Swiss Re Institute estimates that 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 natural catastrophe protection need has grown at about 7% per year on average.

Swiss Re research indicates that the benefit of higher interest rates on insurers’ investment results far outpaces the increased cost of capital that accompanies it. Insurers’ cost of capital has increased in all major regions since the start of the tightening cycle, with European insurers seeing the largest jump in risk-free rates (see how High Reinsurance Costs Will Impact for European Insurers Operating Margins).

Yet since the average non-life investment portfolio is generally 2.5 times net premiums earned, an additional 100 basis points (bps) of investment yield is roughly equivalent to 250bps improvement in the combined ratio.

Even with a likely deterioration in combined ratio between 2021 and 2023, higher interest rates improve the profitability of new business with respect to cost of capital, incentivising stronger growth in 2023.

Higher interest rates transform the economics of insurance and put insurers on a more financially sustainable long-term path. Still, to narrow protection gaps, industry resources would need to grow in line with the growth in demand from evolving risks, such as catastrophes.

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 USD 1.8 trln 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.

Non-life insurers’ risk capital

Non-life insurers’ available risk capital and capacity deployed are constrained in many lines, despite the stronger profitability of new business at current higher interest rates and investment returns. This is driven by heightened risks including economic and social inflation, the war in Ukraine, and uncertainty around claims trends, reserves and other risks (see how War in Ukraine Slows Growth of Global Re/Insurance Market).

Capacity restraints are also partly driven by model uncertainty after years of above-average natural catastrophe losses. With investors hesitant and return expectations rising, issuing new equity is also less attractive.

Given the competing demands of higher demand and risk, and limited capacity, on non-life insurers, more efficient use of capital becomes key. Reinsurance can function as a flexible and efficient capital substitute to ease these pressures (see Global Non-Life Reinsurance Market Outlook).

Evolving natural catastrophe risks require adaptions in underwriting

Rising losses from natural catastrophes are strongly impacting the property re/insurance market. As demonstrated by the many events across the world in 2023, risk profiles continue to evolve and insured losses in excess of USD 100 billion per annum are expected to recur.

Demand for natural catastrophe property reinsurance is likely to remain high as exposures keep increasing. At the same time, the main risk drivers remain unchanged: extreme weather events, urbanisation, higher property values and inflation.

An important discussion point will be the balance between reinsurance capacity and increasing demand.

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FULL Report - https://beinsure.com/global-non-life-insurance-industry-interest-rate/