In an assessment of the prospects for insurance market in 2014/15, Swiss Re’s latest report concludes that “global economic growth will continue to strengthen in 2014, which will in turn “support on-going premium growth in the non-life primary market, particularly in emerging markets, with reinsurance premiums following suit.

“Global premiums in the life market are expected to grow by around 4 percent in real terms in 2014 and 2015. However, life reinsurance premiums are expected to continue to decline in advanced markets, while rising by about 6 percent annually in emerging markets.

“Alternative capital has increased in recent years, putting pressure on prices and margins, particularly in the US catastrophe business. The alternative funds are expected to maintain a focus on established nat cat markets.”

The analyis indicated that the “momentum in global economic growth achieved this year will continue into 2014. The US economy is still growing and the euro area, while not expected to accelerate rapidly, has returned to growth. The weaker yen has boosted growth and increased inflation in Japan, but the sustainability of this recent economic strength is uncertain. China’s growth trend is close to 7.5 percent, down from 10 percent previously.”

The report explains that the “gradual improvement in economic activity in key markets has supported continued growth in non-life premium rates. Real (after-inflation) premium growth in the primary market is projected to be around 2 percent in the advanced economies, and close to 8 percent in the emerging markets in 2014.

“Premium growth in the reinsurance sector will follow suit, but be a little stronger. The low interest rate environment has weighed on investment returns in the primary life market. Reinsurers have been similarly impacted, with sector profitability estimated to be close to 10 percent in 2013, down from 14 percent in 2012.”

Kurt Karl, Swiss Re’s Chief Economist, commented: “A return to economic growth in the mature markets is a good sign for insurance and we see a positive outlook for the next two years. Emerging markets, especially in Africa and Asia, will definitely provide some of the more spectacular growth figures in non-life business as cities grow and people look for financial protection for their property.”

In its analysis of the recent Typhoon Haiyan disaster in the Philippines, Swiss Re said it is “unlikely to generate large losses for non-life insurers. This is because of the very low insurance penetration in the Philippines, currently at around 0.5 percent compared with an emerging market average of about 1.3 percent.”

In the life sector Swiss Re noted that “global primary life premiums have continued to recover this year, with emerging market real premium growth above 6 percent and advanced market growth at 2.3 percent. Global life premium growth is projected to rise to around 4 percent in 2014 and 2015, fuelled by robust emerging market growth on the basis of rising incomes and increased insurance awareness. Life insurance premium growth has rebounded sharply in emerging Asia, growing by about 6 percent in real terms this year.”

Karl noted: “The figures for emerging markets this year have been robust and this is expected to continue. In Latin America, we saw 18 percent growth in 2012 and in 2013 we are looking at 10 percent growth, which is still very good.”

Economic activity in the stable countries of the Middle East and North Africa region is supporting above-5 percent growth in life premiums, but from a very low base.

The role of alternative capital remains a subject of significant interest for the reinsurance industry. Swiss Re’s report sees the additional capacity “provided by Insurance Linked Security (ILS) Funds, Mutual Funds, Pension Funds, Hedge Funds and Private Equity,” as being primarily focused “on the US reinsurance business and retrocession, and the inflow of capital has put margin pressure on US Cat business.”

However, the report also points out that the “staying power of these new investors has yet to be tested by a rise in interest rates, decreasing ILS returns or large catastrophe losses.”

It is expected that alternative capital providers will continue to focus mostly on the US reinsurance business, where well-modelled risks, low entry barriers and relatively high margins characterize the market.

“Investors need well-modelled and transparent risks to invest in,” said Martin Bisping, Head of Non-Life Risk Transfer at Swiss Re. “We can expect funds to focus on established nat cat markets where the conditions are well understood – at the moment this means the US is the most attractive market.”

Source: Swiss Re