Macroeconomic insurance environment
Christian Wuestner
Head of Content
Subdued economic growth at risk of further setbacks
Inflation has been slowing down globally, allowing central banks to cut interest rates. Not only does this help to reduce the cost of debt for businesses and improve the viability of investments, but it also offers growth opportunities for insurers.
The International Monetary Fund (IMF) is predicting global growth of 3.2 percent this year and slightly higher at 3.3 percent for 2025. While the US’ and China’s economies are slowing down, Asia’s emerging economies are the engine for global growth, according to a July 16 update. Global inflation is set to slow to 5.9 percent this year from 6.7 percent in 2023.
Economic growth is cooling down in major economies and there are a few risks that could impact the current relatively stable situation. But there is also a more optimistic scenario.
Source: Trading Economics
Alternative growth scenarios
As the pace of the receding inflation slows, there is a risk that monetary policy remains tight for longer. This could lead to a “global recession”, according to a Swiss Re 29 July update. Escalating geopolitical tensions - for example, around the US presidential election, war in the Middle East, or disruptive trade wars - could result in new, inflationary, supply-side disruptions. But there is also a more positive scenario that could see a “productivity revival", driven by tech-related investment integrating artificial intelligence (AI) and other emerging technologies into the real economy.
The insurance market tends to reflect economic growth. While lower interest rates may eventually impact insurers’ fixed income investments, lower interest rates benefit growth and therefore insurance premium.
Interest rates react to lower inflation
Source: Trading Economics (as of 19.9.2024)
The reinsurance environment
Another factor influencing insurance growth and underwriting appetite is the reinsurance market condition. Depending on how insurers diversify the risk, their underwriting approach may directly reflect reinsurers’ appetite (treaty reinsurance) as everything that falls within the scope of the agreement will be covered, or only anecdotally (facultative), when cover focuses on a specific risk or policy. There is also the possibility of a mix of both. Reinsurance rates have been declining in recent months, suggesting that the market is softening.
Reinsurance rates all lines
Source: Lockton Re Sage
In the first half of 2024 the aggregate combined ratio (a measure of underwriting profitability) of the top 25 global reinsurers for H1 2024 dropped five points compared to the same period of 2023 to 87.1% (profitable < 100% > unprofitable), according to Lockton Re research. This suggests that reinsurance underwriting is currently quite profitable, a result of compounding rate increases and strong underwriting discipline. The positive operating environment is attracting more capital: dedicated reinsurance capital is estimated to hit an all-time high in 2024, with USD 515bn of traditional capital and USD 107bn of third-party capital available.
Dedicated reinsurance capital
Source: Lockton Re
While natural catastrophe (Nat Cat) losses have been a major driver for property and casualty (P&C) reinsurance rate increases lately, the impact these perils have on reinsurers’ combined ratio has been weakening. This suggests that Nat Cat exposure is now better priced in the rates and is becoming less of a concern for reinsurers.
Cat loss impact to combined ratio H1 2024 (vs H1 2023)
Source: Lockton Re, S&P, Insurance Insider
The profitable reinsurance market suggests that pricing is adequate and that insurers are not going to face a lot of cost pressure when negotiating reinsurance protection. This should also reflect positively on insurance buyers.
The insurance market tends to reflect economic growth. While lower interest rates may eventually impact insurers’ fixed income investments, lower interest rates benefit growth and therefore insurance premium.
Improving insurance environment
Following each of the last three hard market cycles in 2007, 2010 and 2013, aggregate rate changes dropped to zero (or below). However, data from Lockton Re's Sage platform indicates that as we come out of the latest hard market cycle (which was more severe), aggregate rate change is settling at +5%. This suggests a ‘new normal’ of overall price increases rather than reductions. While there are differences across the various lines of cover, this may indicate greater levels of underwriting discipline, concern over catastrophe loss potential, and general geopolitical and economic uncertainty.
Commercial insurance rates
Source: Lockton Re Sage
Solvency, liquidity and profitability positions among most insurers globally improved slightly and remained strong overall, according to the July 2024 update from the International Association of Insurance Supervisors. The main factors affecting solvency and profitability include higher interest rates in many regions, higher premium income, lower dividend payments by insurers, and an upturn in financial markets leading to higher investment returns.
Swiss Re expects a notable improvement in P&C insurance profitability in 2024, manifest in a rise in return on equity (ROE) to 10% from 6% in 2023. Profitability of newly underwritten business will be significantly higher than for legacy business as the full benefits of higher interest rates come through, especially for long-tail lines. Average investment returns will also improve, albeit more gradually. Improved financial health of the insurance industry means more risk transfer capacity for better loss mitigation and more stable growth.
Swiss Re estimates that global non-life insurance rates will likely moderate as claims inflation eases.
Lower inflation is set to result in lower claims cost, supporting underwriting profitability, but it might lead to rate softening in the following years. The impact of inflation has been shifting from property into casualty lines (general liability, motor liability and accident), with overall P&C claims and costs inflation this year driven more by casualty than property lines, according to Swiss Re. This is because wage and healthcare expense inflation, key drivers of claims severity in casualty business, are proving more persistent than goods inflation.
While the casualty market, particularly in the US, can currently be challenging for insurance buyers, property market conditions are more buyer-friendly due to competition fuelled by insurers' growth ambitions.
Key takeaways
- Growth in major economies is stagnating while Asia's emerging economies are expanding
- Geopolitical tensions may create sudden volatility
- The implementation of AI technology could trigger a 'productivity revival'
- Falling interest rates in major economies creates a more favourable environment for investments
- Profitable reinsurance underwriting and record available capital suggests that insurers won't face major cost increases at renewal
- Insurers face improving profitability in P&C
- Insurers' claims costs are also set to decrease due to lower inflation, further supporting profitability