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Stronger profitability will enable the non-life insurance industry to increase capital and capacity to match growing demand as risks improve, according to a new study by the Swiss Re Institute.
The non-life insurance sector is rapidly adapting to a new era of higher interest rates, driven by the most significant tightening of monetary policy since the 1980s. Research shows that 2023 will be a transition year characterized by an improved revenue landscape in the world of non-life insurance.
This change results from ongoing price adjustments to address a high-risk environment, combined with increased portfolio yields that increase net investment income.
Although profitability prospects are strengthening, the reinsurer expects that non-life insurers will continue to face profitability challenges in 2023, with returns falling due to high capital costs. Consequently, the trend of rate tightening and capacity constraints is likely to continue throughout 2024.
Despite the improved profit outlook, the Swiss Re Institute also sees a persistent imbalance between demand and supply of non-life insurance. This imbalance indicates that challenging market conditions will continue, especially in property catastrophe lines. The surge in demand for insurance protection since 2017, fueled by more natural disaster events and inflation, has resulted in higher replacement values.
The industry needs significant capital growth to bridge the many protection gaps around the world. The Swiss Re Institute estimates that in the United States, capital in the property and casualty insurance industry has averaged 5% annual growth over the past decade, while demand for natural disaster protection has increased by an average of 7%. every year at the same time.
Increase in value of exposed risk
The global value of exposed risk has increased steadily over the past five years. The Swiss Re Institute assessed global protection gaps for natural catastrophes, crop insurance, mortality coverage, and health insurance at US$1.8 trillion (£1.4 trillion) in premium equivalent terms for 2022.
Both the primary insurance and reinsurance sectors play an important role in closing these protection gaps, explains Swiss Re.
In an environment marked by heightened risk awareness, the role of reinsurance in providing maximum capacity to the primary insurance sector is more important than ever.
Swiss Re said property re/insurance, the segment that covers a significant portion of natural disasters, grew, with primary insurance witnessing 4.3% premium volume growth and reinsurance experiencing 5.9%. which has increased over the past decade.
Due to high demand, high risk, and limited capacity, the main non-life insurers also need to optimize their use of capital. Reinsurers can offer primary insurers access to their balance sheets at lower costs than insurers’ capital costs, thanks to their diverse portfolios covering different geographies and risk categories. .
The study also confirmed that the profitability of the insurance and risk management industry is highly linked to interest rates, given the asset leverage and duration nature of the business model.
The industry invests underwriting cash flows in a variety of securities, particularly longer-term fixed-income investments, before the acquisition obligations are met. Consequently, higher interest rates will improve the profitability of the industry.
“Our analysis shows that the profitability of non-life insurers is set to improve significantly in the coming years as higher interest rates and rate tightening more than offset higher cost of acquisition from continued inflation,” said Swiss Re Group chief economist Jérôme Jean Haegeli. “It. is essential to enable industry resources to grow at a rate that matches the global demand for insurance protection.”
In a recent interview with IB Corporate Risk, Swiss Re head of L&H reinsurance for APAC ex. China Daisy Ning explained the importance of digital trust in risk management, especially among higher levels of digitalization.
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