Global P/C Industry Sees Strongest Rate Hikes in 20 Years but Inflation Headwinds Loom

Robust global economic recovery, higher risk awareness and the strongest rate hardening for 20 years in non-life insurance commercial lines will combine to push premiums 10% above pre-COVID-19-crisis levels this year, creating a faster bounce-back than from the global financial crisis, according to a report published by Swiss Re.

The report describes some tailwinds (such as the current economic momentum) and headwinds (such as rising inflation risk), which the industry faces. But Swiss Re asserts the scales are currently tipped towards a positive insurance market outlook.

Global premiums should grow at an above-trend 3.3% this year and 3.9% in 2022, taking the global insurance market to above US$7 trillion for the first time by the end of 2022, said the sigma report published by Swiss Re Institute, titled “World insurance: the recovery gains pace.”

Swiss Re expects the highest premium growth this year and next in commercial P/C insurance lines of business (including workers’ compensation). “In these lines, premium volume should grow by about 6% in 2021 and around 5% in 2022, supported by significant rate improvements and the economic recovery,” the report said.

The report noted that personal lines growth and profitability will be softer, as motor insurance “undergoes competitive pressure and a return to normal claims after an extraordinarily profitable 2020.”

Overall, however, strong price increases in commercial lines remain a dominant tailwind, said the report.

COVID Claims Still Uncertain

The report said that COVID-19-related P/C claims are still uncertain, but the latest estimates of final industry losses published by various market participants are in the range of US$30 million to $60 billion, with most of the losses related to commercial lines of business.

“The main component has been BI losses, triggered by communicable disease clauses and event cancellations. Trade credit insurance has experienced significant losses, and there will likely also be high claims in liability (E&O, D&O, medical malpractice) and workers’ compensation in the healthcare segment.”

Higher Risk Awareness

The pandemic has cemented some positive paradigm shifts for insurance, including a significant rise in risk awareness, which is helping drive demand for business interruption (BI) protection, as well as life and health insurance, said Swiss Re, in a description of some of the tailwinds benefiting the insurance industry.

“Corporate clients’ awareness of risks has risen, including from disruptions to global supply chains, given the hiatus in international trade, and cyber risks, as employees work increasingly from home,” said the report. “Companies are seeking more comprehensive and flexible protection such as parametric covers as they adapt to new ways of working post-COVID-19.

Swiss Re described the “leap towards digitization” as another tailwind for the industry market’s outlook. “Initially considered an aid to convenience or commoditization in P/C personal lines, digitization is now seen as the key to transforming sales and service for both life and non-life insurers,” the report continued.

“Consumers have quickly adapted to online channels and increasingly prefer to transact digitally at all insurance touchpoints,” said Swiss Re’s sigma report. “This creates opportunities for insurers along the whole value chain, from acquiring new consumers and providing consulting advice to underwriting, generating insurance policies, processing payments and after-sale services.”

Headwinds from Rising Inflation?

On the other hand, Swiss Re indicated there are some headwinds affecting the industry, including inflation.

Inflationary pressures affect insurers’ assets and liabilities through different channels, Swiss Re said, explaining that financial assets, such as stocks and bonds, usually perform better when inflation is low or declining, while equities often fare poorly in the short run when inflation is rising.

Inflation could make non-life claims more costly, particularly for inflation-sensitive longer-tail liabilities, the report warned.

“With excess economic capacity beginning to dissipate, we expect recovering insurance demand and transitory inflation drivers to inch claims costs higher,” Swiss Re continued. “Our analyses indicate that correlations between wage, healthcare and CPI [Consumer Price Index] inflation increase during periods of high inflation.”

As a result, a sustained rise in inflationary pressures represents “a primary medium-term risk for insurers.”

Claims in general liability, medical malpractice and workers’ compensation are dominated by bodily injury claims, which have a high exposure to medical and wage inflation, the reinsurer said.

On the other hand, property, specialty and professional liability are more exposed to CPI inflation and/or social cost escalation, the report went on to say.

“In non-life business, the degree of potential exposure is driven by: (1) the duration (years of claims) of loss reserves exposed to the spike in inflation; and (2) the reserve leverage, meaning the level of affected reserves as a percentage of premiums.”

Other Findings

Other findings from the report include:

• Strong global economic recovery from COVID-19 will lead to historically high global real gross domestic product growth of 5.8% in 2021.
• The U.S., China and Japan were again the world’s top three insurance markets by size in 2020, together accounting for almost 58% of the global market, higher than the previous year (2019: 56%).
• China continues to take a growing share, reaching 10.4% of the global insurance market premium volume in 2020, compared with 9.8% in 2019.
• The rapidly growing Asia region is growing increasingly dominant, with six markets in Swiss Re’s top 20 ranking and about a 25% market share in 2020.
• Emerging markets will continue to outpace advanced markets, while Asia will outperform other regions, “with the ongoing shift in economic power from west to east.”

Topics Pricing Trends Market Property Casualty