Swiss Re upbeat about growth of insurance sector

As a cautionary note, an economist said fixed annuities face potential decline as higher Interest rates shift consumer preferences.

Insurance premiums in the Asia Pacific (APAC) region are projected to increase by 2.3% in both 2024 and 2025, given that insurers can reallocate investments to higher-yielding bonds. This is expected to bolster profitability in the insurance sector, said John Zhu, chief economist for Asia at Swiss Re Institute.

“Insurers can now reallocate or recycle their portfolio rolling them on to higher-yielding bonds, which means the premiums received from the new business that they write, will be invested in higher-yielding assets,” Zhu told Insurance Asia. “That should help insurance profitability over time. And so this is going to be a tailwind for the insurance industry, in terms of profitability on the asset side.”

This growth forecast surpasses the global average of 2.2%, as indicated in the sigma report titled "Risks on the rise as headwinds blow stronger: Economic and insurance market outlook 2024-25".

For the year 2023, the APAC region is expected to experience a more modest increase of 0.7% in insurance premiums. Although this represents a smaller growth compared to the world’s estimated average of 1.5%, the subsequent years, 2024 and 2025, are anticipated to show a more robust upward trend in insurance premiums in APAC.

 However, Zhu acknowledged the nuanced impact on consumer behaviour. Whilst consumers may benefit from higher interest rates through savings-oriented products, there is a potential downside related to lapse risk for existing products.

Products with fixed annuities set at lower interest rates may become less attractive, leading to a higher risk of policy surrender.

“In terms of the risks or slight downside to high-interest rates, it probably comes from lapse risk for in-force business. If you have existing products like fixed annuities, then the higher interest rates that you see now compared to those low fixed interest rates from several years ago, would look relatively more attractive. Consumers could potentially surrender some of their old products and then get the higher rates on new products, Zhu said.

P&C to see repricing risk

In the property and casualty insurance sector, a significant repricing of insurance risk in 2023 is expected to lead to a 3.4% global premium growth, forecasted to soften to 2.6% in 2024 and 2025.

Improved profitability is anticipated, with around 10% return on equity (ROE) in both 2024 and 2025, driven by higher investment returns and better underwriting results.

The report also emphasised the challenges facing the property and casualty (P&C) insurance sector, with claims inflation being a significant concern. Zhu pointed out that even as headline inflation decreases, other sources of inflation, such as services and wage growth, may persist. 

This could pose challenges for insurers in estimating claims costs and adjusting premiums accordingly. “That's why there may be a subtle shift in the source of inflation, maybe away from goods inflation. Now things like the supply chain and commodities have calmed down a little bit. But at the same time, there are other kinds of inflation – whether it's services inflation or social inflation, insurers need to be aware of it,” Zhu warned.

He then addressed the anticipated repricing in 2023, coinciding with a global premium growth forecasted to soften. The economic slowdown, particularly in major economies like the US, the Euro area, and China, might result in slightly slower growth in insurance demand.

However, Zhu highlighted that certain Asian economies, like Taiwan, are showing signs of accelerated growth, potentially offsetting the global downturn.

Role of insurance in retirement planning

The global life insurance industry is expected to benefit from higher interest rates, with strong growth in savings products anticipated in the next two years.

Premium growth is on a recovery path, with 1.5% total real-term global growth in premiums in 2023. Swiss Re Institute forecasts an increase in savings premiums from $2.3t in 2022 to $4.0t in 2033, driven by a growing global middle class and increased reliance on insurers for retirement planning. Emerging markets contribute significantly to this growth.

This would result in an additional $1.7t of savings premiums over the next decade, a 65% increase compared to the past two decades. The report “A retirement lifeline” said the life re/insurance industry has a unique opportunity to play a crucial role in addressing the challenges of retirement preparedness in the private savings market.

With the burden of retirement savings increasingly falling on individuals, especially due to ageing populations straining pension systems, there is a growing concern that the current rate of global retirement savings is insufficient.

An estimated retirement savings gap of $106t exists across government-provided, employer-based, and individual pension savings in eight major economies in 2022, averaging 270% of these countries’ gross domestic product.

Zhu explained that this growth is driven by the growing awareness of the pension savings gap, especially in the face of increasing life expectancy. Insurance, both in the public and private sectors, is seen as a crucial solution to bridge this gap.

Emerging markets, including China, play a pivotal role in driving this growth, thanks to their less-developed insurance markets and significant room for expansion.

“There are public sources of pensions. Such as from the government, social insurance and pension schemes. But given the increases in longevity, including in Asia, this is something that we think is going to also require the private sector, and also private savings by consumers,” said Zhu.

“Hence, this is the subject of several notes that we published this year, not just in the sigma report, but previously another publication as well, where we look at how the insurance industry and reinsurance can help the insurance industry meet the challenge of this growing pension savings gap,” he added.

Opportunities

To capitalise on this opportunity and set insurance-saving products apart, life insurers are advised to consider strategic moves such as freeing up capital, enhancing underwriting capacity, and focusing on innovative product development for growth that is light on capital requirements, according to Swiss Re’s study on retirement preparedness.

“On the in-force book, coinsurance with funds withheld structures can reduce duration gaps and interest rate risks. Mass lapse covers can optimise capital allocation and protect policyholders’ assets, while value in-force (VIF) monetisation can strengthen liquidity and free up capital. Longevity swaps transfer capital-heavy longevity risks,” the report noted.

Beyond these benefits, reinsurance can contribute to stabilising balance sheets, reducing earnings volatility, and improving overall capital efficiency for life insurers.

For new business ventures, reinsurance becomes a valuable tool in the development of competitive index-linked products (ILP) with guaranteed minimum benefits (GMB) riders. It also aids in creating innovative investment strategies and building underwriting capacity through funded reinsurance.