Boosting non-life insurance profitability to strengthen ‘vital role’ as a financial safety net: Swiss Re

An ongoing imbalance in the demand and supply of non-life insurance is predicted.

Swiss Re Institute anticipates 2023 as a transitional year, expecting improved profitability for non-life insurance globally. This is driven by adjustments in pricing to accommodate a heightened risk environment and higher portfolio yields boosting net investment income. 

However, despite these improvements, non-life insurers are projected to maintain lower profitability than their increased cost of capital in 2023. This suggests that rate hardening and capacity constraints are likely to persist through 2024.

The non-life insurance industry is rapidly adapting to a new era of higher interest rates due to intense monetary policy tightening, the most significant since the 1980s. 

Despite the brighter profitability outlook, Swiss Re Institute foresees an ongoing imbalance in the demand and supply of non-life insurance, leading to continued challenging market conditions, particularly in property catastrophe lines. 

Increased demand for insurance protection has been fueled by rising natural catastrophe events and inflation, resulting in higher replacement values.

To bridge substantial protection gaps worldwide, there's a need for higher growth in industry capital. 

For example, in the US, property and casualty insurance industry capital has grown by 5% annually on average over the past decade, while natural catastrophe protection needs have grown at about 7% per year on average during the same period.

ALSO READ: Global reinsurance to breath above waters, life sector will see greener grass: S&P Global Ratings

The state of reinsurance globally

Globally, the value of unprotected risk exposure has steadily increased over the past five years.

Swiss Re Institute estimates the global protection gaps for natural catastrophes, crop, mortality, and health insurance at $1.8t in premium equivalent terms for 2022.

Both primary insurance and reinsurance sectors play a role in closing these protection gaps. 

Reinsurance, in particular, has become increasingly relevant in providing peak capacity for the primary insurance sector, especially in property insurance covering natural catastrophes, with premium volumes growing in both primary insurance and reinsurance.

Due to the heightened demand, increased risks, and limited capacity, primary non-life insurers must use capital more efficiently. Reinsurers can offer access to their balance sheets at costs below insurers' capital costs, thanks to diversification across various geographies and risks.

“In the current capital-demanding environment, reinsurance can enable primary insurers to write new business more efficiently, provide certainty for legacy liabilities and support the growth of new business. The elevated risk landscape calls for more frequent adjustments to underwriting practices. Focusing on portfolio quality and margins as well as contractual clarity in the whole industry will be key in this respect." Gianfranco Lot, Swiss Re's Chief Underwriting Officer P&C Reinsurance, said.

The insurance industry is sensitive to interest rates due to the asset leverage and duration in its business model. 

Low-interest rates before and during the COVID-19 pandemic, as well as the current higher interest rate environment, significantly affect insurers' profitability and risk management. 

Insurers invest their underwriting cashflows in securities, particularly long-term fixed income investments, before paying claims. Higher interest rates positively impact the industry's profitability.