Global insurance premiums returned to growth in 2014, as the insurance and reinsurance industry continued to recover from the economic crisis, with premiums increasing by 3.7% to $4,778 billion.
Advanced markets saw premium growth of 2.9%, which remains below the pre-crisis growth rate of 3.4%. Emerging market premium growth was faster at 7.4% in 2014.
Following five years where premium growth stagnated it will be encouraging to insurance and reinsurance firms to see that premiums are increasing once again. However these growth rates are not spectacular by any means.
In fact, Swiss Re’s latest sigma report highlights that while premiums may have been growing, the profitability of the business underwritten is declining.
Profitability of the global insurance sector has been weak since 2008, Swiss Re notes, due to the investment climate and negative underwriting results from 2008 to 2012. Following that there was some rate hardening, which improved the situation a little, but after 2014 that has ceased.
This is where the soft market environment in reinsurance kicked in and began to have a trickle down effect on other lines of business. The data from Swiss Re shows just how bad that became during 2014 and the industry should expect the profitability figures to worsen for 2015, judging on how the renewals this year have gone.
Underwriting profitability across eight major insurance and reinsurance markets worsened as the combined ratio rose to 98.1% in 2014 from 97.5% in 2013, Swiss Re notes.
In the U.S., underwriting profitability was lower in 2014 than in 2013 due to increased catastrophe losses as well as a reduced contribution from loss reserve releases relative to previous years. The slowing of reserve releases will likely have continued into 2015 given the benign loss environment.
In Western Europe profitability dropped as claims experience worsened and reserve releases fell as well. Swiss Re notes that improvements in Germany were more than offset by weaker results in France, Italy and the UK.
In Japan, underwriting results continued to improve over the year, Swiss Re explains.
Exacerbating the deterioration in underwriting results, the average total investment income as a share of net premiums earned in the eight markets also fell, by 1 percentage point to 8.6%. That meant the overall investment result dropped from 13.2% in 2013 to 11.8% in 2014, and average after-tax ROE fell from 8.6% in 2013 to 7.6% in 2014.
The chart below from the sigma report shows that Swiss Re forecasts further deterioration in underwriting result and return on equity for 2015.
The outlook for the sector, particularly non-life, is mixed, according to Swiss Re. Premium rates are expected to remain low, but a recovering global economy should drive some continued growth in uptake of insurance and as a result some reinsurance growth as well.
Profitability will remain under pressure as flat rate development at best and lower contributions from reserve releases begin to bite. On top of the lower underwriting profits, investment returns are expected to wane for several years due to depressed investment returns.
So while premiums are growing still, which is encouraging for both insurers, reinsurers and for the use of insurance-linked securities (ILS), the challenging environment is set to continue.
With competition still building, thanks to new capital, new business models and an expectation that ILS will keep expanding, traditional insurers and reinsurers are likely to find conditions hardest.
Hence the M&A wheel will likely keep turning, hybrid business models will continue to look to the investment portfolio as an opportunity, and ILS specialists will continue to look to new sources of business and how to tap primary risks directly to cut out the middle men.
The outlook looks like more of the same, but with the added pressure of dwindling reserves and rate pressure building in commercial insurance lines. 2015 looks like another tough year for profits for some.
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