Opportunity for reinsurance & ILS to support global insurance industry growth

by Artemis on May 5, 2017

Improving economic growth in developed and emerging markets is expected to stimulate growth in the global insurance industry by 2018, which, suggests a need for greater reinsurance support and an opportunity for insurance-linked securities (ILS) to continue expanding into new peril regions.

The expectation of global insurance industry growth by 2018, albeit it projected to be slight, comes from reinsurance giant Munich Re. The reinsurer expects to see better economic prospects in the U.S. and emerging countries, which it feels will offset the expectation of insurance industry growth decline in the Chinese marketplace.

Around this time last year Munich Re said that global insurance premium growth would exceed economic growth over the next decade, with much of this growth coming from emerging Asian markets.

Munich Re’s belief in emerging Asia’s growth potential remains, with the company saying that in the longer-term, “the emerging markets of Asia will have the greatest growth potential, and their share of primary insurance premium is expected to be on a par with that of Western Europe in the next few years.”

For global reinsurers and the ever-expanding ILS, or alternative reinsurance capital world, greater insurance penetration provides an opportunity to grow in existing markets and expand into new peril regions.

Where there’s an uptick in insurance coverage increased demand for reinsurance protection typically follows.

And with the broad ILS world looking to access risk more directly, the continued growth of the collateralized reinsurance sector and the catastrophe bond space, and the willingness of the investor and sponsor base to enter new, diversifying and profitable lines of business, there could be greater opportunity for ILS in emerging Asia and elsewhere in the future, as penetration levels rise.

Overall, Munich Re expects global insurance industry growth of 4.5% (3% in real terms, i.e. adjusted for inflation) on average, in both 2017 and 2018. Growth in 2017 is projected to be grow only nominally, says Munich Re, but in 2018 real growth of 3% is expected across the international insurance industry.

Therefore, Munich Re explains that projected premium growth will be slightly higher than 2016, but some way above the average 2% growth rate witnessed throughout the last decade.

“The economies of many emerging markets, such as Brazil, but even Russia, are experiencing a significant recovery. This is leading to increased growth in property-casualty insurance. In most of the industrialised world – in the eurozone, the USA, and Japan – demand has been bolstered by a solid economic environment,” says Michael Menhart, Chief Economist, Munich Re.

Over the next two years, premium growth in life insurance markets is expected to outpace that of property and casualty (P&C) business, says Munich Re. Global P&C insurance industry growth is projected to be at an average of 4% (almost 2.5% in real terms) in 2017 and 2018, with much of this growth coming from emerging Asian markets and the Middle East and North Africa (MENA) region.

“We project that life insurance there will see only marginal growth owing to the low-interest-rate environment. By contrast, demand in the emerging markets will continue to rise appreciably. Growth prospects for insurers are therefore looking a little brighter worldwide,” added Menhart.

Premium growth in the international life insurance industry will be driven by emerging Asia and Latin America, and Munich Re predicts an average growth rate of more than 4.5% (a solid 3% in real terms) over 2017 and 2018.

“Prospects in the industrialised countries continue to be clouded by persistently low interest rates. Premium growth here is likely to fall short of economic growth. However, strong premium expansion in the emerging markets will almost fully compensate for the moderate development in the industrialised countries,” explains Munich Re.

As the numbers show emerging markets are expected to gain a larger and larger share of the global insurance industry. In fact, Munich Re claims that emerging markets’ share of additional insurance premium volume is to increase from 20% in 2016 to as much as 47% by 2025.

This means that by 2025 the overall market share of emerging markets in Asia alone will be roughly 21.4%, which brings it closer to the 24.5% of Western Europe, with North American expected to remain the most dominant with a share of 27.8% by 2025.

Whether insurance industry growth occurs in developed or emerging markets, reinsurers and ILS players have an opportunity to expand their services and provide capital and technical support as economies of the world look to grow, while being resilient to natural and man-made disasters.

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