As primary insurance grows, reinsurers and capital markets need to be ready

The world’s largest reinsurer Munich Re expects the global insurance market to grow strongly over the rest of this decade as emerging economies come up to speed, according to a study published today. Munich Re’s Insurance Market Outlook 2013 concludes that both primary property and casualty insurance and life insurance premiums will grow strongly, while reinsurance market growth will be less rapid.

“The global economic recovery is also benefiting the insurance industry. We expect the economies of key industrialised countries to improve in the second half of 2013 and in 2014. Consequently, this will lend impetus to demand for insurance”, commented Michael Menhart, Munich Re’s Chief Economist.

Munich Re’s estimates for growth of the primary insurance market are for strong increases in all markets but with emerging economies leading the way. It expects the P&C insurance market to grow by 50% by 2020, from the €1.2 trillion of today up to €1.85 trillion. The life insurance market is expected to grow even more significantly by almost two-thirds to €3.1 trillion. Growth of both insurance and reinsurance is expected to be significantly stronger in emerging economies than in already industrialised economies.

Despite the expected boom for insurance in emerging countries, the established leaders in insurance and reinsurance premiums will remain the dominating regions. In terms of total primary insurance premiums, their share will fall back to about 73% of the total by 2020, around 10% points lower than in 2012. The share generated by the emerging countries in Asia will move up from 8% to 16%.

“Approximately half of all the additional premium earned between 2013 and 2020 will come from the USA, China and Japan. In this respect, saturated markets and emerging markets both represent great potential for growth in insurance and reinsurance alike”, added Menhart.

Some highlights from the study include:

• Premium growth forecast for the global primary insurance market: just under 3% in 2013, just over 3.5% in 2014. In 2012, the market grew by around 1%. The chief reason for the expected growth is the predicted revival of life insurance business.
• In reinsurance, growth was high in 2012 at 3.3%, due partly to rate increases following severe natural catastrophes in the previous years. Growth of some 1% is likely in 2013 and around 2.3% in 2014, and is predicted to be greater in life reinsurance than in property-casualty reinsurance.
• Also in the short term, the emerging countries hold the greatest growth potential for the insurance industry. In the property-casualty segment, the strongest growth can be expected in Asia; in life insurance, Latin America is likely to post the highest growth rates in 2013/2014. Europe trails behind all the other regions in terms of growth in both classes of business.

The forecast growth rate for primary insurance is aggressive to say the least, but as emerging economies come up to speed on insurance penetration these may actually end up being on the conservative side. The potential for growth in both P&C and life sectors is huge, with micro-insurance preparing the ground in many emerging countries.

While reinsurance market growth is not expected to be quite so stunning the opportunity for both reinsurers and the capital markets participation in reinsurance is clear. There will be an increasing need for both property catastrophe and life reinsurance cover which will also lead to a greater need for retrocession. While we can imagine 50% growth for primary P&C insurance as feasible, reinsurance growth will be slower to come on-line but this could mean that P&C reinsurance capacity globally needs to increase by 25% by 2020. The capital markets and third-party capital could provide much of that capacity growth.

Aon Benfield recently put global traditional reinsurer capital at $505 billion. Compare that to the size of the primary insurance market from Munich Re’s report which it puts at around €3 trillion in total at the end of 2012, meaning the roughly €390 billion of reinsurer capital is around 13% of global insurance premiums.

On Munich Re’s estimates the total global primary insurance market could be as large as €4.9 trillion, which if reinsurer capital remained as the same 13% would see it near double to €644 billion. The opportunity here for reinsurers, as specialist underwriters of insurance risk, and the capital markets as growing providers of reinsurance capacity could be enormous.

Of course global growth of insurance premiums also means more global players will emerge, so expect reinsurers from emerging countries to start-up and greater capital markets penetration in regions like Asia and Latin America as insurance and reinsurance grows in profile.

Specifically for the convergence market, where the lines blur between reinsurance and capital markets; given the recent growth, success and increase in profile, there is every opportunity for convergence market players to broaden their reach and influence, both in terms of deploying capacity and raising capital as insurance penetration rises.

A summary of the report is available via Munich re’s press release here.