Premium growth in reinsurance lines of business is expected to lag behind primary insurance premium growth over the next few years, according to the world’s largest reinsurance firm Munich Re in its latest insurance market outlook report.
Munich Re published its latest report looking at the insurance and reinsurance market today and in it says that insurance premium growth is expected to strengthen as the economic recovery in industrialised nations accelerates. At the same time insurance premium growth is expected to remain high in emerging economies over the medium to long-term as well, however some deceleration is expected due to a cooling of some emerging economies, said the reinsurer.
Munich Re’s current Insurance Market Outlook 2014 anticipates real overall growth in primary insurance premiums, adjusted for inflationary and currency effects, of 2.8% this year and 3.2% in 2015, which corresponds to nominal growth (in euros) of 3.9% in 2014 and 4.6% in 2015.
“After three years of relatively low growth rates, global premium growth is slowly picking up once again,” commented Michael Menhart, Chief Economist at Munich Re. “Above all, this is due to economic recovery in the industrial nations.”
The cooling in emerging economies means that industrialised nations are once again a major contributor to global premium growth, particularly in property casualty insurance. “In the long term, however, we expect that emerging countries will continue to become more important for the global insurance markets,” added Menhart.
Looking a little further out, towards 2020, shows that emerging economies will have grown their share of global insurance premiums, with Asian countries share of global premiums expected to increase from 9% over the past year to 14% by 2020. The Chinese market, which with premium volume of around €210bn in 2013 was already the fourth-largest primary insurance market, is expected to more than double by 2020, becoming the third-largest market worldwide.
Significant growth is still forecast for the U.S. insurance market, perhaps surprisingly. Munich Re says that its premium volume will increase to more than €1,200bn by 2020, making the U.S. market more than twice as large as the second-largest market, Japan, and more than two and a half times the size of the Chinese market.
By 2020, Munich Re’s analysis forecasts the largest absolute growth in premiums in property-casualty insurance will be in the USA, followed by China. Conversely, China will see the largest absolute growth in life insurance premiums, ahead of the USA.
That is an encouraging forecast for the insurance-linked securities (ILS) and collateralized reinsurance market, as growth in U.S. insurance premiums will no doubt result in an increased demand for reinsurance protection.
However, reinsurance premium growth is expected to lag behind that of primary insurance. Some lag is to be expected but Munich Re highlights the current cyclical price pressures in the property-casualty sector, which it says are curbing premium growth.
Up to 2020, Munich Re expects average growth in global reinsurance markets in real terms of a little above 2% per year (nominally around 4% p.a. on a euro basis), so lagging behind its primary cousin.
Munich Re explains:
In the long term, reinsurance should also benefit from the growth momentum of the global economy and the primary insurance sector. In the P&C segment, however, cyclical pressure on rates and increasing retentions will have a dampening effect on global premium growth in the short term. Last but not least, cover against natural hazards in the emerging countries should have a noticeably positive effect on demand for reinsurance in the medium to long term. In life reinsurance, the use of reinsurance as a capital substitute is one of the options offering additional potential. In the long term we expect real growth in global reinsurance to average just over 2% up to the year 2020.
Chairman of the Board of Management Nikolaus von Bomhard, who is responsible for the Economic Research unit, stated; “Munich Re’s business strategy, with its combination of reinsurance and primary insurance under one roof, remains focused on anticipated market developments. This means that as well as operating in our high-volume core markets, we also want to continue to grow in emerging countries, where it has been proven that increased risk transfer via insurance generates substantial economic benefits.”
The growth rate of reinsurance premiums could be affected by the occurrence of major catastrophe loss events, significant advances in risk modelling particularly in emerging economies or by reinsurance market capital trends. The latter is already affecting premium growth, but Munich Re’s forecast suggests that this impact will not last and actually reinsurance demand is set to continue growing even in the most mature insurance markets in the world.
That is a comforting outlook for traditional reinsurers and promising for ILS managers and insurance linked investors. Premium growth means more opportunity for deployment of capital, for both traditional and non-traditional players, something that remains an issue in the current environment of very active capital management.