sigma 3/2024 – World insurance: strengthening global resilience with a new lease of life
Prevailing economic conditions have given insurance business a new lease of life. Economic resilience, reflected in slowing but still robust economic growth, and high interest rates are driving much-improved industry profitability. An insurance sector in healthy earnings mode will attract more capital. This, in turn, will drive industry growth and expand risk transfer capacity, enabling the industry to contribute more to narrowing existing protection gaps in many parts of the world.
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The key takeaways of this sigma are:
- Today's higher interest rates have transformed the operating environment for insurers, most notably for asset-intensive business, from low yields and lows returns to one of higher yields and higher returns.
- We estimate an aggregate 15% improvement in profitability for the life insurance sector across major and advanced markets, with an expected uptick in life savings products as a result of stronger investment returns.
- We also see stronger results in the non-life sector, with newly-underwritten business benefitting as the effects of high interest rates come through, and also due to improved investment returns.
The insurance industry has reached a new equilibrium. The global economy has surprised on the upside, which should drive more demand for insurance.
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Growth resilience
The world economy has shown to be more resilient than widely anticipated. Recession fears have faded, and in real terms the pace of growth is not far off the 2.8% average of the past two decades. This year, and for the third year running, economies in emerging Asia (excluding China) will be the main engine of global growth.
The economic environment is supporting the insurance industry
The prevailing economic backdrop has generated a new and favourable operating environment for insurers. Steady growth, strong labour markets, rising real incomes as inflation moderates from recent highs, and higher interest rates are driving and will continue to drive demand for insurance. At the same time, the higher interest rates are supporting industry profitability.
Insurance markets set for growth
The insurance markets demonstrated recovery in 2023, in large part due to a return to positive premium growth in the life sector. This year, still-strong labour markets and improving real wages will underpin demand for both life and non-life insurance, while in life, higher interest rates will fuel strong sales in fixed-rate savings business.
We estimate that global life premiums will grow by 2.9% in real terms in 2024, well above the annual average of the previous decade (0.8%), and by 2.7% in 2025. In non-life, rate hardening, especially in personal lines, will drive growth. Global non-life premiums will grow by an estimated 3.3% in 2024 and slightly slower (forecast 3%) in 2025, as insurance prices moderate alongside an easing in (claims) inflation.
Life insurance: a new lease of life
In addition to a recovery in premium growth in life insurance, we see a strong 15% gain in sector profitability this year, driven by a 14% increase in investment income as a result of the higher interest rate regime that now prevails. For many years, life insurance business has been in the doldrums due to the very low interest rates in place since the global financial crisis (2008-09) and until after 2021.
A notable development of the now higher interest rate environment will be a marked turnaround in life insurance business, in the advanced markets in particular. We estimate that in absolute terms, the advanced markets will contribute about half of all additional life premiums over the next 10 years, a significant improvement from the 9% in the low-interest rate decade before the pandemic. The contribution of incremental premiums from advanced Asia Pacific and western Europe to global volumes will turn strongly positive, having been negative.
Non-life insurance: healthy earnings trend to continue
The profitability of non-life business remains on an upward trend. After rising to 6% in 2023, we estimate that sector return on equity will improve to about 10.0% in 2024 and 10.7% in 2025, with progress on both the underwriting and investment fronts. We see significant improvements in underwriting results.
Specifically, the profitability of newly-underwritten business is much higher than legacy across most lines of business, due to the full benefits of higher interest rates coming through. Average investment returns will also improve, albeit more gradually. We forecast an improvement in investment yields to 3.6% in 2024 and 3.9% in 2025 as bond portfolios move away from pre-pandemic compositions.
Life insurance sector growth 2023, by market
Life insurance premium volumes in advanced markets were down 1.1% in real terms last year, an improvement from the 4.7% slump in 2022. This was due to declines in both advanced Asia Pacific and western Europe, as high inflation eroded real growth and reduced disposable incomes. Emerging market life premiums were up 8.4%, mostly driven by China, where growth recovered to 12.5% from 2.0% in 2022 on the back of strong sales in saving products.
Non-life insurance sector growth 2023, by market
Non-life insurance premium volumes in advanced markets grew by 3.6% in 2023, boosted by price increases in personal and, to a lesser degree, commercial insurance lines. The markets in emerging economies grew by 5.3% in 2023, slightly below the 5.9% average level seen in the previous decade. Below-trend economic growth in China, which accounts for half of emerging markets' total premiums, was the main drag.