Global insurance industry to grow in 2011

Growth in the insurance and reinsurance industry will continue to accelerate in 2011, benefiting from economic recovery and further improvements in financial markets, say economists at reinsurance giant, Swiss Re, warning at the same time that renewed financial turmoil could derail the global economic recovery.

Expected growth for non-life insurance in developed economies is 3% after inflation and in emerging markets between 7% and 8% after inflation. Non-life premium rates have been deteriorating now for several years.

“Current rates are not sustainable even when interest rates start to correct. A correction in premium rates is overdue but we may have to wait until 2012 for that to materialise,” said Swiss Re’s Chief Economist, Thomas Hess. The primary life and health sector is recovering. The primary life insurance industry will be back on track in 2011 though low interest rates will continue to weigh on profitability.

Non-life reinsurance is currently faring better than the primary non-life insurance industry. Insured losses in 2010 are close to the long-term average for the industry – high losses during the first half of the year were offset by a benign US hurricane season.

Growth expectations for the non-life reinsurance industry are moderate but profitability is expected to erode as rates decline. Life reinsurance is expected to grow moderately overall, with stagnation in industrialised countries offset by annual growth of around 10% in emerging markets. Longevity and large transactions are particularly interesting potential growth areas for life reinsurers operating in mature markets.

Profitability is set to remain under pressure, however, since investment returns are dampened by low interest rates which remain a key challenge for insurance companies. (Re)insurers will need therefore to maintain underwriting discipline. The risk of over-regulation in the insurance industry also remains high.

The EU Solvency II regulatory initiative is likely to lead to higher capital requirements for many insurers if the implementing measures stray too far from the original economic-based principles.

Other challenges are posed by a confluence of forces – mark-to-market accounting, risk-free discounting, and heightened capital, regulatory and ratings standards – that is pressuring investors to allocate more to lower-risk, lower-return assets.

Regulatory standards that require insurers to invest more in such assets could ultimately lead to higher premiums for policyholders.

The cost of reduced insurance asset diversification will also eventually be felt in the real economy. Furthermore, a risk remains that the economic recovery will be derailed by renewed financial market turmoil, resulting in part from a potential widening of the Euro zone debt crisis.