Life insurance business expected to be challenging in advanced markets, says Swiss Re

By Susan Yellin | September 24 2018 07:00AM

Global life insurance premiums are expected to improve around the globe over the next few years, with markets like China growing at a faster pace than their “advanced country” cousins, according to a Swiss Re report. Closer to home, Canada should see life premium growth improve this year and next but will remain below pre-crisis levels.

However, profitability remains a concern because of low interest rates that affect investment returns, increased competition and regulatory changes.

Emerging markets

Nevertheless, in terms of absolute volume for life insurance, advanced markets like Canada, the U.S. and Britain, are expected to contribute around half of the additional future annual premium income over the next five years. The life insurance business is expected to be “challenging” among advanced markets, but strong in emerging ones, according to the report.

The life insurance sector generally has had financial troubles since the global recession of 2008-2009 and hasn’t been able to fully recover. Overall economic growth is a key determinant for the insurance markets.

“Well-documented factors, such the depressed economic environment, stagnant wages combined with low interest rates and changing solvency regimes made traditional savings products with interest rate guarantees both unattractive for consumers and life insurers,” states the report.

“Unless life insurers find new ways to profitably offer attractive life insurance savings products, the downturn of the life market could continue for some time.”

But that all depends on where you are. The insurance markets in emerging countries, for example, have solidly outperformed. Much of that is expected considering these countries have not been as steeped in insurance as more advanced economies.

“Also, many emerging markets are in the sweet spot of growth, where individuals and companies see incomes, revenues and assets to be insured grow, which in turn boosts the demand for insurance. [And] in the case of China, the development of insurance markets is strongly supported by government policies.”

In the United States, life premiums fell 4 per cent in 2017 mainly because of individual annuities. Variable annuities in particular, and retirement savings products in general, have been hurt by big players leaving the business, a lower supply of products with guarantees and changes in the U.S. Department of Labor’s fiduciary rule. The rule, intended to impose a fiduciary standard on financial advisors and insurance companies in their handling of certain retirement accounts, had become the subject of harsh scrutiny over the last two years. In a June 21st decision, the 5th Circuit Court of Appeals issued an order vacating the rule

Canadian market

In contrast to the U.S., Canadian life insurance premiums remained “moderately positive” at 1.6 per cent, states the report. A big hit came to permanent individual life sales when tax exemption rule changes came into effect at the beginning of January 2017 and business dropped sharply after that.

Annuities saw some small gains last year, compared to a contraction the year before. And while group sales strengthened, profitability was down for Canadian life insurers because of stronger expense growth.

“In our view, dynamic economic growth in the U.S., spurred by fiscal stimulus, should support insurance demand in 2018,” states the report. “The rise in interest rates, driven by monetary tightening should slowly strengthen insurers´ investment income and profitability. … In Canada, premium growth should improve in 2018, and reach trend growth by 2019. Profitability is forecast to recover in 2018, but remain well below pre-crisis levels.”

The report notes that many Canadians have been victims of reduced benefits from pension plans, potentially opening up an area for life insurance companies to step in, especially with products that have tax incentives.

Asian markets

Areas where growth has been greatest is in emerging Asian markets where premiums are rising faster than GDP. Life premiums rose 21 per cent in China, which is the second largest insurance market globally after the United States. They also rose 27 per cent in Indonesia and increased 24 per cent in Vietnam. In India, life premiums grew by 8 per cent.

“However, as equity volatility has increased and regional central banks may need to adjust rates, profitability is expected to revert from last year’s high level,” cautions the report.