The Swiss Re Institute says stronger profitability enables the non-life insurance industry to increase capital and capacity to match growing demand as risks evolve. The benefit of higher interest rates on investment results, meanwhile, far outweighs the associated higher cost of capital.
“The non-life insurance industry is adjusting rapidly to the new higher interest rate era ushered in by the most intense monetary policy tightening since the 1980s. Swiss Re expects 2023 to be a transition year,” they write in a statement. They add that the industry continues to adapt prices to an elevated risk landscape while higher portfolio yields boost net investment income. At the same time, profitability is expected to remain lower than their increased cost of capital. “This suggests further rate hardening and constraints on capacity are likely to continue throughout 2024.”
The company’s group chief economist, Jérôme Jean Haegeli adds: “Our analysis shows that non life insurers’ profitability is set to improve strongly in the coming years as higher interest rates and rate hardening more than offset higher claims cost from persistent inflation. This will be vital to enable industry resources to grow at a rate that will match global demand for insurance protection.”
The hard market conditions are especially expected to continue in property catastrophe lines, where demand is rising alongside replacement values.
“Higher growth in industry capital is needed to narrow large protection gaps worldwide. Swiss Re Institute estimates that, for example, the US property and casualty insurance industry capital has grown by five per cent annually on average for the past 10 years. During the same time, the natural catastrophe protection need has grown about seven per cent per year, on average,” the institute writes in a statement. “Given higher demand, elevated risks and limited capacity, more efficient use of capital becomes key for primary non-life insurers.”
Swiss Re’s chief underwriting officer for property and casualty reinsurance, Gianfranco Lot concludes saying “in the current capital-demanding environment, reinsurance can enable primary insurers to write new business more efficiently,” he states. “The elevated risk landscape calls for more frequent adjustments to underwriting practices. Focusing on portfolio quality and margins as well as contractual clarity in the whole industry will be key in this respect.”
