Insurance Premiums To Top $7 Trillion in 2022 as Rates Continue Upward

Global insurance premiums should exceed $7 trillion for the first time by mid-2022, according to a new sigma report from the Swiss Re Institute.

The Swiss Re report, "Turbulence after lift-off: global economic and insurance market outlook 2022/23," says global insurance premiums should increase by 3.3 percent in 2022 and 3.1 percent in 2023. The growth will be driven by rising risk awareness in both the life and non-life insurance sectors, as buyers react to the COVID-19 pandemic and above-average natural catastrophes.

The insurance industry has demonstrated strong resilience to the COVID-19 pandemic, and in 2021, global direct premium written should be 8 percent above 2019's level, the report says.

The sigma report notes that the pandemic experience highlighted the important role insurance plays in absorbing risk during crises. The pandemic represented a significant global shock, with severe and costly natural catastrophes adding to its impact in 2021.

"The re/insurance industry's timely provision of financial relief to households, businesses, and governments has enabled a fast and effective rebuild and recovery," the report says. "The experience has reiterated the supportive role the re/insurance industry plays in strengthening global resilience."

At the same time, global supply chain disruptions underscore the need for better protection to improve the resilience of societies, the report notes.

"Insurers continue to upscale their digital technology and data analytics capabilities to provide better understanding of supply chain risks and design innovative covers, particularly in the realms of contingent business interruption and nonphysical damage solutions," the sigma report says.

Extreme weather events have also given the risk of climate change additional prominence, the report suggests, as above-average insured losses from natural catastrophes "add urgency to the race to net-zero carbon emissions."

The report notes that 2021 was marked by extreme heat, cold, drought, and water, and estimated that 2021 will be the fourth costliest year in sigma's record-keeping for the insurance industry. "Flood is the year's most prominent secondary peril, from Europe to China and the United States," the report says. "Insured claims from secondary perils have been rising for a decade and represent the majority of insured losses globally each year, with climate change a key driver."

That trend is likely to continue, Swiss Re says, due to urbanization, the concentration of assets in exposed areas, and the climate change risk of more intense precipitation as rising temperatures increase moisture in the atmosphere.

"Insurance plays a crucial role not only in absorbing catastrophe losses, but also in supporting investments in resilient infrastructure to mitigate the impacts of volatile weather conditions," Swiss Re says.

The report also suggests that increasing inequality heightens the risk of social inflation. "While everyone suffers, the pandemic has disproportionally affected some lower-income segments and we expect it to worsen social trends such as inequality," Swiss Re says. "This has ramifications for US insurers, which face rising claims costs higher than general economic inflation in commercial casualty lines from litigation case awards."

The factors driving social inflation are noneconomic, the report says, and the trend is heavily influenced by jurors' attitudes to such issues as social injustice, inequality, and negative sentiment toward corporations. "A policy reset that supports greater societal inclusion and cohesion could help to address this divergence in attitudes," the sigma report says.

"The United States has experienced a new episode of social inflation since about 2015, with liability claims growth trending higher," the report says. "This is driven by factors such as the trial bar increasingly using psychology-based strategies, data analytics, digital media advertising, and litigation funding. Other factors relate to jurors' attitudes to issues like social injustice, rising inequality, and negative sentiment toward corporations."

Swiss Re expects the social inflation trend is likely to continue over the next few years, the sigma report says.

The insurance sector's profitability was challenged in 2021 by COVID-19-related claims, above-average catastrophe losses, and high inflation, the Swiss Re report says, though adding that the reinsurer expects a "strong rebound" in 2022.

"Non-life underwriting profitability should recover fast as insurers internalize expectations of higher inflation, and rates in commercial lines rise again," the report says.

Insurers' investment returns will be challenged by ongoing low interest rates that don't fully compensate for inflation, according to Swiss Re, putting additional pressure on underwriting discipline.

While saying that it sees a positive outlook for economic growth, Swiss Re suggests that "the strongest recovery momentum is behind us." The report sees inflation as the number-one near-term macro risk.

Price increase momentum will continue in commercial insurance lines, according to Swiss Re. The report says non-life premiums saw a 15 percent year-over-year increase during the third quarter of 2021, with the upward trend broadening across lines of coverage and regions.

Commercial property insurance premiums increased 9 percent in the third quarter, Swiss Re says, while financial and professional lines saw increases of 32 percent across almost all regions.

The report suggests that property catastrophe insurance rates should increase in 2022 after another year of high losses. The report says Swiss Re expects 2021's insured catastrophe losses to top $100 billion. "US Hurricane Ida in August provided a powerful reminder of the loss potential of primary perils in densely populated areas," the report says.

The report indicates that flood is the peril most likely to increase as a result of climate change, with most climate models showing extreme precipitation events that cause floods becoming more intense.

Casualty rates should also increase due to social inflation and low interest rates, according to Swiss Re. Casualty claims severity may continue increasing as a result of increases in health care, wage inflation, and social inflation, the report says.

Overall, "We see sustained, but moderating rate hardening in commercial lines into 2022," the Swiss Re report says. "Our positive view on rate increases into next year is based on inflation-induced higher claims developments in all lines of business, and a still significant profitability gap in non-life as witnessed by the average (return on equity) of 6.2 percent in 2021."