Market Analysis Sees Increased Rate Hardening over Next 2 Years

With the global insurance industry facing a variety of pressures, rate hardening will gain momentum in 2023 and 2024, with hard market conditions likely to persist for several years, according to the Swiss Re Institute.

In a sigma report, titled Economic Stress Reprices Risk: Global Economic and Insurance Market Outlook 2023/24, Swiss Re suggests that as inflation pressures lessen over the next 2 years, insurers will benefit from higher interest rates that support investment results and profitability.

"Inflation remains the number one industry concern," the report says. "We forecast high inflation in cost components relevant for insurers, such as construction and healthcare that suggests insurers' claims and costs could rise markedly in 2022 and 2023, even without considering changes in claims frequency and natural catastrophe activity."

The November 17, 2022, report says Swiss Re expects total global insurance premiums to decrease slightly this year, with real premium growth recovering but remaining below normal trends over the next 2 years.

For non-life insurers, the combination of slowing global growth and inflation is likely to reduce real premium growth to less than 1 percent this year, the sigma report says, with premium growth recovering as inflation eases and the hard market continues.

"Global non-life insurance return on equity (ROE) is expected to halve to just 3.4 percent in 2022 as underwriting performance and investment results are weaker, but rebound to a 10-year high in 2024 as the interest rate tailwind and potential rate hardening take effect," Swiss Re says.

Over the next 12 to 18 months, Swiss Re expects major economies like the United States and Europe to move into "inflationary recessions."

"Without considering the additional spillover risks of financial instability, the euro area is likely to face a deeper recession than the [United States] due to the energy and cost-of-living crisis, with leading indicators already in recessionary territory," the report says. "In the [United States], it will likely be the aggressive monetary policy tightening from the Federal Reserve (Fed) that tips the economy into recession, although this will likely materialize later and be more moderate than in the euro area."

The economic recovery will likely be slow, stretching past 2023, Swiss Re says. In addition, recoveries will likely be weaker than that after the COVID-19 recession, which was boosted by large-scale monetary and fiscal stimuli in economies around the world, along with pent-up household demand, and savings, the report says.

Global inflation will likely remain volatile and above historical averages in 2023, though declining year on year, according to Swiss Re. "The fall in inflation momentum may also be slower if central banks are forced to prioritize addressing financial instability and increasing fiscal stresses at the expense of fighting against inflation," the report says.

As inflation persists, fiscal relief that aimed at eliminating cost-of-living pressures would sustain normal insurance demand, Swiss Re says, though without sufficient relief for consumers and businesses insurers could experience demand headwinds.

Still, governments emphasizing fiscal policy over monetary policy could keep inflation higher and more volatile, which would have a negative impact on non-life insurers, Swiss Re says.

"First, higher and more volatile inflation impacts claims and repricing," the sigma report says. "When non-life insurers' ability to reprice is constrained by market competition or political headwinds, underwriting margins would be expected to come under pressure. There, those insurers with the greatest reserve buffers would be more resilient."

In addition, there would be distinctions between exposure to property versus casualty business, Swiss Re says. In Europe, the report says, non-life insurers with a greater share of property business are more exposed to supply-driven inflation, while those with a greater share of casualty lines would be more exposed to wage-driven inflation.

Swiss Re says the insurance industry is engaging in major mitigation measures in response to the underwriting and investment pressures it faces. "We expect hard market conditions to continue for some years," the report says.

"In non-life insurance, we see weak real premium growth this year, strengthening in 2023 and 2024 from anticipated lower inflation and a hard market for commercial lines," the report says. "The Florida landfall of Hurricane Ian adds profitability pressure to non-life insurers already feeling the effect of higher claims severity this year."

Inflation, however, remains the dominant concern for insurers, the report suggests. Both inflation volatility and its absolute level will challenge insurers, as their underwriting will have to address the increased uncertainty in their outlooks.

Noting that both businesses and individuals tend to reduce demand for discretionary goods and services when prices increase, Swiss Re suggests compulsory insurance lines such as auto or professional liability are likely to fare best in maintaining demand. "Large firms may use captive insurance to self-insure as an alternative to commercial insurance markets," the report says.

Inflation also will erode insurers' profitability, Swiss Re says, with underwriting results suffering as inflation increases the cost of claims and expenses. "Non-life is most affected at present as high inflation in car parts and construction negatively impacts motor and property claims," the report says. "Higher fuel prices also have an effect as costlier transportation adds to the final cost of claims."

In addition, long-tail liability business will be more affected by wage and healthcare inflation over the long term, Swiss Re says, with the industry also exposed to social inflation stemming from larger court judgments awarding larger financial awards to plaintiffs, as well as legislative changes.

Significant claims inflation in commercial lines of business this year will fuel new rate hardening momentum over the next 12 to 18 months, the report says.