Resilient Insurance Industry Recovering Quickly from Pandemic's Impact

A recovering global economy, increased rates, and growing demand for insurance products are pushing global insurance premium volume higher, according to a recent report from the Swiss Re Institute.

Meanwhile, premiums fell less during the COVID-19 pandemic and are recovering more quickly than during the global financial crisis of 2008–2009, according to the July 14, 2021, Swiss Re sigma report, titled World Insurance: The Recovery Gains Pace.

An increased awareness of risks coupled with the strongest rate hardening in 20 years will push this year's total non-life insurance premium volume to a level 10 percent above that prior to the COVID-19 pandemic, Swiss Re projects.

As increased economic activity drives insurance demand, Swiss Re projects global premium growth of 3.3 percent this year and 3.9 percent in 2022. By the end of 2022, total global insurance premium volumes will top $7 trillion for the first time ever, according to the report.

The Swiss Re report credits the swift rollout of vaccines and large-scale fiscal stimulus by many governments for the strong recovery from the economic impacts of the COVID-19 pandemic. The report notes, however, that uncertainty remains, both over the pandemic and the economic recovery.

Swiss Re says it's forecasting "historically high" global real gross domestic product (GDP) growth of 5.8 percent this year, after a 3.7 percent downturn during 2020. The global growth figure includes anticipated 6.5 percent GDP growth in the United States and 8.3 percent in China.

"However, uncertainty around the emergence of more transmissible COVID-19 variants and the ability of vaccines to keep the pandemic under control suggests that the recovery may be more uneven and protracted than our base-case forecasts," the report says.

The report notes that new developments in the COVID-19 pandemic could slow global economic growth momentum. In addition, considerable uncertainty remains regarding whether countries' vaccination rates will be sufficient to stop the spread of the virus as new variants emerge.

New variants that cause more severe illness, result in vaccines or treatments being less effective, or cause new waves of infections, hospitalizations, and deaths could lead to renewed lockdown measures that slow or halt economic growth, Swiss Re notes.

"Current economic growth is also supported by the large scale of stimulus, and could slow if real economic activity recovers less strongly than expected, or central banks normalize (taper) monetary policy earlier," the report says. "We see a roughly 20 percent possibility of downside risks to global growth."

The insurance industry demonstrated resilience through the pandemic, the report suggests. The downturn in premiums was less severe during the pandemic than during the global financial crisis of 2008–2009, and Swiss Re expects the premium recovery from this latest crisis to be faster.

Swiss Re notes that while global GDP declined by 3.7 percent in 2020, non-life insurance continued to expand with premiums increasing 1.5 percent to $3.49 trillion. "Advanced market premiums grew faster than emerging markets for the first time in 25 years, partly driven by strong commercial line rate hardening," the report says.

Swiss Re says downside risks to its premium recovery projections include a more protracted economic recovery due to soft global demand, ineffective government stimulus efforts as debt levels constrain policy, the possible emergence of new COVID-19 variants, and a sluggish labor market recovery.

The pandemic has resulted in an increase in risk awareness that's one factor in increased demand for insurance products, according to the Swiss Re report. Among other things, pandemic-related business disruptions have increased awareness of supply chain and cyber risks.

The report says that the highest premium growth this year and next is expected to be in commercial property-casualty lines, including workers compensation. Premium volume in those lines should increase 6 percent this year and 5 percent in 2022, Swiss Re says, "supported by significant rate improvements and the economic recovery."

Commercial lines pricing should continue to harden in 2021, Swiss Re says, and in 2022 at a slightly slower pace. Underlying drivers for the market hardening such as increasing claims severity and a reduction in re/insurer risk appetite driven by modeling uncertainty remain in place, Swiss Re says.

Despite the uncertainties, the Swiss Re report suggests the demand for insurance will benefit from anticipated economic growth, though inflation is a concern.

"Inflation is a key medium-term risk in non-life insurance," the report says. "We expect non-life premium volumes to grow 2.8 percent this year after 1.5 percent expansion in 2020, as strong price increases in commercial lines remain the dominant tailwind."

The report says that Swiss Re does not expect current, transient pandemic-driven spikes in inflation to have a major impact on insurers, though longer-term tolerance of inflation by governments and central banks is a risk, particularly for longer-tail liabilities that might be exposed to increasing claims.

"We expect central banks to tolerate higher inflation to support the recovery," the report says. "This is a growing risk for insurers that may make non-life claims more costly, particularly for inflation-sensitive longer-tail liabilities."

In addition, social inflation—societal trends increasing claims severity—will likely remain a challenge for US insurers, Swiss Re says.

"We expect inflation in all major markets to be higher this year than last," the Swiss Re report says. "In the US, we anticipate that it will exceed the 2 percent target both this year and in 2022, with risk skewed to the upside due to the possibility of economic overheating as reopening causes consumer spending to accelerate."

Inflationary pressures will likely prompt the US Federal Reserve to start tapering its monetary stimulus in early 2023, Swiss Re says, which could lead to volatility in financial markets.