Slower Economic Growth, Geopolitical Factors Cloud Insurance Outlook

An anticipated slowdown in global economic growth coupled with geopolitical uncertainty dampens the outlook for the primary insurance industry in 2024–2025, according to the Swiss Re Institute.

In a new sigma report, Risks on the Rise as Headwinds Blow Stronger: Global Economic and Insurance Market Outlook 2024–25, Swiss Re forecasts global real premium growth at 2.2 percent annually on average for the next 2 years.

That would be below the pre-pandemic trend of 2.8 percent in 2018–2019 but above the 1.6 percent average over the past 5 years, the November 21, 2023, report says.

"Profitability is recovering and underwriting gaps closing as investment returns increase with high interest rates, but we estimate the industry will not earn its cost of capital in 2024 or 2025 in major markets," Swiss Re says. "Events such as the Middle East war may hurt insurers' capital positions through channels such as inflation and market volatility."

Swiss Re expects the global economy to slow in 2024 as the impacts of cumulative monetary policy tightening intensify and the growth trends of 2023 fade. The outbreak of war in the Middle East adds additional risks to the outlook, the report says.

Meanwhile, there is a divergence among major economies. Swiss Re says. While the US economy continues to grow, the economy in Europe is stagnating and might already be in recession in some countries. At the same time, China is struggling with structural challenges in its domestic economic growth, the report says.

The sigma report says Swiss Re expects the insurance industry's premium growth to rebound to 2.7 percent in 2025, supported by lower inflation and central bank interest rates. "Still, in developed markets both inflation and interest rates will likely stay higher than previously anticipated in this decade, and risks are skewed to the upside," the report says.

Non-life insurers are facing challenging claims dynamics, Swiss Re says, with the frequency and severity of claims increasing despite declines in economic inflation.

The pace of claims growth in liability lines poses challenges to the insurability of those risks, the report says. Meanwhile, Swiss Re says it estimates that natural catastrophe losses are on track to reach $100 billion in 2023—the fourth consecutive year of losses reaching that level and the sixth year since 2017 on an inflation-adjusted basis.

"We anticipate further hard market conditions in 2024 at least," the Swiss Re report says.

Swiss Re estimates 3.4 percent real premium growth worldwide in the property-casualty segment in 2023, above its forecast for 2024–25 of 2.6 percent. "This reflects a significant repricing of risk, especially in claims-impacted lines," the sigma report says.

The sigma report says Swiss Re expects economic inflation's impact on claims to ease further over 2024 and 2025. "As it does, more structural trends such as social inflation and increasing natural catastrophe exposure are likely to return to the heart of claims dynamics," the report says.

The sigma report says that (geo)politics plays a dominant role in driving Swiss Re's outlook for the economy and the insurance market. "The war in Israel adds new, potentially non-linear, downside risks, with potential energy price shocks the key risk channel to the global economy," the report says.

According to the sigma report, an adverse scenario in which the Middle East conflict expands to include major regional oil producers could add 2.4 percentage points to Swiss Re's global inflation forecast. Swiss Re's current baseline forecast for global CPI inflation is 5.1 percent in 2024 and 3.4 percent in 2025, the report says, though price pressures will likely remain volatile.

At the same time, more assertive industrial policies emerging in various countries have long-term implications, the report says.

"Major government initiatives to galvanize sectors from semiconductors to clean energy may add structurally to inflation, fiscal deficits, and interest rates if implemented," the sigma report says. "The insurance industry is a key partner to such projects and we see the potential for growth in commercial lines of business from liability to property, engineering, trade credit, and surety as these initiatives take shape."

The report notes the potential role those lines could play to support potential new investment and construction activity.

"Property, engineering, and liability insurance in particular can serve to cover losses caused by accidents, natural disasters, or professional negligence in the construction phase of infrastructure and industrial projects, and machinery and equipment breakdowns in the operational phases," the Swiss Re report says. "Surety bonds can cover completion risk in jurisdictions, such as the [United States]. Marine insurance may benefit from the reshaping of trade lines, while trade fragmentation is likely to raise the profile of counterparty risk and need for trade credit insurance. As long-term investors, insurance companies can also support infrastructure financing."

There are a variety of challenges inherent in governments' industrial policy initiatives, however, Swiss Re notes.

One is that government budgets are typically constrained by debt levels and election cycles, the report says. For example, a divided Congress in the United States after the 2024 presidential election could repeal major elements of current US government spending plans.

Successful and sustainable implementation of industrial policy initiatives requires corporate funding alongside government spending that might not materialize, while the private sector also faces a major challenge in reorganizing global functions such as research and development and operations, training workers, and building local technical expertise, the report notes. Consequently, long-term continuity in government incentives is essential for these industrial policies to be implemented by the private sector, Swiss Re says.

In addition, even if the new industrial policies are implemented, investments could be misallocated, resulting in lower productivity increases than projected, according to Swiss Re. Meanwhile, government efforts to "pick winners" or reallocate resources can create inefficiencies or raise debate about protectionism. And, industrial policies can intensify competition among allies, creating the risk of a "subsidy race," the report says.

Finally, moves away from free trade and shifting production to higher cost locations could add to structural inflation, the sigma report says.