Insurance market outlook

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1 Munich Re Economic Research 2 May 2013 Global economic recovery provides stimulus to the insurance industry long-term perspective positive as well Once a year, MR Economic Research produces long-term forecasts for the global insurance markets. These forecasts are based on underlying economic data, our own models of the insurance industry s growth potential, external market analyses and, for the P&C segment, on estimates from the Client Management teams. This insurance market outlook provides an overview of these forecasts. Information on the macroeconomic prospects is available in our current Economic Outlook "Global economy 2013: Outlook still clouded for the moment ". 1 Overview Growth in PI premiums slightly above global economic growth and growth in RI premiums lower than global economic growth for the period up to 2020 In line with the improved prospects for the global economy over the course of this year and especially next year, the global primary insurance industry is likely to see a rise in premium growth. After only modest growth in primary insurance premiums of about 1% in real terms (i.e. adjusted for inflation) in 2012, we are expecting growth of just under 3% in 2013, and as much as 3.5% in The main reason for the improvement in the outlook for primary insurance is that life insurance is expected to recover, having seen a fall in premium income in real terms in the last two years as a result of a number of one-off factors. However, the appreciable growth in reinsurance premiums seen around the world in 2012 is not expected to continue at a similar level in the coming years. Real growth, which was still 3.3% in 2012, thanks to, amongst others, rate increases in P&C business following the major natural disasters in the previous year, is expected to be only around 1% in 2013; we anticipate a slight improvement in 2014, with growth reaching roughly 2¼%. Nonetheless, in the subsequent years up to 2020, global growth could reach between 2.5% and 3.0% in real terms, which would put it somewhat below the figure for economic growth. In the long term, emerging markets with the BRIC countries leading the way will become more and more significant from the point of view of premium volumes. In many of the emerging markets in Asia, for example, we expect to see average annual real premium growth in P&C and especially in life primary insurance of more than 10% for the rest of the decade. Latin America and eastern Europe are also forecast to perform well. Nonetheless, the majority of all primary and reinsurance premiums around 70% will still come from industrialised countries in 2020.

2 Page 2/8 Primary insurance recovering already in 2013 despite a still hesitant revival in global economic growth 2 Short-term outlook for 2013/2014 Increasing momentum expected in primary insurance reinsurance to grow by significantly less than in 2012 The expected growth pick-up in major industrialised nations an increase in growth rates is forecast for the second half of 2013 and 2014 will quite likely only gradually provide noticeable stimulus to insurance demand. For a number of reasons, premium growth in global primary insurance business is expected to be already higher in 2013 compared to last year. However, there will be marked differences in growth in demand for insurance in different regions and sectors. Growth in P&C business has already been stronger in 2012 due to positive market cycle effects, and a further modest increase in growth dynamics may well continue over the next two years. Real growth rates in this segment are expected to be more or less in line with economic growth in amount of 3.4% in 2013 and 3.6% in 2014 on a global average. After contracting in real terms over the last two years, life insurance is expected to return to growth in 2013 and The negative rates of growth in 2011 and 2012 were in general attributable to low interest rates and volatile stock markets, but also driven by detrimental developments in several large markets, e.g. a significant fall in single-premium business (e.g. Italy and the UK) or changes in sales structures (China). For 2013 and 2014 we expect to see growth prospects return to normal, assuming that these one-off factors will disappear. Overall, we expect worldwide growth in primary insurance premiums of just under 5% in 2013 on a euro basis (2.8% in real terms, i.e. adjusted for inflation) and close to 6% in 2014 (3.6% in real terms). Growth in reinsurance expected to be weaker than in primary insurance We forecast reinsurance business to grow by significantly less than primary insurance, particularly in 2013 but also in In 2012, growth in reinsurance premiums was driven in parts by higher rates in P&C business, following heavy losses in 2011, and partly as a result of large-volume deals and in general strong emerging market growth in life reinsurance. However, we expect growth in 2013 and 2014 to be somewhat subdued. This is because primary insurance companies continue to keep larger retentions, and because the fact that there is sufficient capacity in the NatCat and P&C sector overall means rate increases continue to be limited. There is also a likely fall in demand for life reinsurance in certain markets, which high growth in regions such as Asia and Latin America can only offset to a certain extent. Overall, we expect reinsurance premiums to grow by just over 3% in 2013 on a euro basis (1.1% in real terms) and 4.5% in 2014 (2.3% in real terms). Life reinsurance is a larger factor in this growth than P&C reinsurance. Uncertainties in the forecast remain There are a number of uncertainties which cast doubt on these forecasts. These arise partly from the general economic environment the main risk here comes from future developments in the euro area, although stabilisation in the financial markets means this is less of a concern than it was last year. However, unexpected fiscal cutbacks in the USA also represent a danger for the global economy, as do potential international conflicts in east Asia or in the Middle East. If these factors were to lead to weaker economic

3 Page 3/8 growth, this would also have an effect on prospects for the insurance market. However, these economic risks could also provide some limited potential for additional reinsurance business such as solvency-relief transactions. As well as economic uncertainties, there are also uncertainties specific to the insurance market, e.g. the further pricing trend in P&C business. If the trend towards large-volume reinsurance contracts ("capital relief deals") were to continue, for example, this could have a positive effect on growth in the reinsurance market; our forecasts do assume a certain kind of normalisation towards a lower level. Regional differences remain emerging markets are growing strongly, North America is on the path to recovery, but progress in Europe is very slow Emerging markets continue to show great catch-up potential in primary insurance, particularly Life The highest levels of growth in the insurance industry continue to come from emerging markets. There is still plenty of catch-up potential, although in some countries growth rates have now reached their peak or are falling slightly. In Eastern Europe and in Latin American, we expect to see real-terms growth in P&C business of about 6% in 2013/14. In many parts of Asia, such as China, India and Indonesia, real-terms growth rates could be as high as 10% or more. The fact that premium growth in the Asia/Australasia region as a whole may be falling slightly is the result of waning market cycle effects in the saturated Australian and Japanese markets on the one side, and a strong decrease of the savings portions in the South Korean P&C business (currently between 60% and 70% of all P&C premiums) on the other side. In life insurance, we expect 2013/14 to bring even higher levels of real premium growth in many Asian and Latin American markets considerably more than 10%, and over 15% in some areas. In Latin America, the growth of 18% seen in 2012 is now forecast to return to the more normal level of 11% in The extremely strong growth in private pension insurance schemes (nominal growth of 37% in 2012) in Brazil, the largest market in Latin America (with almost 60% of life insurance premiums), cannot be expected to continue at this level in the future. Above-average increases in insurance premiums are also forecast for Africa and, the Middle East, although these markets continue to represent a very low proportion of global premium income (around 2.5%). The situation in Europe is very different here we expect only very moderate growth in life insurance in the short term as a result of the sovereign debt crisis. It is very likely that premiums, adjusted for inflation, will continue to fall in several markets, such as in the peripheral euro zone countries, in We then expect most European countries to see a slow return to growth again in 2014, in line with economic recovery. In North America the expected improvement in the economy should help P&C business, as will the rate increases which have been observed. However, in life insurance we only expect to see modest growth, because of the high level of saturation and changes in the regulatory environment.

4 Page 4/8 Reinsurance cyclical growth effects in P&C business coming to an end; continuing high growth only expected in life reinsurance in emerging markets There is a strong correlation between the forecast growth in reinsurance and expectations for the primary insurance markets namely strong growth in emerging markets and market saturation in industrialised countries. Rate increases in P&C business due to cyclical factors are an exception to this, and were observed throughout the world in 2012, but had a particularly strong effect on the countries severely hit by natural disasters in 2011 (Australia and Japan), and have had an appreciable influence on premium growth over the last year. Given the renewals to date and sufficient overall capacity, we nonetheless do not expect any further positive cyclical effects on premium growth in P&C reinsurance in 2013 and The particularly marked fall in growth rates between 2012 and 2013 in the Asian/Pacific P&C business is attributable, besides a normalisation of growth in the important markets Australia and Japan due to market-cycle effects, to one-off factors peculiar to the Chinese reinsurance market (which has a premium share above 20% within the region). Because a large solvency deal has come to an end, a real decline of more than 3% in premiums ceded is expected in In life reinsurance, it is clear that growth in North America and Europe will be limited, primarily because of the modest prospects for growth in primary insurance. At more than 5% in real terms, the above-average growth in North America in 2012 has been an exception to this. However, this was mainly driven by one-off factors arising from largevolume contracts, in which reinsurance primarily served as capital relief. The fact that worldwide growth of Life reinsurance premiums is nonetheless expected to be slightly higher than in P&C business in 2013 and 2014 is entirely due to high forecast growth in premiums in emerging markets.

5 Page 5/8 3 Long-term forecast up to 2020 Long-term outlook: Worldwide growth in primary insurance remaining higher than GDP growth, with reinsurance growing more slowly The long-term prospects for the insurance markets between now and 2020 are of course subject to much more uncertainty than the short-term forecasts. Important drivers of expected insurance market growth are economic factors such as economic growth, an increase in incomes, and inflation. These factors are expected to provide a stimulus to the insurance industry, primarily in emerging markets. As shown in the diagram entitled "State of development of non-life insurance markets global comparison", as per capita income rises in emerging markets, the penetration ratio in non-life (i.e. P&C and health) business that is non-life premiums as a proportion of GDP increases in line with the global trend. The reason for this is the high level of additional demand from companies for property and liability coverage, and, in the light of a rapidly growing middle class, from private households, both in property/casualty and in personal insurance. This means that P&C/non-life insurance premiums are very likely to grow much more rapidly than GDP in these countries in the coming years. A comparable trend is also having appreciably positive effects on expectations for growth in life insurance. As well as purely economic factors, there are also other important trends which will shape the growth of international insurance markets, such as technical advances, demographic change or further increasing globalisation. In addition, the insurance industry is affected by sector-specific factors such as industry-wide consolidation, changes to taxation and the regulatory environment as well as changing sales channels, but also by upcoming demand for new types of coverage, e.g. with respect to renewable energy.

6 Page 6/8 For life insurance business in industrialised countries, the insurance sector's ability to innovate will also play an important role. The attractiveness of traditional life insurance as a savings and pension product has fallen significantly, not least because of continuing low interest rates. In the medium and long term, continued growth in this segment will depend strongly on developing new products, for example in the area of occupational pensions. Mature markets' share of global premium volumes falls further, but still remains above 70% up to 2020 Growth in the life insurance and P&C segments, both in primary and reinsurance, will continue to be significantly more dynamic in emerging markets than in industrialised countries up to Emerging countries in Asia (Emerging Asia) could see annual real (i.e. inflation-adjusted) growth rates of over 10%, both in P&C and Life. Second in terms of growth in P&C business is eastern Europe, with a rate of over 6% per annum. Very strong growth is also expected in life insurance in eastern European countries besides Emerging Asia, only Latin America has higher forecast growth rates. Despite the high rates of growth in emerging markets, the share of premiums held by "mature" markets will still be a decisive factor in the coming years. The proportion of total primary insurance premiums (life, P&C and health) coming from these mature markets North America, western Europe and industrialised countries in the Asia-Pacific region will fall from 83% in 2012 to roughly 73% in 'Emerging Asia' countries, on the other hand, will double their market share from 8% to 16%. In primary life insurance, the share held by mature markets will fall more rapidly (from 85% in 2012 to 72% in 2020) than in P&C primary insurance (from 80% to 73%). Similar changes are expected in reinsurance, although the proportion of reinsurance business attributable to industrialised countries is already lower than in primary insurance, because of the tendency for emerging markets to have a stronger need for reinsurance cover.

7 Page 7/8 Half of the additional premiums generated until 2020 will come from the USA, China and Japan Premium growth in absolute terms in the coming years will be determined by the current size of the market, as well as by the level of growth rates. This means that the USA, given high premium volumes, will see the highest absolute premium growth despite low growth rates in P&C primary insurance, followed by China with currently a significantly lower volume but high growth rates. Both for P&C and life primary insurance, around half of all new premiums earned between 2013 and 2020 will come from the USA, China and Japan. In this respect, both saturated markets and emerging markets represent great potential for the reinsurance industry. Growth markets and global rankings in 2020 large emerging markets with high potential, USA and Japan remain the largest insurance markets Highest growth potential in BRIC countries and Indonesia We conclude by considering the changes expected in individual insurance markets. It should come as no surprise that the large markets in emerging countries the BRIC countries (Brazil, Russia, India, China) and Indonesia are among the insurance markets with the greatest growth prospects. Accordingly, the global rankings of the largest primary insurance markets will change over time. While China was only in 15th place in 2000 in terms of total premium income, for example, in 2010 it had already reached 6th place and in 2020 is likely to be at number three. Brazil and India will also be in the top ten in However, we do not expect the dominant position of the US market, followed by Japan, to have changed by the end of the decade.

8 Page 8/8 USA still the largest insurance market in Conclusion Change in regional balance and numerous challenges as well as opportunities for primary and reinsurers Changing environment calls for flexibility The insurance landscape is still changing Markets in Africa, Asia, eastern Europe and Latin America are becoming more and more important, although the majority of primary and reinsurance premiums will still come from industrialised countries in The insurance industry faces challenges from a variety of areas. The euro crisis will have a detrimental effect on growth in many European countries in the short to medium term. The life insurance industry in Europe and the USA needs to increase its focus on innovation so that it can compete with other investment products outside the insurance sector. The Solvency II Directive will have far-reaching consequences for the insurance industry in Europe. Globalisation is leading to increasingly complex interdependencies and risks, which become difficult to quantify as they accumulate. On the other hand, there are many promising opportunities it would be wise to take advantage of the business potential presented by as yet untapped markets and new risks. Primary insurers and reinsurers should therefore be flexible in adapting their business strategies to the changing environment so that they can hold their own against the competition. Monika Gruber Tel.: +49 (89) Fax: +49 (89) Dr. Oliver Büsse Tel.: +49 (89) Fax: +49 (89) Münchener Rückversicherungs-Gesellschaft, Königinstraße 107, Munich

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