sigma No 3/2012 World insurance in 2011 Non-life ready for take-off 1 Executive summary 3 Global economy: recovery faded and interest rates very low

Transcription

1 sigma No 3/2012 World insurance in 2011 Non-life ready for take-off 1 Executive summary 3 Global economy: recovery faded and interest rates very low 6 World insurance: the life sector dragged down overall premium growth 14 Advanced markets: premium growth restricted by weak economic environment 20 Emerging markets: China and India weighed on otherwise solid growth 28 Methodology and data 30 Statistical appendix

2 Published by: Swiss Reinsurance Company Ltd Economic Research & Consulting P.O. Box 8022 Zurich Switzerland Telephone Fax New York Office: 55 East 52nd Street 41st Floor New York, NY Telephone Fax Hong Kong Office: 18 Harbour Road, Wanchai Central Plaza, 61st Floor Hong Kong, SAR Telephone Fax Authors: Irina Fan Telephone Thomas Seiler Telephone Daniel Staib Telephone Editor: Jessica Villat Córdova Telephone Managing editor: Dr Kurt Karl, Head of Economic Research & Consulting, is responsible for the sigma series. The editorial deadline for this study was 28 May sigma is available in English (original language), German, French, Spanish, Chinese and Japanese. sigma is available on Swiss Re s website: The internet version may contain slightly updated information. Translations: CLS Communication Graphic design and production: Swiss Re Logistics / Media Production 2012 Swiss Reinsurance Company Ltd All rights reserved. The entire content of this sigma edition is subject to copyright with all rights reserved. The information may be used for private or internal purposes, provided that any copyright or other proprietary notices are not removed. Electronic reuse of the data published in sigma is prohibited. Reproduction in whole or in part or use for any public purpose is permitted only with the prior written approval of Swiss Re Economic Research & Consulting and if the source reference is indicated. Courtesy copies are appreciated. Although all the information used in this study was taken from reliable sources, Swiss Reinsurance Company does not accept any responsibility for the accuracy or comprehensiveness of the information given. The information provided is for informational purposes only and in no way constitutes Swiss Re s position. In no event shall Swiss Re be liable for any loss or damage arising in connection with the use of this information. Order no: 270_0312_en

3 Executive summary Real premium growth in 2011 Markets Life Non-life Total Advanced 2.3% 0.5% 1.1% Emerging 5.1% 9.1% 1.3% World 2.7% 1.9% 0.8% Growth of the world economy slowed and interest rates remained very low. The insurance industry faced a difficult economic environment in While global life insurance premiums fell, non-life insurance prices began to harden in some markets and premiums grew. Overall, direct premiums declined 0.8% in real terms.1 However, direct premiums reached a record high of USD billion in nominal terms, increasing 6% over 2010 as the US dollar depreciated against the major currencies. Historically low interest rates and extraordinarily costly natural catastrophe events affected insurers overall results. Yet, the insurance industry was able to maintain its capital strength because falling interest rates increased insurers asset values but not their liabilities. Real growth in the world economy slowed to 3% in After getting off to a strong start, the economy gradually weakened in the second half of the year, undermining demand for insurance cover and leading to a continuation in accommodative monetary policies that kept interest rates low. The economic landscape ahead looks challenging for insurers. Although the emerging markets are set to continue to grow at a fairly robust pace and moderate growth is expected in the US, Western Europe is not likely to emerge from its recession until the second half of Figure 1 Total premium real growth rates in 2011 No data > 20% 20% to 10% 10% to 5% 5% to 0% 0% to 5% 5% to 10% 10% to 20% > 20% Source: Swiss Re Economic Research & Consulting In 2011, global life insurance premiums shrank. The outlook remains sluggish for advanced economies but premium growth in emerging markets is expected to resume. Global life insurance premiums shrank 2.7%. Advanced markets contracted 2.3%, with the sharpest decline observed in Western Europe ( 9.8%). Meanwhile, the US market resumed moderate growth (2.9%). Japan and the newly industrialised Asian countries grew 4.4% well above their ten-year average. In emerging markets, premium growth proved robust in most cases, but was negative overall due to steep premium drops in China and India in the wake of regulatory changes that restricted the use of certain distribution channels. The low interest rate environment also continued to weigh on life insurers investment results. In 2012, life premium growth is likely to remain sluggish in advanced economies, but is expected to resume in emerging markets as Chinese and Indian insurers adapt to the new regulations. 1 All premium growth rates provided in this study are in real terms adjusted for inflation (measured using local consumer price indices), unless otherwise noted. 1

4 Executive summary In part due to the euro zone crisis, non-life premium growth was weak in It is expected to remain modest in the difficult economic environment. GDP per capita is the most important driver of property insurance penetration. A strong rule of law is associated with higher penetration, too. The European debt crisis remains a key risk to insurers due to their large balance sheet exposure on the asset side. Global non-life insurance premiums grew a moderate 1.9% in In advanced markets, the unfolding recession in Europe and weak growth in the US in the second half of the year dampened insurance demand. Premiums grew by 0.5%. Emerging market growth remained robust at 9.1%, but also slowed. Overall, non-life insurer results were significantly impaired by the large catastrophe losses in 2011, the worst catastrophe year on sigma record in terms of total economic losses and the second worst ever in terms of insured losses. Nevertheless, the non-life industry s capital position remains strong. For 2012, growth is expected to remain modest due to the adverse economic environment. Although premium rates in some markets began picking up in 2011, the turn of the cycle is expected to be only gradual and limited to certain markets and lines of business in The strongest driver of property penetration2 is GDP per capita. Open economies with a strong rule of law exhibit a higher insurance penetration than others. However, because of differences in risk awareness, a country s property insurance penetration is not directly related to its exposure to natural catastrophes. Therefore, risk awareness at all levels of society is needed to improve insurance protection for people living in natural catastrophe-prone regions. The economic outlook remains challenging in The European debt crisis poses an enduring threat to insurers due to their large balance sheet exposures to banks and sovereign debt. Further increases in already elevated oil prices or a sharp reversal in growth in China could choke off the fragile global recovery. This sigma study contains the latest market data available at the time of going to press. The final 2011 figures were not available for most insurance markets. Consequently, this sigma also contains Swiss Re Economic Research & Consulting estimates and provisional data released by supervisory authorities and insurance associations. 2 Property insurance penetration is measured as the ratio of property premiums to GDP. 2

5 Global economy: recovery faded and interest rates very low The global economic recovery faded in the second half of 2011 The economic recovery slowed down significantly in the second half of The slowdown was most pronounced in advanced economies... but emerging markets were also affected. Growth of global real gross domestic product (GDP)3 slowed from 4.1% in 2010 to 3% in In the first half of 2011, the global economy continued to recover at a fairly robust pace. Business and consumer sentiment were positive, credit spreads narrowed, corporate profits recovered further and banks eased their lending conditions. Robust global demand pushed up commodity prices, especially for food and energy. However, due to several factors, the pace of economic expansion slowed, particularly in the second half of the year. Japan was hit by a devastating earthquake and tsunami in March. The resulting power outages and supply chain disruptions not only plunged the country back into recession but also negatively affected the still fragile recovery in the US. Weakening global demand and the resurgent sovereign debt crisis, particularly its contagion to large peripheral European economies such as Spain and Italy, also caused Europe s economy to slow. Overall, advanced economies grew only 1.5% in 2011, after growing 2.8% in Emerging markets did not entirely escape the slowdown in advanced economies, on which they depend heavily for exports. Although overall economic growth was still slightly above the average for the past decade, it slowed to 5.8% in 2011 (versus 6.8% in 2010). The Chinese economy grew a still very high 9.3% and the Latin American economy expanded 4.1%, above its ten-year average. Riding on the surge in oil prices, the Middle Eastern and Central Asian economies also expanded above trend. In contrast, given their strong trade and financial interconnections with Western Europe, the Central and Eastern European economies grew below trend. While growth was solid in most countries in Africa, headline figures were depressed due to political turmoil in Egypt and the collapse of the oil-rich Libyan economy in the wake of a political regime overthrow. Figure 2 Real GDP growth by region Real growth rates World Advanced markets North America Western Europe Japan and newly industrialised Asian economies Oceania Emerging markets South and East Asia Latin America and the Caribbean Central and Eastern Europe Africa Middle East and Central Asia Growth rate in % 2% 4% 6% 8% 10% Annual average growth rate Remarks: Countries GDP weighted with market exchange rates. Source: Oxford Economics, Vienna Institute for International Economic Studies (WIIW), Swiss Re Economic Research & Consulting World 3 The aggregation of the individual economies that make up the global economy is weighted using US dollar GDP (gross domestic product) based on market exchange rates. International statistics using purchasingpower parity show higher world GDP growth rates because they place more weight on fast-growing coun- Advanced markets tries such as China and North India. America Western Europe Japan and newly industrialised Asian economies Oceania 3 Emerging markets

6 Global economy: recovery faded and interest rates very low Inflation, particularly in the emerging markets, was mainly driven by rising food and energy prices. Despite expansionary monetary policies, inflation remained relatively low in advanced economies due to unused industrial capacity and high unemployment. The economic slowdown in the second half of 2011 further softened labour market conditions, thereby reducing wage pressures and further abating inflationary risks. Inflation was more of a concern in emerging markets due to rising food and energy prices in the first half of Emerging markets also grew close to or above trend, thereby further buoying inflation. However, tightened monetary policies in the first half of the year and the slowdown in economic growth in the second half helped reduce inflationary pressure. Capital market conditions strengthened insurers capital position but reduced investment returns Long-term interest rates have reached historical lows, bolstering insurers capital but eating into profitability. The aforementioned expansionary monetary policies pushed long-term interest rates to historical lows at the end of 2011, undermining insurers investment returns. Although falling interest rates supported the capital position of many insurers by increasing the value of their corporate and government bond portfolios, these capital gains will disappear once interest rates rise. Yet, interest rates were not low everywhere. As the European debt crisis unravelled, yields rose in Italy, Spain, Ireland, Portugal, and Greece, leading to a capital squeeze for those insurers with a high exposure to these markets. Figure 3 The downward trend of long-term government bond yields for major advanced economies 14% 12% 10% 8% 6% 4% 2% 0% Long-term interest rates The stock market recovery in 2011 was interrupted by the European sovereign debt crisis and the deceleration in global economic growth. Source: Datastream US Germany France Japan UK After performing solidly in the first half of 2011, the major stock markets fell in summer 2011 as advanced economies began to slow and the spectre of a renewed recession emerged. Stock markets remained highly volatile throughout the remainder of 2011 and embarked on a solid path of recovery only at the beginning of UK Japan France German US 4

7 Figure 4 Stock market performance since Share index, local currency, 31 December 2010 = 100 Jan 09 Mar 09 May 09 Jul 09 Sep 09 Nov 09 Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 May 12 US (DJ Industrials) Germany (Dax 30) Japan (Nikkei 225) France (MSCI France) UK (FTSE 100) MSCI Emerging Markets Source: Datastream What s ahead: curbed growth, low interest rates and the European debt crisis Growth is expected to be tepid in 2012; recovery is likely to be slow in advanced markets, while emerging markets will see their high growth rates decelerate. Low interest rates are expected to prevail throughout The European debt crisis remains a key risk. Rising oil prices and a hard landing in China are further concerns. Going forward, the economic environment for insurers in advanced economies will remain challenging. Europe is likely to remain in recession until late 2012, and although the US has avoided a recession, recovery is nonetheless proving slow and fragile. Japan will likely suffer from a strong yen and weak external demand. In the emerging markets, growth is likely to remain solid and self-sustained, but is expected to decelerate during 2012 as global demand weakens. Given their close ties to Western Europe, Central and Eastern Europe will feel the effects of the renewed recession. Meanwhile, Latin America is likely to profit from elevated commodity prices and strong domestic consumption. Weak external demand due to the global slowdown will continue to dampen emerging Asia s growth prospects. However, internal consumption remains resilient and is likely to continue gaining in importance. Interest rates are not expected to rise significantly in As long as inflation expectations remain well contained, the recession-like environment in advanced economies and the slowdown in emerging markets will support a continuation in accommodative monetary policies and keep interest rates low as a result. The ongoing European sovereign debt crisis remains a key risk. Although the threat of a near-term financial market disruption has weakened, policymakers now must devise a way to make the euro zone more viable in the long run. This implies structural reforms and enhanced fiscal discipline in individual countries together with improved economic and fiscal governance on a European level. However, such structural reforms are politically challenging to implement and take time to become effective. The risk of new setbacks will therefore keep markets volatile in the foreseeable future. Other key risks to the economic outlook include further increasing oil prices from already elevated levels and a sharp growth reversal in China. Supply disruptions in Iran, Sudan, Libya, and Nigeria pushed up the price of Brent oil from USD 95 at the end of 2010 to about USD 105 at the end of Oil prices rose further to peak at USD 125 in March Prolonged high oil prices or even a further rise could particularly undermine the fragile US recovery. In China, inflation, a potential overheating of the property sector, and excessive local government debt will need to be handled via a balanced monetary and fiscal policy mix in an environment of slower economic growth. 5

8 World insurance: the life sector dragged down overall premium growth Global insurance premiums contract In 2011, total premiums declined by 0.8%. Premiums contracted in advanced markets and barely grew in emerging markets. Life insurance premiums amounted to 57% of total premiums in Global direct premiums contracted 0.8% in However, because the US dollar depreciated against the major currencies, premiums increased 6% in nominal terms to USD billion. In advanced markets, premium volume contracted ( 1.1%), while barely growing in emerging markets (1.3%). These overall figures, however, mask significant differences across regions and business lines. In advanced markets, for instance, life premiums dropped a staggering 9.8% in Western Europe, while growing 2.3% in North America. In emerging markets, life premiums declined mainly due to new distribution regulations in China and India, while strong non-life premium growth continued. Life insurance premiums accounted for 57% (USD billion) of total premiums, down slightly from 58% in The share is higher in advanced economies (58%) than in emerging markets (52%) mainly due to the low share of life insurance in the Middle East and Central and Eastern Europe. Figure 5 Premium growth since 1980 shows an overall decline 20% 15% 10% 5% 0% 5% 10% Real growth rates Total Advanced markets Emerging markets Source: Swiss Re Economic Research & Consulting Life insurance premiums fell in 2011 Although global life insurance premiums fell in 2011, there are remarkable differences across markets. Life premiums declined in advanced markets overall, while premium growth accelerated in Japan, for example. Life insurance premium development Global life insurance premiums dropped 2.7% to USD billion in However, there are remarkable differences in the development of premium income across markets. In advanced markets, life insurance premiums declined 2.3%, thereby reversing their short-lived recovery in In the US, where in-force life premiums had been declining massively in recent years, premiums improved modestly in 2011, driven by a rebound in savings products. However, in Western Europe, premiums declined 9.8%. Premiums continued to drop in the UK, and in-force premiums fell sharply in Germany, Italy, Portugal, and France. Among the advanced Asian economies, growth in Japan accelerated, underpinned by stronger sales of individual whole life policies and a recovery in sales of annuity products. Hong Kong and Singapore s life markets remained robust, but business slowed in South Korea and declined in Taiwan on the back of falling sales of variable annuity products. 6

9 Figure 6 Life: real premium growth in 2011 No data > 20% 20% to 10% 10% to 5% 5% to 0% 0% to 5% 5% to 10% 10% to 20% > 20% Source: Swiss Re Economic Research & Consulting In emerging markets, life premiums fell overall but saw strong growth in the Middle East and Latin America. In emerging markets, life premium income fell sharply as premium volume shrank in China and India. The introduction of tighter regulations governing bancassurance in China and the distribution of unit-linked insurance products in India resulted in a sharp decline in new life premium growth. Premium income fell 15% and 8.5% in China and India, respectively. In contrast, other emerging regions upheld robust growth. Premium income rose 9.4% in the Middle East and 9.5% in Latin America. Overall, emerging markets share of global life premiums decreased slightly from 14.2% in 2010 to 13.9% in Figure 7 Life premiums dropped significantly in Western Europe, China and India. Growth was strong in Latin America. Real growth rates World Advanced markets North America Western Europe Continental Europe Japan and newly industrialised Asian economies Oceania Emerging markets South and East Asia Latin America and the Caribbean Central and Eastern Europe Africa Middle East and Central Asia 15% 10% 5% 0% 5% 10% 15% 20% Growth rate in 2011 Annual average growth rate Source: Swiss Re Economic Research & Consulting World Advanced markets North America Western Europe Continental Europe Japan and newly industrialised Asian economies Oceania 7

10 World insurance: the life sector dragged down overall premium growth Life insurer profitability remains low, but capital is solid. Prudence is needed going forward. Life insurer profitability and capital position The life insurance industry s capitalisation declined slightly in 2011, but is still well above 2008 crisis levels. Balance sheets are solid, although some of the improvement is due to unrealised gains under GAAP accounting principles4 as a result of declining interest rates. Exposure to troubled European peripheral country (GIIPS5) debt is generally very limited, although some insurers in GIIPS countries are under a great deal of stress. Investment portfolios are solid on the whole, hedging programmes have been improved, and products are better priced. Operating margins and the return on equity of life insurance companies have stabilised. Nevertheless, overall profitability remains below pre-crisis levels. Prudent investment strategies, low interest rates, volatile financial markets, and sluggish sales have kept profitability from improving. Figure 8 Risk capital and solvency development in life insurance in USD bn 70% 60% 50% % % % % % Risk capital (2011 USD bn, LHS) Solvency ratio (risk capital/premiums, RHS) Note: This figure is based on a sample of countries: the UK, Germany, France, Italy, the Netherlands, Switzerland, the US, Canada, Japan, and Australia. Source: Swiss Re Economic Research & Consulting Life insurance business in emerging markets is expected to recover, but growth remains sluggish in advanced markets. Continued low interest rates pose significant risks to profitability. Life insurance outlook Life insurers will face some serious challenges in Growth in advanced markets is likely to remain sluggish given weak economic expansion that will limit premium growth. In emerging markets, premium growth is expected to recover in 2012, as life premiums in the two key emerging markets are expected to return to positive growth. In India and China, insurers have been adjusting to the new regulations by consolidating their distribution channels and restructuring products. Elsewhere, life premium growth should continue to benefit from rising income and increasing risk awareness, particularly in the Middle East and Latin America. Bancassurance as a distribution channel is expected to expand further as savings products and credit life insurance make deeper inroads into Latin America. Interest rates will remain low for some time to come. Whereas new business can be adjusted to the low investment return environment, old books of business with interest rate guarantees pose significant risks to profitability. 4 GAAP stands for Generally Accepted Accounting Principles. 5 Greece, Italy, Ireland, Portugal, and Spain. 8

11 Non-life: ready for take-off as prices begin to harden Gradual price increases supported non-life premium growth in Non-life insurance premium development Overall, at 1.9%, non-life premium growth in 2011 remained robust (2010: 1.9%). Growth was supported by gradually increasing prices in certain markets and lines of business. Costly natural catastrophe events in Japan, New Zealand, and Australia led to significant rate increases in property markets. Rates increased in other advanced markets as well, partially offsetting the effects of the weak economic environment. In emerging markets, premium growth was mostly driven by robust economic growth. Figure 9 Non-life: real premium growth in 2011 No data > 20% 20% to 10% 10% to 5% 5% to 0% 0% to 5% 5% to 10% 10% to 20% > 20% Source: Swiss Re Economic Research & Consulting Non-life insurance premium growth was strong in emerging markets. Non-life insurance markets in emerging economies outpaced their equivalents in advanced economies, but the growth differential shrank in The only region outperforming its ten-year average growth rate was Latin America, where most markets reported solid growth. Figure 10 Non-life insurance premium growth: recovering slowly, but still below the long-term average Real growth rates World Advanced markets North America Western Europe Continental Europe Japan and newly industrialised Asian economies Oceania Emerging markets South and East Asia Latin America and the Caribbean Central and Eastern Europe Africa Middle East and Central Asia 4% 0% 4% 8% 12% 16% Growth rate in 2011 Annual average growth rate Source: Swiss Re Economic Research & Consulting World Advanced markets North America Western Europe 9

12 World insurance: the life sector dragged down overall premium growth 2011 was an exceptionally adverse catastrophe year, with economic losses estimated at USD 370 billion. Profitability remained low due to low interest rates and very high losses from natural catastrophes. Competition and the weak economic environment also weighed on underwriting results. Catastrophe losses6 In 2011, total economic losses to society due to disasters (both insured and uninsured) reached an estimated USD 370 billion, compared to USD 226 billion in The earthquake in Japan, the country s worst on record in terms of magnitude, alone accounted for 57% of global economic losses. Altogether, insured losses from natural catastrophes came to around USD 110 billion, while man-made disasters cost the sector around USD 6 billion, making 2011 the second-highest catastrophe loss year ever for the insurance industry. The gap between economic and insured losses of USD 260 billion points to the still widespread lack of insurance protection worldwide. Non-life profitability7 In 2011, the profitability of the non-life insurance industry came under pressure from both the underwriting and investment sides. In the eight leading markets, the average after-tax return on equity was around 4% in 2011, down from an already low 6% in The average combined ratio rose to 106%, compared to 102% in The exceptionally high catastrophe losses in 2011 weighed heavily on underwriting results in Japan, Australia, and the US, while European countries generally enjoyed low catastrophe claims. Apart from this, the underlying underwriting results also continued to be under pressure, due to competitive pricing and inadequate rates in many market segments. Rates in advanced economies remained broadly flat in 2011, with signs of market hardening in some personal lines. The weak economic environment of the second half of 2011 also kept commercial insurance rates broadly stable. The low interest rate environment prevailing in 2011 made it difficult to generate adequate returns from investment activities; total investment income as a share of net premiums earned declined one percentage point to 9%. Figure 11 Underwriting results worsened further in 2011 on the back of exceptional catastrophe events 20% 15% 10% 5% 0% Aggregate of US, Canada, France, Germany, Italy, UK, Japan and Australia 5% 10% estimates / forecasts 15% Capital gains/losses as a % of net premiums earned Underwriting result as a % of net premiums earned Current investment income as a % of net premiums earned After-tax return on equity (%) Source: Swiss Re Economic Research & Consulting 6 Swiss Re, sigma No 2/2012 Natural catastrophes and man-made disasters in 2011: historic losses surface from record earthquakes and floods. These figures exclude liability losses. 7 The following section describing the performance of non-life insurance is based on the aggregate of eight large insurance markets: the US, Canada, the UK, Germany France, Italy, Japan, and Australia. 10

13 Non-life capitalisation remained high despite the difficult environment. Non-life capitalisation Despite the severe catastrophe losses experienced in 2011, the industry maintained its strong capital position. Solvency declined only marginally, by 3%, to 113%. That said, GAAP figures overstate current capital levels: interest rates at year-end 2011 were lower than at the end of 2010, which increased the value of insurers fixed-income portfolios while the value of their liabilities remained unchanged. However, as soon as interest rates rise, these temporary capital gains will disappear.8 Solvency II and rating agency model adjustments will also bring higher capital requirements in the future. Finally, the large catastrophe losses in 2011 revealed hidden risks, particularly in emerging markets, that were insured at insufficient rates. At the same time, reserve adequacy has also weakened due to continued reserve releases in Figure 12 Non-life insurer solvency remained high in Aggregate of the US, Canada, France, Germany, Italy, UK, Japan and Australia estimates / forecasts 140% 120% % % % % % Premiums earned, USD bn Shareholders equity, USD bn Solvency (Capital/Premiums) right-hand scale Source: Swiss Re Economic Research & Consulting Non-life insurance underwriting results are expected to improve in Non-life insurance outlook Premium rates that began picking up in 2011 are expected to continue to harden and support premium growth in 2012, although the turn of the cycle is expected to be gradual and limited to certain markets and lines of business. In emerging markets, robust economic growth will increase demand for insurance. Assuming average losses from natural catastrophes, underwriting results should improve slightly compared to 2011, but will still remain negative. Investment yields will remain under pressure as the low interest rate environment persists. As long as interest rates stay low, the high valuation of bond portfolios will strengthen insurers solvency position. 8 Insurers may decide to realise some of the capital gains on investments. However, this would lower investment yields in the future since the freed-up funds would have to be reinvested in today s lower yield bonds. 11

14 World insurance: the life sector dragged down overall premium growth A closer look at property insurance penetration drivers 2011 was a year of extraordinarily high losses due to natural catastrophes and manmade disasters. However, only one third of the economic losses incurred by natural catastrophes and man-made disasters were covered by the insurance industry because of the large coverage gap. Property insurance penetration is the ratio of property premiums to GDP and is a measure of the take-up rate for property insurance in a country. There are a number of factors reviewed here that can potentially explain the differences in property insurance penetration by country. The S-curve hypothesis postulates an S-curve relationship between property insurance penetration and GDP per capita. The familiar S-curve concept provides a good starting point to analyse property premium penetration trends. The S-curve hypothesis posits that income, as measured by GDP per capita, is the main factor driving insurance market penetration. Accordingly, countries are aligned on an S-shaped curve based on insurance penetration and GDP per capita. In a low-income country, penetration is low and the insurance market grows at the same pace as the general economy. Once a certain per-capita income level is reached, a country s insurance market enters a phase of rapid growth which continues until it reaches a saturation point.9 Although the S-curve fits the data reasonably well, Figure 13 shows that large, unexplained deviations from it remain. Figure 13 The S-curve estimation for property premiums in % Property insurance penetration 0.8% South Africa 0.6% Russia Chile 0.4% Argentina 0.2% Brazil India Mexico 0.0% China 1 10 US Italy Japan 100 GDP per capita in 1000 USD Source: Swiss Re Economic Research & Consulting Deviations from the S-curve are presumed to be due to various country-specific economic, institutional, cultural, and geographical factors. An unbalanced panel data set covering 23 countries between 1970 and 2010 was used to analyse potential explanatory factors for these deviations.10 9 This finding was presented in Swiss Re, sigma No 5/1999 and Enz, Rudolf, The S-curve relation between per-capita income and insurance penetration, The Geneva Papers on Risk and Insurance, Vol. 25, No 3, July Swiss Re Economic Research & Consulting s research included data for the major advanced and emerging economies from 1970 to Data sources: the International Religious Freedom Report 2004 as published by the US State Department; the United Nations Conference on Trade and Development (UNCTAD); La Porta et al, 2001, Law and Finance; the Centre for Research on the Epidemiology of Disasters (CRED); Oxford Economics; and Swiss Re Economic Research & Consulting. 12

15 More open economies tend to have higher penetration rates. A stronger rule of law in a country correlates with higher property insurance penetration. Natural catastrophe exposure alone cannot explain property insurance market penetration. This is perhaps because risk awareness is often low before an actual catastrophe happens. The insurance industry must therefore try to raise risk awareness at all levels of society. Of all the factors tested, the strongest explanatory power for the deviations from the S-curve was average foreign direct investment as a share of GDP. This variable was used as a measure of the openness of an economy and is positively correlated with property insurance penetration, suggesting that more open economies tend to have higher insurance penetration. A strong rule of law in a country is also positively correlated with higher property insurance penetration. Intuitively, a sound judicial system is a logical predictor of insurance penetration because insurance is basically a promise to make a payment following the occurrence of a specified event. If this payment cannot be enforced due to weak judicial systems, insurance loses its value proposition entirely. Although recent natural catastrophes have led to significant rate increases in the affected markets, thereby increasing insurance market penetration temporarily, no evidence was found in this study to suggest that natural catastrophe exposure drives property insurance market penetration. As a proxy for exposure, the average share of the population affected by storms, floods, or earthquakes in a country was used and found to be statistically insignificant.11 One possible explanation for this finding is that risk awareness in markets exposed to natural catastrophes is often very low before a catastrophe actually occurs. However, the case of Turkey shows that large natural catastrophes can trigger regulatory changes and, in turn, increased risk awareness. Following two major earthquakes in 1999, the Turkish government made earthquake insurance coverage mandatory for residential buildings that fall within municipal boundaries. Although coverage is still relatively low, earthquake insurance penetration is expected to deepen alongside increased awareness measures. By working to raise risk awareness at all levels of society, the insurance industry can help populations secure better insurance protection without having to first face the harsh lessons exacted by a major catastrophe. 11 This result was tested for robustness by employing other measures for natural catastrophe exposure, eg the average number of catastrophes by year in the CREDT database and various indices based on Swiss Re internal exposure assessment versus flood, earthquake and storm. 13

16 Advanced markets: premium growth restricted by weak economic environment Premiums decline slightly in advanced markets Total premiums in advanced markets declined by 1.1% in 2011 to USD billion. In advanced economies, life insurance premium income decreased 2.3%. In 2011, total premiums in advanced markets decreased by 1.1% to USD billion. Life insurance in Western Europe weighed particularly on the overall result, while the newly industrialised economies in Asia pushed premium growth upward. The advanced countries share of global insurance premiums remained at 85%. Life insurance In 2011, life insurance premiums dropped 2.3% to USD billion after staging an initial recovery in 2010 (1.7%). Life insurance in Western Europe was particularly hard hit, with premiums falling 9.8%. On the upside, the slide in the US came to a halt and premiums rose by 2.9%. As in 2010, Japan and the newly industrialised Asian life markets grew robustly, expanding by 4.4% in Figure 14 Life and non-life premium growth versus GDP growth in advanced economies in 2011 Real premium growth % 10% 0% 10% Australia South Korea rising penetration 20% 30% Italy falling penetration 40% Luxembourg 50% Portugal 60% Liechtenstein 2% 1% 0% 1% 2% 3% 4% 5% 6% Real GDP growth 2011 Non-life insurance Life insurance Source: Swiss Re Economic Research & Consulting Non-life insurance premiums in advanced markets increased 0.5%. Insurance density in advanced markets increased to USD per capita, while penetration shrank to 8.6%. Non-life insurance In 2011, non-life premiums in advanced markets increased 0.5% to USD billion. Growth was negative in North America ( 1.1%) and weak in Western Europe (+0.7%) due to feeble economic growth and the pricing cycle, which had only just begun turning in selected markets. In the newly industrialised Asian economies, rates increased after Japan s devastating earthquake in March 2011, fuelling 5% premium growth. Insurance density and penetration In 2011, an average of USD per capita in nominal terms was spent on insurance in the advanced markets (versus USD 118 in emerging markets). Of this amount, USD was spent on life insurance and USD on non-life insurance. Since economic growth surpassed insurance market growth, overall insurance penetration shrank further to 8.6%, even lower than a decade ago. The decline in life business volume, particularly in Western Europe, in combination with soft pricing12 in the major non-life markets, were the principle factors behind the drop. 12 Despite the high insured losses incurred, the devastating natural catastrophe events of 2011 have not led to a global change in insurance market pricing. 14

17 Figure 15 Insurance density and penetration in advanced markets in 2011 Switzerland Netherlands Luxembourg Denmark Japan Finland United Kingdom Sweden Ireland Japan and newly industrialised Asian economies Norway Australia France G7 Hong Kong United States Average Belgium Canada Taiwan Singapore Euroland Germany Liechtenstein EU, 27 countries Austria South Korea Italy New Zealand Spain Israel Portugal Cyprus Iceland Malta Greece Premiums per capita in USD % 5% 10% 15% 20% Non-life premiums per capita Life premiums per capita Premiums as a % of GDP Source: Swiss Re Economic Research & Consulting 15

18 Advanced markets: premium growth restricted by weak economic environment North America: premiums recover slightly but profitability is under pressure Life insurance premium income increased 2.3% in North America to USD 590 billion. In the US, premiums recovered and the industry is back on track while life premiums fell 3.2% in Canada. In 2012, life premiums are expected to grow in the US and stagnate in Canada; in both markets profitability is likely to remain low. Non-life premiums shrank by 1.1% in real terms. Profitability deteriorated in the US, but increased in Canada. In 2012, non-life premiums in North America should grow, but profitability will remain a challenge. Premiums in 2011 in North America World USD bn market share Life % Non-life % Real premium growth 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 0.5% 1.0% 1.5% Life Non-life Life insurance Life insurance premiums in North America grew 2.3% to USD 590 billion in In the US, life premiums grew for the first time since 2007, rising 2.9% on improving economic conditions. New business premiums rebounded, led by strong demand for variable annuity products with guarantees, while individual life premiums continued growing at a modest pace. Because of attractive cash value guarantees, whole life products saw another year of robust growth. However, the sale of universal life products slowed as profitability challenges and reduced guarantees affected supply and demand. Term sales also contracted, but the decline was less severe than in Low interest rates, volatile equity markets and sluggish economic growth all weakened US life insurers profitability and capital growth. In turn, profitability pressures led some life insurers to restructure and reduce underperforming lines of business. Nevertheless, following the financial crisis, the de-risking of assets and liabilities has kept balance sheets generally solid. The industry as a whole is well capitalised enough to deal with the challenging external conditions. In Canada, life premium growth was negative for the second consecutive year in 2011 ( 3.2%). In an attempt to adjust to the low interest rate environment, many Canadian life companies re-priced and offered lower guaranteed rates on individual annuity products. The adjustments made the products less attractive for consumers and sales declined. However, Canadian life companies remain well capitalised. Profitability in 2011 was solid compared to historical norms, even though the result was largely driven by accounting conventions with regard to fixed-income assets. Going forward, US life premiums are expected to continue growing, albeit beneath their long-term trend path. The slow and prolonged recovery of employment and income growth are the main factors behind this subdued growth. In Canada, life premium growth in 2012 is likely to remain flat due to economic uncertainty and a lack of clear growth drivers for the Canadian economy. Profitability in both markets is expected to remain below pre-crisis levels, at least through 2013, since interest rates remain low, equity markets volatile, and sales sluggish. Non-life insurance Nominal non-life premiums in North America increased from USD 719 billion in 2010 to USD 736 billion in However, inflation eroded the gain, meaning that premiums were down by 1.1% in real terms. In Canada, premiums grew 1.7%, driven largely by personal lines, while in the US premiums declined by 1.3% in The profitability of the North American non-life insurance industry deteriorated in 2011, but the sector remains strongly capitalised. In fact, in both the US and Canada, the statutory surplus declined only 1.4%. The combined ratio of US property and casualty insurers (excluding health) rose from 101% in 2010 to 107.5% in Profitability deteriorated primarily due to high catastrophe losses, low investment returns, and insufficient reserves. Statutory ROE fell from 8% in 2010 to 4% in Despite severe catastrophe losses, Canada s property and casualty insurers reported a combined ratio of 100% in 2011, a slight improvement over the 101% recorded in ROE remained flat at 7%. 3.0% For 2012, continued rate increases in personal lines and rate-firming in select commercial lines are likely to drive up premiums in North America. Large first-quarter 2012 catastrophe losses may further boost rates in the US. However, the industry s growth outlook for 2012 will continue to be hampered by competitive market pricing and inadequate rates in some commercial lines of business. Profitability will remain under pressure due to low investment yields and decreasing reserve adequacy. Growth rate 2011 Annual average growth rate

19 Western Europe: life premiums decline after a short recovery, non-life stagnates In 2011, life insurance premiums in Western Europe declined by 9.8% to USD 916 billion. In Western Europe, the confluence of a weak macro environment, low interest rates, and upcoming regulatory changes are particularly challenging. In 2011, non-life premiums in Western Europe increased slightly overall. The largest European markets supported business growth, while crisis-ridden countries such as Italy and Spain restricted it. Premiums in 2011 in Western Europe World USD bn market share Life % Non-life % Real premium growth 2% 0% 2% 4% 6% 8% 10% 12% 14% Life Life excl. UK Non-life Life insurance In 2011, overall life insurance premiums in Western Europe fell 9.8% (versus 1.8% in 2010) to USD 916 billion. Premium income declined virtually across the board in Western Europe. Liechtenstein and Luxembourg s life insurance savings business was hit the hardest, with premiums falling 52% and 37%, respectively. In Germany, Italy, Portugal and France, the life industry generally weathered the crisis years well until 2011, when in-force premiums fell sharply. New life business in the Dutch market fell for the third consecutive year due to competition from bank savings products. In the UK, premiums continued to decline to 3.3%, but at a much slower pace than in previous years (2010: 9.3%). In Scandinavia, the picture was mixed. Although premium income increased 5.7% in Norway, Denmark s life insurance market stagnated and Sweden and Finland s premium income declined 4.9% and 8.2%, respectively. Premium income also increased 6.1% in Spain, 3.1% in Switzerland and 3.1% in Ireland. In the near term, life insurers will continue to face significant headwinds. Interest rates are likely to remain low for a prolonged period of time, weighing on insurers profitability. The weak macroeconomic outlook and elevated risks in the euro zone will also negatively impact demand for life insurance. While the life industry s overall exposure to troubled GIIPS sovereign debt is limited and manageable, some insurers remain more vulnerable than others. Moreover, a re-escalation of the sovereign debt crisis in Europe could result in a renewed banking crisis that could spill over to the insurance sector. Regulatory changes will also challenge European life insurers. Once introduced, Solvency II will increase the capital requirements for asset risk and long-term guarantees. Companies will need to balance their search for high investment returns against higher risk capital charges and strategically calibrate the guarantees embedded in their savings products. Insurers are likely to focus on risk protection rather than on savings products with long-term guarantees. Non-life insurance In 2011, non-life insurance premiums increased slightly in Western Europe by 0.7% to USD 642 billion (2010: 1.1%). However, individual market development varied. The largest European markets contributed most to business growth, riding on moderate economic performance and premium rate increases, predominantly in personal lines. Non-life premiums increased 1.2% in Germany, 1.8% in France and 1.4% in the UK. Smaller markets such as Switzerland, with 1.2% growth in premiums, and Norway, with 3.4%, also added significantly to overall growth in the region. By contrast, non-life insurance in crisis-ridden countries shrank in Premium volume in Italy declined 1.8% despite significant rate increases in personal lines. Spain contracted 3.4%, reflecting difficult economic conditions and falling insurance rates. In terms of profitability, underwriting results improved somewhat. The average combined ratio for direct business in the four largest European markets declined 1.3 percentage points to 100.6%. Higher motor insurance prices were a key driver for this improvement in underwriting performance. However, investment results suffered due to the difficult economic climate. For 2012, premium growth is expected to pick up somewhat despite the weak economic outlook. The recession in southern European markets is likely to persist for some time yet, so any expansion in insurance business in the region will be limited. However, in the rest of Europe, economic activity is likely to increase in the second half of 2012, paving the 4% way for premium growth. Rate increases are likely to spread gradually from personal to commercial lines and support top-line growth in all markets. Nonetheless, profitability will remain weak as price increases will be slow to lend any substantial support to underwriting results, while investment returns will continue to suffer from low interest rates and adverse economic conditions. Growth rate 2011 Annual average growth rate

20 Advanced markets: premium growth restricted by weak economic environment Japan and the newly industrialised Asian economies: economic uncertainty lies ahead despite positive premium growth In 2011, life insurance premiums in advanced Asian economies grew 4.4% to USD 704 billion. However, life premium growth slowed in South Korea and saw a sharp drop in Taiwan. Looking ahead, slowing economic growth will weigh on life insurance premium growth in advanced Asian economies. Non-life premiums grew 5% in 2011 in advanced Asian markets. Non-life insurance results were poor in Japan and Korea, but were positive for Singapore, Taiwan, and Hong Kong. Premiums in 2011 in Japan and the newly industrialised Asian economies World USD bn market share Life % Non-life % Real premium growth 5% 4% 3% Life insurance Life insurance premiums in advanced Asian economies grew 4.4% to USD 704 billion in Premium growth in Japan accelerated to 6.5%, versus 1.9% in 2010, underpinned by stronger individual whole life policy sales and a recovery in the sales of annuity products. Operating results are expected to remain largely stable as lower benefit payments were partly offset by higher expenses. Japanese insurers kept their investment portfolios conservative, reducing their exposure to equities and retaining a high share of government securities. At 2%, investment yields remained as low as in past years. In Hong Kong and Singapore, life insurance premium growth remained robust, riding on stable economic growth and rising incomes. However, business slowed to 2% in South Korea and declined 7.9% in Taiwan as a result of falling sales in variable annuity products. Insurers in Taiwan were further beleaguered by the appreciation of the Taiwan dollar, which led to losses on overseas investments that were not fully hedged. Although the regulator allowed insurers to set up a special reserve in response to absorb the losses, better risk management is needed to address the underlying issues. Japan s life insurance outlook remains relatively positive. Its economy is on track to recover from the earthquake and tsunami in The catastrophe raised insurance awareness and drove demand for protection-type insurance policies. However, due to the still large number of in-force policies offering high guaranteed yields, low investment yields remain a key concern. In other advanced Asian markets, Taiwan s life insurance sector is expected to recover modestly and lower economic growth may restrict premium growth in South Korea. Low interest rates and tightening solvency requirements are also major hurdles for insurers. Non-life insurance In 2011, overall non-life premiums in advanced Asian markets increased 5% to USD 208 billion. Growth was strongest in South Korea (11%) given the strong demand for long-term products.13 Singapore (7.3%) and Taiwan (4.9%) showed solid expansion as well. The devastating earthquake and ensuing tsunami in March 2011 raised risk awareness and premium rates in Japan, keeping premium growth at 2.8%. However, Japanese insurance companies bore very high losses not only from the earthquake and ensuing tsunami, but also from the Thai flooding, which together cancelled out the profits from higher tariffs for third party motor liability insurance. Korean insurers saw underwriting results worsen due to a surge in motor business claims and high losses overseas. Meanwhile, improvements in motor business lent support to profitability in Singapore, while Taiwanese insurers experienced low losses from major catastrophes. In Hong Kong, motor premium income deteriorated but was partly compensated by reserve releases in other lines. The near-term outlook for non-life business remains challenging amidst low interest rates and moderating economic growth in the region. However, increasing risk awareness is expected to bolster demand for property insurance. In Japan, demand for household and commercial earthquake insurance is expected to remain strong, and rising motor premium rates will also support premium growth. In South Korea, recent regulations 6% imposing higher penalties for traffic violations should help keep the loss ratio low. 2% 1% 0% Life Non-life Growth rate 2011 Annual average growth rate These are insurance policies under which parts of the premiums are returned to the policyholder if no claims are made after a number of years. 18