Rates need to rise if industry is to support recovery – Haegeli

Given the ongoing collapse of global economy the insurance industry will not be able to meet the growing need for insurance protection in a commercially viable way, without significant price increases according to Swiss Re.

The reinsurer’s Group Chief Economist, Jérôme Jean Haegeli, (pic) has issued his view on the company’s website this morning in which he said the industry needs to continue to drive price increases as the green shoots of an economic recovery are still to be seen.

“2020 will mark an inflection point in our history books,” he said. “We are continuing to experience a global health crisis caused by the COVID-19 pandemic.

“There is still no ‘V’-shaped economic recovery in sight. And global economic resilience, already fragile before the pandemic, has declined even further, according to our research.

“Even before the COVID-19 crisis, low interest rates were severely undermining the profitability of the insurance industry. Further rate cuts to help shore up the economic recovery are only going to exacerbate the challenges. And it’s clear that without significant price increases the insurance industry will not be able to meet the growing need for insurance protection in a commercially viable way.”

However, Mr Haegeli added after years of low prices and below-average profits, there are signs that insurance markets may finally be turning the corner, driven by commercial insurance lines.

The firm’s research shows compared to the global financial crisis in 2008-09, the decline in global insurance premiums in 2020 is of a similar magnitude.

“This is significant because this year’s estimated economic contraction of 4% is much steeper than the 1.8% contraction seen during the GFC,” he added. “From this perspective, when looking ahead to global insurance premium growth, insurance markets are more likely to bounce back quicker and harder than what global economic indicators would currently seem to imply.

“Such a recovery should boost overall growth in non-life insurance markets in 2021, even if the segment is weathering the pandemic unevenly.

“On the one hand, premium growth will be negatively impacted by declines in lines linked to business activity. On the other hand, prices in commercial insurance have been hardening, providing a tailwind to premium growth in the current year.”

“Overall, we expect a moderate reduction in global non-life premium growth due to the COVID-19 crisis, and then a strong rebound in global P&C premiums by 3.8% in real terms in 2021,” said Mr Haegeli.

He added Swiss Re is expecting strong rate increases in credit and surety and moderate rate increases in other affected lines of business and portfolios, including D&O and medical malpractice. In addition to the need for prices to cover increasing loss trends, the low interest rate environment is likely to drive up prices in commercial insurance markets.

“Even with recent rate hardening in commercial lines, our analysis suggests more work on the underwriting side is needed to offset the effect of low interest rates,” he cautioned.

Prices have been rising, as peak losses and accelerating claims inflation have forced the industry to respond, explained Mr Haegeli. Some insurers have increased prices drastically in loss-affected lines. Others have even decided to withdraw completely from certain lines or geographies, pushing up pricing further in light of reduced underwriting capacity.

“These various actions have had a positive impact on the overall rate environment, and we expect the trend to grow stronger in 2021,” he said.

“Overall, our analysis shows that the non-life insurance market is set to grow further, driven primarily by exposure growth across the world, especially new risks emerging along with rapid growth in Asia.

“Against the backdrop of ensuring pricing adequacy, underwriting fundamentals such as risk selection and costing, portfolio steering, appropriate terms and conditions, and contract wordings will be critical to writing future business.”