World insurance in 2013: steering towards recovery

01 Executive summary03 The global economy and

financial markets in 201306 Life and non-life insurance:

slower growth in 201314 The interest rate legacy

for the insurance sector18 Advanced markets:

insurance premium growth lags the economy

24 Emerging markets: solid growth in non-life, below pre-crisis trend in life

31 Methodology and data33 Statistical appendix

No 3/2014

Swiss Re sigma No 3/2014 1

Global economic growth was about the same in 2013 as in 2012, and still below long-term trends. Among the advanced markets, growth was strongest in North America, despite a slowdown in the US. Western Europe returned to slow growth. The emerging markets had a difficult year given still-weak demand from the advanced economies. Also, the announcement of monetary policy normalisation by the US Fed sparked financial market turmoil, leading to weakness in emerging market currencies and equities. In contrast, advanced market equities rallied. By the year-end, long-term interest rates in the US and UK were up by over 100 basis points from historically low levels at the end of 2012.

Life Non-life Total

Advanced markets 0.2% 1.1% 0.3%Emerging markets 6.4% 8.3% 7.4%

World 0.7% 2.3% 1.4%

Source: Swiss Re Economic Research & Consulting

In 2013, global life insurance premiums written were USD 2 608 billion, with growth slowing to 0.7% from 2.3% in 2012.1 Strong growth in Western Europe and Oceania was offset by a contraction in North America and stagnating sales in advanced Asia. Premiums contracted by 7.7% in the US. This was mainly because large corporate deals that had boosted group annuity business in 2012 were not repeated. In emerging markets, life premium growth improved to 6.4% in 2013. Growth was solid in Latin America and Africa, and resumed in China and India. In advanced countries, post-crisis2 average premium growth has been well below pre-crisis levels. In emerging markets the same is true in emerging Asia only. This is because of sharp declines in China and India coming after regulatory changes in both in 2011.

Global non-life premium growth slowed to 2.3% in 2013 from 2.7% in 2012, with total premiums of USD 2 033 billion. The advanced markets barely moved, with premiums up just 1.1% (2012: +1.5%) due to stagnation in Western Europe and a slowdown in advanced Asia. In Oceania growth remained solid at 5.1% and in North America it was roughly unchanged at 1.9%. The emerging markets continued to

1 Unless otherwise stated, premium growth rates indicate changes in real terms.2 Pre-crisis:20032007; post-crisis:20092013

Global economic growth was steady but below trend in 2013. Interest rates remained low, and stock markets in the advanced markets rallied.

Figure 1 Real premium growth rates, 2013

No data < -10.0%

10.0% to 5.0%5.0% to 2.5%2.5% to 0.0%

0.0% to 2.5%2.5% to 5.0%5.0% to 10.0%

> 10.0%

Global life insurance premiums increased only marginally in 2013, but there was considerable variation across markets.

Non-life premium growth slowed, with the advanced markets up only slightly.

Executive summary

http://www.sigma-explorer.com/map/WOR/index.php?lob=total&year=2013

2 Swiss Re sigma No 3/2014

Executive summary

drive global growth. Performance was firm across all emerging regions with the exception of Central and Eastern Europe (CEE). Expansion in emerging Asia was based on sustained strong growth in Southeast Asia and China, and growth was also robust in Latin America (premiums up 7.2%). Post-crisis average premium growth from 2009 to 2013 was well below pre-crisis rates in advanced markets. The post-crisis average was also lower, but still strong (+7.6%), in the emerging markets.

Overall profitability has improved in life and non-life. However, it is still lower than in pre-crisis times even though non-life underwriting results have improved. Insurers investment returns remain low given the low interest rate environment. Both the life and non-life sectors are well capitalised.

Life premium growth is expected to resume in the advanced and improve in the emerging markets. The firming economy and labour markets in North America and Western Europe will support growth in life and non-life, and growth should hold up in emerging markets also. In the life sector, China and India in particular could see notable strengthening in premium growth.

Since the financial and economic crisis started in 2008, global interest rates have been very low. This has severely affected insurance companies revenues, given the approximately USD 27 000 billions of funds invested.3 In 2013, interest rates started to rise in advanced markets, particularly in the US and UK, and are projected to continue to increase over the next four years. However, the benefits of rising interest rates take a few years to filter through to investment yields, and also pose some immediate challenges.

Life insurance companies roll over only a small fraction of their investment portfolios every year (about 10%) so rising rates have only a marginal and lagged impact on investment portfolios. In fact for a typical German life insurer rolling over a 10-year government bond portfolio, the investment yield will continue to decline from 3.2% in 2012 to 2.7% in 2017. In addition, the market value of the bond portfolio, having been inflated by falling interest rates, will fall from its peak. For a typical German life insurer, the loss of value of the bond portfolio could amount to up to 50% of equity. Non-life insurers involved in long-term (casualty) business will also be affected, while short-term (property) insurers will be the least challenged.

This sigma study contains the latest insurance sector data available at the time of going to press. The final 2013 figures were not available for most markets. Hence, the study also contains Swiss Re Economic Research & Consulting estimates and provisional data from the supervisory authorities and insurance associations.

3 According to sigma estimates for 2012

The life and non-life sectors are well capitalised, but profitability remains subdued in the low interest rate environment.

Economic recovery in advanced markets should boost growth in life and non-life premiums.

Interest rates are starting to rise, but this will not be an instant remedy for insurer. Rising rates also present challenges

because the average yield on bond portfolios will continue to fall before rising.

The data in this study are the latest available at the time of going to press.

Swiss Re sigma No 3/2014 3

The global economy and financial markets in 2013

Global economy steady below long-term growth trend

Global real gross domestic product (GDP)4 grew by 2.5% in 2013, little changed from 2012 and below the 10-year average of 2.8%. Economic growth in advanced markets was unchanged at 1.3%, with the US slowing to 1.9% from 2.8% in 2012 and Western Europe returning to low growth of 0.3% from 0.2% the year before. The German and UK economies were robust. Growth in France and the southern economies (Greece, Italy, Portugal and Spain) improved but continued to lag.

The US led the advanced economies in 2013, its growth based on a recovery in domestic consumption and investment spending, and coming in spite of fiscal tightening and a 16-day government shutdown in October. In Western Europe considerable progress on agreements with respect to the creation of a banking union was made, which eased worries about the future of the euro. A banking union would include among other reforms a common supervisory framework and a single resolution mechanism. Growth differences between the core and peripheral countries, however, persist. The periphery region overall registered full-year contraction even though some of the southern countries came out of recession in the second half of the year. Meanwhile, Euro zone-wide joblessness peaked at a record high of 11% and social discontent against austerity measures increased.

In Japan, Premier Abe launched unprecedented expansionary fiscal and monetary policy to reignite economic growth and escape two decades of stagnation. On the fiscal side, the government initiated the second largest supplementary budget ever. And alongside an expanded monetary base, the Bank of Japan (BoJ) set a target for inflation of 2% for the next two years. This led to a weaker yen and stronger exports. However, it could also generate rising yields if inflation expectations rise, which in turn would increase financing costs. The consumption tax hike in April 2014, while reducing the government deficit could also dampen economic growth.

Remarks: Countries GDP weighted with market exchange rates.

Source: Oxford Economics, WIIW, Swiss Re Economic Research & Consulting

4 The aggregation of the individual economies that make up the global economy is weighted using US dollar GDP based on market exchange rates. International statistics using purchasing-power parity place more weight on fast-growing countries such as China and India and therefore show higher world GDP growth rates.

Global economic growth was 2.5% in 2013, with US GDP up 1.9% and Western Europe growing by 0.3%.

US growth was based on domestic consumption and investment. Growth differences between the core and periphery Western Europe economies persist.

Abenomics boosted growth and inflation in Japan but may generate increased financing costs. The VAT introduced in April 2014 will also hurt growth.

Figure 2 Real GDP growth by region, 2013 and average 20032012

0% 2% 4% 6% 8% 10%

Annual average growth rate 2003-2012

Growth rate 2013

Middl