Global Insurance Review 2014 and Outlook 2015 16

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November 2014

Global insurance review 2014 and outlook 2015/16

01 Executive summary02 The macro environment

continues to strengthen09 Non-life re/insurance:

premiums grow, profits still weak

18 Life re/insurance: navigating the new normal

26 Emerging markets: steady improvement ahead Economic Research & Consulting

Swiss Re Global insurance review 2014 and outlook 2015/16 1

Executive summary

The global economy is expected to gain some strength next year, but regional prospects are mixed. Of the major economies, the US is in the best shape and growth is expected to accelerate to 3.3% from 2.3% this year. The Euro area remains fragile, but growth is still expected to improve to 1.3% from 0.8% in 2014. On the other hand, China, Japan and the UK are all expected to have a slightly lower growth next year. All emerging market regions are projected to have at least a modest improvement in economic activity. With this global environment, inflation is expected to remain subdued and long-term yields on government bonds will rise gradually in the advanced economies, especially in the US and UK. Investment returns for insurers and reinsurers (re/insurers) will continue to deteriorate for at least a couple of years as they roll over maturing fixed income securities into lower yielding, more-recently released bonds.

The additional economic activity will support a mild improvement in non-life premium growth. Real (after-inflation) premium growth in the primary market next year is projected to be 1.4% in the advanced economies and close to 8% in the emerging markets. The return on equity (RoE) for the main non-life insurance markets is estimated to be a subdued 7% for the full-year 2014, down from 8.4% in 2013. Profitability will continue to be challenged by the low investment returns and will need below-average catastrophe losses and reserve releases to be sustained. Since both cannot continue indefinitely, underwriting standards will need to improve. Reinsurance premium growth will be significantly lower than in the primary sector mostly due to reduced reinsurance buying in China and a softening of property catastrophe reinsurance rates, which is underway but decelerating.

Surveys indicate that US commercial casualty insurance prices have been flat to slightly up recently, while rates in property have been slightly lower. Market participants in other regions have a general sense that pricing is being driven by regional loss developments, which vary greatly. Property pricing will remain challenging in the near term, particularly in the North American catastrophe market, where alternative capital is focused. In casualty lines, accident year loss ratio data from the US and UK indicate that reserve releases are unlikely to continue for long, so pricing prospects are expected to improve over the next couple of years.

Real growth of global in-force life premiums in the advanced economies is expected to be nearly 4% this year and about 3% next, after declining 1.5% in 2013. Emerging market life premiums are forecast to grow 9% this year and 10% next year after a sluggish 4.5% advance in 2013. The low yield environment is an even greater challenge for life re/insurers than non-life re/insurers because of their greater dependence on investment returns for profits. Thus, life re/insurers are focusing on new products, increased market penetration, improved distribution techniques and cost-cutting. New business growth in the major markets is being driven by robust sales of savings products. The efforts have been paying off and profitability has improved over the past year, with RoE at 12%.

Global life reinsurance premiums are expected to expand by nearly 1% this year after shrinking 0.3% last year due to weakness in the advanced markets. Modest growth of less than 0.5% is expected in 2015 and 2016. As a consequence, reinsurers are increasingly seeking large block deals and providing major capital relief solutions. These include longevity deals with annuity insurers and pension plans, which is on track for a record year in 2014.

In general, both life and non-life real premium growth will be stronger in all the major emerging market regions in 2015 and again in 2016. Emerging Asia will have stable growth at robust double-digit rates of around 13% for both sectors. Thus, the emerging markets will remain an area of interest for global players. The exceptions are perhaps Central and Eastern Europe, where premium growth will be relatively weak due to a slow economic recovery and the life business in sub-Saharan Africa, excluding South Africa, because of the small size of the market.

The US economy is strengthening, but the outlook in the Euro area is less certain.

Non-life premium growth is improving along with economic activity and price improvements in key markets.

Property pricing will remain challenging in the near term, but prospects for casualty pricing are better.

Though the low yield environment remains a challenge, life insurers are growing their business and increasing profits.

Global growth for traditional life reinsurance premiums will be subdued, so large transactions are being pursued.

Emerging markets continue to offer stronger premium growth prospects in both life and non-life insurance.

2 Swiss Re Global insurance review 2014 and outlook 2015/16

The macro environment continues to strengthen

The major economiesAside from the US, growth in many of the other major economic regions slowed into the middle of this year. The Euro area weakened significantly in the second quarter as Germanys economy contracted. Nevertheless, Euro area average growth in 2014 will be significantly stronger than in 2013, due to the statistical effects resulting from a strong second half in 2013 and first quarter in 2014. Another bright spot is the UK, with fairly robust growth this year. Growth in China has been a little lower than expected and Japans economy shrank more than expected in the second and third quarters of 2014 in the aftermath of a sales tax hike. Many emerging markets are strengthening but the outlook has become more uncertain given the expectation that the US Federal Reserve (Fed) will begin raising interest rates in 2015.

Overall, however, the global economy is still expected to improve modestly in 2015 with slightly stronger growth in many countries, especially the US. Growth is also expected to improve in the Euro area, but not in China, Japan or the UK. Of the major emerging markets, Brazil and India are expected to have stronger growth, while growth in Russia will be slow. The projection for slightly faster global growth in 2015 is consistent with International Monetary Fund (IMF) and World Bank (WB) forecasts. These institutions both have growth increasing by about 0.5 percentage points in 2015, to 3.8% from 3.3% this year (IMF) and to 3.4% from 2.8% (WB). The greatest downside risk is a major slowdown in the Euro area leading to a deflationary period of stagnation.

Monetary policy is expected to tighten next year in the US and UK, with both countries raising their policy rates, and remaining highly accommodative in the Euro area and Japan. Chinas success in steering its economy toward growth with subdued credit expansion, will determine if it avoids a hard landing.

As growth strengthens and the Fed raises rates, the yield on the US 10-year Treasury note is expected to climb to 3.5% by end of next year and to 4.5% by end-2016. Yields in the UK will rise to similar levels, but yields in the Euro area and Japan could move up by less than 100 basis points. Though rates will be rising, insurers and reinsurers face declining investment yields on their bond portfolios for a couple more years yet, as higher yielding bonds mature and are replaced with the current lower yielding ones. Corporate bond spreads are expected to tighten a little after widening recently, and equity markets are expected to continue to rise, but only moderately.

2013 2014E 2015F 2016F

Real GDP growth, annual avg., % US 2.2 2.3 3.3 3.2UK 1.7 3.0 2.5 2.6Euro area 0.4 0.8 1.3 1.5Japan 1.5 1.5 1.2 0.9China 7.7 7.4 7.1 6.8

Inflation, all-items CPI, annual avg., %(monthly data refer to yoy growth)

US 1.5 1.9 2.2 2.4UK 2.6 1.7 1.8 1.9Euro area 1.3 0.5 1.1 1.4Japan 0.4 2.8 1.5 2.2China 2.6 2.1 2.6 2.9

Policy rate, year-end, % US 0.25 0.25 1.25 3.25UK 0.50 0.50 1.25 2.25Euro area 0.25 0.05 0.05 0.05Japan 0.07 0.10 0.10 0.10

Yield, 10-year govt bond, year-end, % US 3.0 2.6 3.5 4.5UK 3.0 2.6 3.5 4.0Euro area 1.9 1.0 1.4 1.7Japan 0.7 0.5 0.6 0.9

E = estimates, F = forecasts

Source: Swiss Re Economic Research & Consulting.

Economic activity slowed in many regions into the middle of 2014 but global growth is still expected to improve modesty next year.

The IMF and WB also project modest improvement in growth in 2015, but this will be overly optimistic if the Euro area goes into recession.

The US and UK central banks are expected to begin tightening next year.

Growth and rising policy rates will push government bond yields higher, especially in the US and UK.

Table 1 Real gross domestic product (GDP) growth, inflation and interest rates in select regions, 2013 to 2016


The ECB is unlikely to start raising rates before 2017. On the contrary, with inflation close to zero and growth still fragile, the ECB may even purchase government bonds (public QE) to prevent a prolonged period of deflation. However, the political hurdles for the ECB to embark on QE are high. Beyond the question of the legality of such purchases, the distributional impact of government bond purchases is contentious in a currency union of many countries. Finally, for QE to obtain a majority of the governing councils votes, growth, inflation and/or financial market stress will probably need to deterioate further. Also, it is questionable how effective such purchases would be in stimulating growth and inflation given that yields are already very low, and most companies would not benefit directly from lower market yields because they do not issue bonds on the capital markets. Despite these hurdles, the ECB may yet adopt public QE to further weaken the euro exchange rate and stabilise inflation expectations.

When will policy rates be raised?Of the four major central banks the Fed, the ECB, the Bank of Japan (BoJ) and the Bank of England (BoE) the Fed and the BoE are expected to start raising rates in the first half of 2015. The US and the UK economies are relatively strong and unemployment is declining in both. This will eventually lead to wage pressures and, potentially, an increase in inflation. There are already some signs of wage inflation in the US (Figure 1). In the UK, though wage growth remains benign, labour market surveys indicate that the slack is diminishing: staff availability is declining and salaries for new hires are increasing. Also, the unemployment rate is falling rapidly. It was only 6% in August, so stronger wage gains are very likely next year.

In the Euro area, on the other hand, economic activity unexpectedly stalled this year and the ECB is unlikely to raise rates anytime soon but may instead provide more quantitative easing. This will mean a sharp divergence with US and UK interest rates, more money taking advantage of this differential in a carry trade, and a weakening euro. This carry trade will also constrain the rise in US and UK long-term interest rates.

In Japan, central bank head Haruhiko Kuroda is still struggling to entrench some expectations of inflation and recently launched a more aggressive quantitative easing, surprising the market and causing a sharp jump up in equity prices. His policies are expected to succeed, with inflation close to 2% from 20142016.

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Fed funds rateRecessions

Core PCE inflationAverage hourly earnings

Source: National Bureau of Economic Research, Bureau of Labour Statistics.

The likelihood of public QE by the ECB is increasing but political hurdles remain.

The Fed and BoE are expected to raise policy rates in the first half of next year.

The ECB is on hold indefinitely so the Euro area spreads with the US and the UK will widen, weakening the euro.

BoJ policy is expected to succeed in getting inflation to near 2% along with a modest improvement in GDP growth.

Figure 1 US average hourly earnings, core PCE and Fed funds rate, and periods of recession



Emerging markets

Emerging AsiaEconomic growth in Emerging Asia is expected to remain fairly strong and stable in 2015 and 2016, even though China is targeting a slower and more sustainable growth path. A highly leveraged property sector coupled with weakening real estate prices remains the key downside risk in China in the near term, particularly given the close reliance of the property sector on shadow banking for financing (see Box: The risk of a hard-landing in China). In India, business and consumer sentiment has improved significantly on expectations of a strong push toward economic reform and liberalization by Prime Minister Narendra Modi. In Southeast Asia, economic activity will be robust, with the strongest growth in the Philippines, Malaysia and Vietnam.

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2016F2015F2014E20132012

Advanced markets

Sub-SaharanAfrica

Central andEastern Europe

Latin America

Middle Eastand North Africa

Emerging Asia


The risk of a hard landing in ChinaThe adoption in China of more growth-supporting measures earlier in the year helped support GDP growth of 7.4% in the first three quarters of 2014. Although recent economic indicators point to modest GDP expansion ahead, weakening property investment continues to drag on growth. The Chinese authorities have launched more measures, including easing home purchase restrictions and mortgage lending, to slow further declines in real estate sector investment and property prices. China is expected to continue its targeted easing to support growth, but will set a lower growth target for 2015. Real GDP growth is expected to ease from 7.4% in 2014 to 7.1% in 2015.

Risks to growth remain tilted to the downside. Credit risk from a deepening housing market correction remains the main risk. Home prices in many cities have continued to fall amidst weakening sales. The property sector is highly leveraged and credit quality is deteriorating. The problems in the sector will likely be felt more acutely by smaller developers who have less access to lower-cost funding. So far, there have only been a few defaults or delayed payments, and they have been orderly. But with a large portion of property trust loans due for repayment in the near term, investors are worried that defaults in real-estate-related shadow banking products may bring big problems to Chinas financial system. Even so, at this juncture, the risk of a hard landing in China remains unchanged at 15%. The government will likely step in with support measures should market conditions deteriorate sufficiently.

Growth in emerging Asia will remain strong and stable into 2016.

Figure 2 Real GDP growth in select regions, 2012 to 2016

Chinas growth is expected to moderate to 7.1% in 2015.

Downside risks will revolve around the weak real estate sector and its interplay with the shadow banking system.


Middle East and North Africa (MENA)Growth in the MENA region remained relatively subdued in 2014 due to lower hydrocarbon production, political uncertainty and weak external and domestic demand. A modest recovery is expected in 2015 and 2016, but the outlook is uncertain given potential downside risks from continued political turmoil and lower oil prices. Diversification of the economy with heavy infrastructure developments should bode well for some GCC markets. The non-GCC oil exporters will be under stress due to political turmoil (Libya and Iraq) or international sanctions (Iran). High unemployment rates and inflation in the region will also weigh on regional growth.

Central and Eastern Europe (CEE)Overall, growth in CEE has slowed in 2014 but it is expected to improve in 2015 and beyond. Some countries will do better than others. The outlook for many EU-member countries is more positive, driven by improving consumer sentiment, low inflation and stronger labour market conditions. In comparison, Russia is on the brink of recession and inflation is rising rapidly, driven by the depreciating rouble and capital outflows, which reduces investment that could improve productivity and lower prices. The economic situation in the Ukraine is dire, with GDP expected to contract sharply this year and next. Assuming the Ukraine crisis does not deteriorate further, overall CEE growth is expected to improve next year. In Russia, growth will remain low. Besides Russia, the Baltic states will be most impacted by the Ukraine crisis, while elsewhere the impact will be limited.

Sub-Saharan Africa (SSA)Despite the recent slump in commodity prices, growth in most SSA countries remains strong. An exception is the Republic of South Africa (RSA), where growth has been hampered by the extended strikes in the mining sector and electricity bottlenecks. Growth will also be weak in RSA next year because the strikes have reduced confidence and investment, causing capital outflows and raising the current account and government deficits. Similar concerns highlight the vulnerability of some other SSA countries including Ghana, where the currency has collapsed due to high government and current account deficits and a reversal of reforms. The Ebola epidemic will hit the three affected economies Liberia, Sierra Leone and Guinea badly, but the drag on the African continent as a whole should be very limited.

Across the continent, statistical institutions are revising their GDP estimates to better reflect the sector composition of the different economies. In the case of Nigeria, this has increased the estimated size of the economy by almost 90%, making it Africas largest economy. For other countries, the revisions have led to smaller but still substantial changes. For example, Kenyas GDP was revised up by 25%. The revisions more accurately reflect the regions current industrial structure, with the share of services (eg, financial services, telecommunications and real estate) in a countrys economy typically having grown substantially.

Geopolitical tensions and lower oil prices are the main concerns in MENA.

Countries growth rates will diverge in CEE, with Russia and the Ukraine laggn.

Growth in SSA remains strong with the exception of South Africa, Ghana and the countries hit by the Ebola virus.

Statistical revisions to GDP estimates have made Nigeria the largest economy in Africa.



Capital flight risk in emerging marketsAs a Fed tightening nears, some emerging markets could be vulnerable to capital flight, causing a payments crisis, sharp devaluation and recession. Most emerging markets have fairly strong fundamentals and are expected to weather the storm. Also, some have taken corrective actions: allowing currency depreciation, tightening monetary policy to slow growth and protect their currencies, and even some structural reforms and fiscal prudence. Others Argentina, Venezuela, Ukraine have not been able to adjust and could suffer a crisis during the next 18 months.

However, a general emerging market crisis contagion is unlikely, because the truly problematic countries are special and well-known cases. Also some countries, India and Indonesia, for example, have made significant progress on all fronts over the past year. But others considered fragile a year ago Brazil, Turkey and South Africa have done little to alleviate concerns about their future economic outlook, though Brazil and South Africa have raised interest rates, which has stabilised their outlooks for the time being.

US tightening of monetary policy will reduce cash flows to emerging markets, rendering some of them vulnerable to capital flight and crisis.

But a general emerging market crisis is unlikely.

Table 2 Key macroeconomic indicators for emerging markets

Real GDP growth

(%-change yoy)

Inflation (%-change

over last year)

Current account balance

(2014, % of GDP)

Government balance

(2014, % of GDP)

External debt

(2014, % of exports)

Risk of capital flight

AsiaChina 7.3% 1 1.6% 5 2.9% 3.2% 34% LowIndia 5.7% 2 6.3% 5 1.5% 4.7% 87% MediumIndonesia 5.0% 1 4.8% 4 2.9% 2.1% 124% MediumThailand 0.4% 2 1.5% 4 3.8% 3.2% 50% Low

Central & Eastern EuropeCzech Republic 2.5% 2 0.7% 5 1.1% 2.0% 67% LowHungary 3.9% 2 0.5% 5 3.4% 2.5% 128% MediumPoland 3.3% 2 0.3% 5 1.2% 5.6% 148% LowRomania 1.2% 2 1.5% 5 1.8% 2.0% 145% MediumRussia 0.8% 2 8.3% 4 2.6% 0.3% 141% MediumUkraine 4.7% 2 17.5% 5 4.0% 6.2% 228% High

Latin AmericaArgentina 0.0% 2 20.9% 5 0.9% 2.1% 153% HighBrazil 0.9% 2 6.8% 5 3.5% 4.3% 101% MediumChile 1.9% 2 4.9% 5 0.6% 0.8% 124% LowColombia 4.3% 2 2.9% 5 4.1% 2.9% 151% LowMexico 1.6% 2 4.2% 5 2.2% 3.7% 90% LowVenezuela 1.0% 3 52.7% 6 n.a. 4.4% 141% High

Middle East & AfricaTurkey 2.1% 2 9.0% 4 5.5% 1.4% 181% MediumSouth Africa 1.1% 2 5.9% 5 5.1% 4.2% 133% Medium

1 data as of third quarter 2014 4 data as of October 20142 data as of second quarter 2014 5 data as of September 20143 data as of fourth quarter 2013 6 data as of December 2013

Note: Cells in red indicate observed weakness while cells in green indicate strength. The shading is based on ER&C analyses.

Source: Bloomberg, Thomson Reuters Datastream, IMF, Oxford Economics, Swiss Re Economic Research & Consulting.


Latin America Economic growth has slowed in 2014 in the face of deteriorating terms of trade, less favourable external financing conditions and widening imbalances in some countries (Argentina, Venezuela and, to a lesser extent, Brazil). The region is forecast to grow by just 1% in 2014, and to recover to 2-4% over the medium term. Brazil has weakened substantially, dragged down by reform inertia, a long and uncertain election cycle, high inflation and interest rates, and weaker demand in key exports markets (notably China and Argentina). Mexico, in contrast, exports to the accelerating US economy and has begun major structural reforms, and thus has strong near-term growth prospects. Chile and Peru have suffered worse-than-expected slowdowns in GDP growth due to their higher dependence on metal exports and more uncertain policy outlooks. In contrast, Colombia is poised to record stronger economic growth given a stable policy environment, large infrastructure investment pipeline and more favourable trade profile.

Venezuela and Argentina deteriorated further in 2014. Argentina is in selective technical default after refusing to abide by a US court ruling in June 2014 in favour of hold-out creditors to its 2005 and 2010 debt restructurings. The default has exacerbated Argentinas already precarious balance-of-payments position, which has been eroded by years of expansionary economic policies. These have fuelled inflation rates approaching 40% (unofficial estimates from August 2014). Venezuelas multiple-exchange-rate regime and price controls have led to widespread shortages of basic goods and economic stagnation. This, coupled with unrestrained economic stimulus, has pushed inflation over 60%. The recent drop in oil prices has raised the spectre of a sovereign default in the not-too-distant future. Given this backdrop, the outlooks for both countries are negative and contain medium-to-high probabilities of economic crises in 2015.

Risk scenariosThe risks to global growth are tilted to the downside this year because the Euro area has proven to be weaker than expected. There remains a 10% upside risk, but the possibility of a major regional downturn is now 15%. This is still a significant improvement from late 2012 when the downside risks were substantially higher (about 30%), but worse than a year ago when things were balanced. Prospects for the US have improved, but the opposite is the case for the Euro area. Additionally, there remains a risk of hard landing in China, and Japans recovery could be derailed after another sales tax increase next year. The economic situation in emerging markets remains tenuous, with many countries vulnerable to capital flight. In the downside scenario, yields on government bonds would stay near current levels through to mid-2015 and perhaps longer. Meanwhile equity markets would fall rapidly, and credit spreads would widen.

Upside risks include the US housing market, which could turn out to be very strong given pent-up demand, low mortgage rates and rising housing prices. In Europe, the UK economy continues to surprise on the upside, and Spains recovery is proving resilient. Finally, Chinas policymakers may end up being more expansionary than intended, creating unexpectedly strong growth. Interest rates would be higher under this scenario.

Latin America has entered a soft patch, but some countries are performing better than others.

The macro environment in Argentina and Venezuelas continues to deteriorate.

Downside risks have increased from a year ago, but are still less than in 2012.

Growth could be stronger than expected, improving investment returns and insurance premium volume growth.



Under the baseline, upside and downside scenarios, insurance premium growth will be close to GDP growth in the advanced economies and generally higher than GDP growth in the less developed economies, which will benefit from increased insurance penetration. In the downside scenario, there is greater stress from lower premium growth and pressure on asset valuations. The upside scenario would be more favourable for the re/insurance industry. Investment yields would improve and premium volume growth would rise along with economic activity.

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Real GDP growth drives insurance premium growth in all the scenarios.

Figure 3 Example of scenarios, using Euro area real GDP growth (upside, baseline and downside scenarios), 2014-2019


Non-life re/insurance: premiums grow, profits still weak

Non-life insurance in 2014: moderate growth, mixed underwriting resultsGlobal non-life insurance premiums are growing at a 2.5% pace in real terms in 2014, down from 3.0% and 3.1% in 2012 and 2013, respectively. In the advanced countries, premium growth has slowed to 1.7% from 1.9% last year, due mainly to weaker markets in the US and Canada. The western European market has had some strengthening based on moderate rate increases in Germany, France and the UK. In southern Europe, however, premium income has fallen significantly. This is in large part due to shrinking demand for motor insurance, with car sales at multi-year lows in some countries.

Premium growth in the emerging markets has also slowed compared to 2013, and significantly so. Premiums are up 5.5% in 2014, down from an 8.5% gain in 2012 and 8.2% in 2013. The notable deceleration is partially due to the economic slowdown in many export-dependent countries in Southeast Asia and CEE. That said, in China non-life premiums have risen by about 15%, based on new car sales and infrastructure investments. In keeping with the other emerging regions, premiums in Latin America, Africa and the Middle East are also estimated to be weaker this year than in 2013.

Country/region 2012 2013 2014E 2015F 2016F

United States 2.3% 3.2% 2.1% 0.8% 0.6%Canada 1.6% 2.6% 1.2% 1.1% 3.0%Japan 3.7% 4.3% 2.5% 2.0% 2.2%Australia 5.5% 5.7% 1.9% 3.0% 2.6%United Kingdom 1.5% 0.5% 1.6% 1.7% 2.4%Germany 2.4% 2.1% 2.7% 1.4% 0.7%France 2.7% 0.2% 0.6% 1.4% 1.6%Italy 5.5% 6.1% 3.7% 0.8% 1.0%Advanced markets 1.8% 1.9% 1.7% 1.4% 1.6%Emerging markets 8.5% 8.2% 5.5% 8.1% 8.7%World 3.0% 3.1% 2.5% 2.8% 3.2%

Note: Advanced markets include North America, Western Europe, Israel, Oceania, Japan, Korea, Hong Kong, Singapore, and Taiwan.


Underlying underwriting profitability1 in non-life has improved marginally in 2014 due to a gradual strengthening of premium rates in some key markets, and also because claims growth has remained benign. However, the investment environment remains challenging: after a short-lived recovery in 2013, government bond yields began to slip again this year. This has dashed hopes of an improvement in investment returns, which will instead remain subdued for a while thus limiting non-life insurers operating profitability. Overall industry profitability has declined in 2014, with RoE estimated to be at around 7%, down from 8.4% in 2013.2

1 Underwriting profitability is defined as the difference between premiums and the sum of expenses plus claims costs, as a percentage of premiums. Underlying underwriting profitability adjusts for prior year reserves changes and large catastrophe losses.

2 The calculation of the industry average profitability is based on data for the following eight leading non-life insurance markets: Australia, Canada, France, Germany, Italy, Japan, the UK and the US.

Global non-life premium growth has slowed to 2.5% in 2014 from 3% in 2013.

Premium growth in the emerging markets has slowed notably in 2014.

Table 3 Real growth of direct premiums written in major non-life markets and regions

Underlying underwriting profitability in the non-life sector has improved, but investment income and RoE remain low.



Underwriting profitability deteriorating in the US, improving in EuropeUnderwriting results in the US deteriorated in the first half of 2014. The positive impact of moderate rate increases was more than offset by slightly higher catastrophe and non-catastrophe losses, and reduced support from reserve releases. Of the cat losses, only one was noteworthy: the Northeast thunderstorm and hail event in May which caused about USD 3 billion in insured losses. The P&C combined ratio was 99% in the first half compared to 97% in the same period of 2013. By segment, the combined ratio was about 99% in commercial and 101% in personal lines. The accident year combined ratio3 for the industry rose to 102% from 101% in the first half of 2013. Reserves releases continued to support underwriting profitability in the first half of 2014 but at a lower rate that the year before. Unusually benign casualty claims trends are expected to end as claims costs increase, leading to more cases of adverse claims development.

Underwriting profitability in Europe4 improved in the first half of the year compared to the same period in 2013, with the average combined ratio below 95%. Most notably, there was a significant and broad-based improvement in Germany, driven by low natural catastrophe losses (whereas 2013 was impacted by severe floods and hailstorms), better margins following rate increases in motor insurance, and improved underwriting results in general liability. In France, Spain, Italy and the UK, combined ratios were stable to slightly declining. Underwriting results strengthened marginally across Europe, a continuation of a trend that began in 2010-2011, with improved combined ratios in the motor business, followed by moderate rate increases in other lines. Germany lags this general trend by more than one year. The most costly natural catastrophe in Europe so far this year has been Storm Ela, resulting in combined insured losses of EUR 2.5 billion across France, Germany and Belgium. Heavy floods in May in Serbia, Bosnia, Croatia and other eastern European countries led to total economic losses of USD 4.5 billion but with low insurance penetration, the associated insured losses were moderate.

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2010 2011 2012 2013 2014


In Japan and Australia, the biggest mature markets in Asia Pacific, underwriting results have been positive this year. In Australia, overall underwriting results have been stable relative to 2013, with improvements in property risks (homeowners, fire, industrial special risks) offsetting declines in liability lines. The claims burden in Japan for fiscal 2013 (which ended in April 2014) was also lower than the previous year, meaning a stronger underwriting result.

3 Unlike the published calendar year combined ratio, the accident year combined ratio excludes changes in claims reserves for prior underwriting years.

4 Based on an aggregated sample of large European insurers active in Germany, France, the UK, Italy, Spain and Switzerland.

In the US, underwriting results worsened in the first half of 2014

while underwriting results in Europe have been generally positive.

Figure 4 Combined ratio in Europe, quarterly, 2010 to 2014

Japan and Australia have had strong underwriting results this year.


Investment returns continue to suffer Non-life earnings are under pressure from weak investment returns. Seven years after the financial crisis, the investment environment remains challenging: fixed income securities, the main asset class in insurance, offer low yields and are exposed to many risks. Other asset classes may offer better returns, but at the cost of elevated volatility.

Figure 5 shows that in Germany, non-life insurers running yields are following the general interest rate trend. Maturing bonds and new cash flows can only be invested at lower yields, which drives the average yield of a bond portfolio lower. Even when market rates bottom and begin to rise again, insurers running yields will continue to fall: yield improvement will come with a considerable lag. The same applies to other mature markets where interest rates are at historical lows.

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Source: Bafin, GDV, Swiss Re Economic Research & Consulting.

As a consequence of the low interest rate environment, the contribution of investment returns to overall profitability will remain low for the next two years at least. For 2014, investment returns in non-life are estimated at around 9% of net premiums earned, down from 9.4% in 2013, and well below the 13.5% annual average of 19992007.

Current investment yields are down and are expected to decline further ...

even though interest rates are expected to start rising again.

Figure 5 Non-life insurers current investment returns in Germany versus 10-year German government bond yields

Investment returns are contributing less to net income.



Outlook 2015-2016: premiums will grow, but pressure on profitability to continueGlobal economic growth forecasts for 2015 and 2016 are more positive and demand for non-life insurance is expected to increase. Global premium growth is forecast to accelerate to 2.8% in 2015 and 3.2% in 2016, from 2.5% this year. The emerging markets will be the main driver. Premium growth in advanced markets is expected to slow slightly as the current cycle of moderate rate improvements loses steam alongside an only slight improvement in macroeconomic conditions.

Pricing in US commercial insurance has improved during the last two to three years, but the gains are moderating. The latest CIAB market survey index registered stable rates in the third quarter of 2014, while Marketscout indicated still a 1.5% increase in September. Generally, liability lines, which have fared better than property, are continuing to show some moderate price increases. Casualty pricing is expected to improve once reserve releases turn to adverse development. Claims costs are likely to rise with increasing economic activity (Figure 6).5

50%

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60%

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70%

75%

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2013201220112010200920082007200620052004

20132012

20112010

20092008

20072006

20052004

Source: SNL, Swiss Re Economic Research & Consulting.

There are virtually no price surveys available in Europe. However, several market leaders indicated stable to slight rate improvements across most commercial business lines that were renewed during the first half of 2014. There were exceptions such as Italian motor and commercial insurance lines. Domestic motor insurance in the UK is also experiencing shrinking margins, but by far less than the double-digit declines new business surveys suggest. According to the Association of British Insurers (ABI), average motor premiums were 4% lower in the first half of 2014 than in the first six months of 2013.6

5 Swiss Re, sigma 4/2014 - Liability claims trends: emerging risks and rebounding economic drivers.6 Quarterly average comprehensive private motor insurance premium data from the ABI.

Premiums will grow in 2015 and 2016, driven by emerging markets.

Price increases are moderating in the US

Figure 6 US Other liability accident loss year ratios, 2004 to 2013

while in Europe they will generally be stable to slightly stronger (but not everywhere).


The pricing outlook for the non-life insurance industry is mixed with significant differences expected depending on market and line of business. Recent price improvements are fading and it is possible that more lines of business will experience rate softening. Prices in certain lines, such as aviation on the other hand, will improve as the market responds to the higher loss occurrence of 2014.

One important factor for such a scenario is the current strong capital development in the insurance industry, which puts competitive pressure on the primary P&C insurers. Abundant capital leads to: (1) a decline in reinsurance demand since more risks can be retained; and (2) pressure on primary insurance margins. Even so, the current trend towards rate softening may be short-lived: Reserving may soon prove to be insufficient. It is difficult to forecast the timing of this and there are big differences between individual companies. Reserve releases will eventually shift to a need to strengthen reserves. When this happens, it will no longer be possible to ignore that prices are too low to make an underwriting profit and the scene will be set for a hardening of rates.

Stricter solvency regulations and higher capital requirements will help turn the market. Solvency II is expected to be implemented in 2016 and a further tightening of rating agency models is also expected.

Volatile and significant capital market developments impacting insurers capital base may be another trigger for rate hardening, because this could include impairments of invested assets, or a quick and strong rise in interest rates.

Based on the current pricing trends, overall underwriting profitability in non-life insurance will likely be more or less stable in most markets in 2015 and 2016. Investment returns are expected to remain low. Profitability will rise only slowly as prices and interest rates increase. Further, reserves may begin to develop negatively in 2015, reducing accounting profits in the near term and accelerating the hardening of casualty rates.

The non-life reinsurance market: on the verge of low profitability years?The non-life reinsurance industry is caught between a bright present and cloudy future. The industry is currently heading for a third year of very strong underwriting results. Assuming there are no large catastrophes in the rest of the year, the combined ratio is expected to be around 90% again this year, and RoE will remain double-digit at 12%. Also, capital levels have increased rapidly due to high profits, and the recent decline in interest rates has again inflated the value of fixed income assets and thus GAAP capital.

However, reinsurance prices are softening. US property cat rates started to weaken in mid-2013 and the trend towards softening spilled over into both the general January 2014 renewals and those that followed in June and July. Most obvious and most observed has been the downward trend in property catastrophe reinsurance, but rates in non-catastrophe covers in P&C lines of businesses have also softened markedly.7 In general, rates in casualty have been less soft than in property lines and in a few segments they have been firmer. The trend of softening of prices is expected to decelerate as demand increases and the pressure for profits grows.

7 Other than for primary insurance in the US and for property catastrophe reinsurance, no price indices are available for the major reinsurance lines.

Rate improvements are fading

as a result of increasing competitive pressures on primary P&C insurers.

However, the trend to rate softening could be short lived.

Underwriting profitability is likely to improve only slightly.

Strong underwriting results and increasing capital levels

have triggered significant rate softening in non-life reinsurance this year, but the pace is expected to slow.



Capital development in non-life reinsurance: alternative and traditionalThere is currently much talk about excess capacity in the reinsurance market as prices soften, particular for property cat covers. It was primarily the quick expansion of alternative capital (AC) in 2013-2014 that generated the supply/demand imbalance in property cat reinsurance. AC has become a standard form of re/insurance capital supply in certain peak risk areas, mainly in the US property cat and global retrocession markets. After a rally in the mid 2000s, which was interrupted by the outbreak of the financial crisis, AC stagnated for a few years before beginning to rise strongly again in 2013. By mid-2014, the reinsurance capacity provided by AC was estimated at USD 59 billion, up from USD 50 billion by end of 2013, according to Aon Benfield.8 AC has now a 14% market share in the global property catastrophe reinsurance market.

The capital position of global reinsurers, the traditional capital, has improved since 2011 along with rising premium income.9 The hard capital of reinsurers (ie, capital which excludes elusive unrealised capital gains), developed strongly between the end of 2011 and end 2013, growing by 22%. Premiums also rose, partially due to a moderate hardening of rates but also due to large premiums transactions such as large Chinese motor quota-share reinsurance treaties. Premiums a proxy for insured exposures and capital grew roughly at the same pace during this period. Thus, this capital could not be considered excessive or the main cause of softening. Instead, AC was likely a main cause for the change in the pricing cycle, since reinsurance rates started to soften after mid-2013, not earlier.

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Essentially four factors have impacted capital development recently: Natural catastrophe losses or lack thereof; Reserve releases from prior years claims; Interest rate movements, and, Capital management activities, including dividend payments, capital raising and share buy-backs.

8 Aon Benfield, The Aon Benfield Aggregate, 30 June 2014, p 3.9 The figures presented here are based on a sample of 20 leading reinsurance companies.

A strong influx of alternative capital led to a supply/demand imbalance in property catastrophe reinsurance.

And this AC was most likely the main cause of price softening in mid-2013.

Figure 7 Global non-life reinsurance premiums and GAAP capital, 4Q09 = 100

Four factors have recently affected reinsurance capital changes.


In 2011, large natural catastrophe losses (major earthquakes in New Zealand and Japan) curbed reinsurers capital growth. Underwriting losses were offset by unrealised capital gains from falling interest rates and reserve releases. In the following two and a half years, natural catastrophe losses were lower and underwriting results were strong.

Reserve releases from prior years claims of liability lines, which have been significant since 2009, have also contributed to capital developments recently. Losses from liability lines have simply been lower than expected, which allows reserves to be released, contributing to profits and capital developments.

Changes in interest rates cause mark-to-market swings in the values of invested fixed income securities, the most important asset class of reinsurers, impacting the GAAP accounting capital of reinsurers. Unrealised capital gains, which were between 4-5% of industry capital in 2009 and 2010, soared to 14% at the end of 2012. They fell back to 5% through 2013, but had risen again to 10% by the end of June 2014 as interest rates declined. These unrealised gains are temporary and will disappear over time if the bonds are held to maturity.

Because pricing has been softening and traditional capital has been growing rapidly, reinsurers have begun to more actively manage their capital. They have stepped up their capital management efforts by increasing dividend payments and intensifying share buy-back programmes. This will decrease capital and help to stabilize property nat cat prices.

Strong underwriting results in non-life reinsuranceThe non-life reinsurance industry posted strong underwriting results during the first three quarters of 2014, amidst an absence of large natural catastrophe losses. Based on preliminary data, the reinsurance industry is expected to report a combined ratio of around 90% for the financial year 2014. This figure, however, does not properly reflect the underlying underwriting profitability, because large natural catastrophe losses have been lower than anticipated and the claims ratio has been reduced by positive reserve releases derived from redundant reserves for prior years claims.10 Excluding these two major impacts, the underlying underwriting result would instead be around 98%, and RoE about 8%.

Investment returns still weakThe investment environment for reinsurers is the same as it is for insurers: challenging. The industry achieved a mere average 3.6% annualized investment yield in the first half of 2014. Current investment returns have fallen below 3%, while capital gains are at 0.9%. Nevertheless, for the full-year 2014, an overall RoE of around 12% is expected for non-life reinsurance due to the windfall gains in the underwriting result.

10 With regards to the P&L account of insurers, claims reserve releases lower the amount of claims incurred which are booked in a certain financial year, thus positively impacting underwriting results and net income. Claims reserve additions add to the accounted claims burden in a financial year, with the opposite effect on the P&L. For a deeper discussion, see sigma 4/2014 - Liability claims trends: emerging risks and economcic drivers.

Large catastrophe losses in 2011 reduced capital, but losses were lower in 2012 and 2013.

Reserve releases from casualty lines have also bolstered capital recently.

Interest rate changes have created volatility in GAAP accounting capital.

Reinsurers have stepped up capital management to fight excess capacity.

The reinsurance underwriting result has been strong so far this year, given low nat cat losses. The combined ratio for 2014 is estimated to be around 90%.

Investments: capital gains and current yields are down.



Outlook for 2015 and 2016 Real premium growth in the non-life reinsurance sector is expected to be weak in 2015 and 2016. Advanced markets will be impacted by the current softening of rates, leading to stagnating premiums in 2015 and only a slight increase of 1.3% in 2016. Premium growth in the emerging markets overall is heavily influenced by ups and downs in China. After this years increase of cessions due to large motor quota share reinsurance transactions, premium volumes in China are expected to drop back in 2015 and 2016. Excluding China, emerging markets are expected to have improving real growth rates of 5% in 2015 and 6% in 2016.

Given the strong underwriting results and ongoing abundance of capacity, property catastrophe reinsurance rates will likely remain under pressure. In 2016 rates will likely stabilise. Over the long term, however, demand for nat cat capacity will continue to increase. For casualty and special lines, significant differences in pricing developments by market and line of business are expected.

Assuming average catastrophe losses, somewhat softer reinsurance rates, a less benign claims environment than in the last three years, and declining reserve releases, the combined ratio in non-life reinsurance is forecast to be at around 100% in 2015. Underwriting profitability is expected to remain below the average of recent years. Also, though interest rates will be rising in the advanced markets in 2015 and 2016, they will still be low by historical standards, so investment returns will remain below pre-financial crisis levels. The overall profitability outlook is therefore expected to be a RoE of around 7% in 2015 and 2016.

Region 2012 2013 2014E 2015F 2016F

Advanced markets 4.3% 0.3% 0.5% 0.3% 1.3%Emerging markets 1.0% 6.6% 15.9% 4.6% 0.5%World 3.1% 1.7% 3.5% 1.0% 1.1%


Trade credit insurance11 Global trade credit insurance premiums are estimated to have expanded by around 2.5% to USD 10.8 billion in 2014, after contracting by 1.5% in 2013 (all growth rates adjusted for inflation). Premium growth in Western Europe the largest trade credit insurance market remained sluggish at 0.5%, but this is an improvement from the contraction of the previous two years. While premiums in North America have expanded at a solid pace of 5.0% in 2014, growth in Latin America has been close to zero. Sector growth since the financial crisis has been strongest in China with premiums there increasing about fivefold between 2008 and 2014. This has been driven by the expansion of Sinosure, the Chinese export credit agency.

Overall sector profitability has remained solid with an average loss ratio of just below 50% in 2013, according to data from the International Credit Insurance & Surety Association (ICISA). According to data from the largest private trade credit insurance companies, loss ratios improved further during the first half of 2014.

11 For a more detailed overview of recent developments in the trade credit insurance and surety markets, please refer to the recent Swiss Re Expertise Publication: Trade credit insurance & surety: taking stock after the financial crisis, October 2014.

Premium growth will be subdued in the advanced and emerging markets.

Property cat rates will likely be under pressure at January 2015 renewals.

The average combined ratio is expected to be around 100% in 2015, and RoE 7% in 2015 and 2016.

Table 4 Real growth of non-life reinsurance premiums

Trade credit insurance premiums have expanded moderately in 2014.

Profitability remains sound


Despite these favourable trends, the monitoring of potential early warning signs remains essential. While the major credit insurers have de-risked their portfolios since 2008, favourable loss developments, increasing willingness of policyholders to revert to self-insurance, and ample capacity from both primary and reinsurers have led to a gradual decline in premium rates over recent years.

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Notes: The implied premium rate refers to the ratio of premiums to insured credit limits. The premium data in the chart is from ICISA and differs from the premium data referred to in the text, which is based on data from insurance supervisory authorities.

Source: International Credit Insurance & Surety Association (ICISA).

SuretyGlobal surety premiums are estimated to have expanded by about 3.0% to USD 13.6 billion in 2014. The US is the largest market, accounting for about 40% of global premiums. Surety is also important in many Latin American markets where like in the US there are legal bonding requirements. South Korea is the largest surety market in Asia.

Surety firms compete with banks for bonding and guarantee business in many markets. In the US, the banks role is restricted by law but in many European markets, banks are important players. In Latin America banks compete also, but to a lesser degree than in Europe.

Demand for contract surety in advanced markets remains subdued due to government spending cuts, so surety firms are looking for new growth opportunities. The share of emerging markets in global surety premiums has increased significantly in the last decade, particularly in Latin America.

At an aggregate level, market discipline appears satisfactory, notwithstanding some recent large losses in a few markets. However, there is a risk that the current fierce competition both on the primary and reinsurance side will lead to pressure on premium rates and a softening of terms and conditions.

While the economic environment remains challenging, it may also present some opportunities for surety companies. For example, surety insurers may benefit from the reduced risk appetite of banks in some European markets and secure some of the surety market share that has traditionally been in banks hands.

but premium rates have been declining recently.

Figure 8 Gross premiums, insured credit limits, and implied premium rate (indexed to 2005 = 100) in trade credit insurance, and net claims ratio, 2005 to 2013

Global surety premiums totalled USD 13.6 billion in 2014. The US accounts for about 40% of the global market.

Sureties compete with banks in many markets.

The share of emerging markets in global surety premiums is increasing.

There is a risk that fierce competition could put pressure on premium rates.

On the other hand, surety companies may benefit from the reduced risk appetite of many European banks.


Life re/insurance: navigating the new normal

Premiums grow, but business environment will remain challengingGlobal life insurance premiums have risen by 4.8% in 2014 in real terms. Life insurers balance sheets have generally strengthened as companies de-risk products and asset impairments moderate due to stronger credit and equity markets. But continued low economic growth, persistently low (and again declining) interest rates and regulatory changes mean the business environment will remain challenging in the coming years.

On an accounting basis, the life insurance industrys reported capitalization improved further in 2014 (see Figure 9), mirroring solid business operations and strong profits. However, the improvement has in part been driven by the renewed decline in interest rates, resulting in higher mark-to-market values of fixed-income investments and derivative instruments.12

In an economic sense, low interest rates continue to create serious headwinds. Life insurers must honour guarantees close to, or even above, their average investment yield, resulting in lower profitability and negatively impacting capitalization and solvency.

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Market cap weighted average

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4Q13

2Q13

4Q12

2Q12

4Q11

2Q11

4Q10

2Q10

4Q09

2Q09

4Q08

2Q08

4Q07

Note: Based on IFRS/local GAAP data. Missing Q1/Q3 values are interpolated. Companies in the sample include: Aflac; Allianz; Assurant Inc; Aviva; AXA; China Life; CNP; Generali; Genworth Financial; Great-West Lifeco; Hartford; Legal & General; Lincoln National; Manulife; Metlife Group; Old Mutual; Ping An; Principal Financial Group; Protective Life; Prudential (UK); Prudential (US); St. James Place ; StanCorp Financial Group; Standard Life; Storebrand ASA; Sun Life; Swiss Life; Torchmark; Unum Group; Zurich.

Source: Company reports, Bloomberg, Swiss Re Economic Research & Consulting.

With low interest rates continuing to pressure investment yields, life insurers have been shifting their portfolio mix toward higher-risk, less liquid assets such as infrastructure, private equity and joint ventures. Interest rates are projected to gradually increase but they will remain low by historical standards. As in the non-life sector, investment yields will improve slowly and running yields will continue to decline over the next few years and squeeze investment income, the main source of life insurers income. The situation is worse for life insurers than non-life insurers because of the longer duration of their liabilities.

12 In US GAAP and Japan GAAP, the interest rates used to value liabilities are locked in. Under IFRS, valuation of insurance liability allows insurers to use either US or local GAAP. In the UK, Canada, Australia, the Netherlands, Sweden, South Africa and other countries, local GAAP do not lock in rates.

Global premiums grew 4.8% in 2014, but the outlook remains challenging.

Capitalisation on an accounting basis further improved in 2014.

Insurers will have to contend with the low interest rate legacy in the coming years.

Figure 9 Shareholder equity for 30 global composite and life insurance companies, 4Q07 = 100

In a scenario of gradually increasing interest rates, running yields will continue to decline.


In-force premiums and new business recovered in 2014In advanced markets, real premium income has grown by 3.9% this year, with strong gains in Western Europe (except in Spain and the Netherlands), in Canada, Australia and Japan. In the US, premium income has rebounded following a dip in 2013, which was partly caused by one-off effects.13

In emerging markets, premium income has risen by 9.1%. Growth has been strongest in the emerging Asian countries (up 13.1%). In China, premiums have increased by 15.7% and in India, premiums are up 6% after four years of contraction and stagnation. Premiums have risen by about 3.6% in Latin America, well below the trend growth of recent years, and by just 1.8% in Africa. In CEE, premiums were down 1.7%, led by a decline of single premium business in Poland as a result of regulatory changes and new guidelines in the bancassurance segment.

Country 2012 2013 2014E 2015F 2016F

US 2.5% 7.1% 1.3% 2.1% 2.8%Canada 1.9% 3.0% 3.8% 4.1% 4.1%UK 3.8% 2.6% 3.5% 3.4% 3.3%Japan 5.8% 5.8% 3.5% 4.5% 2.5%Australia 4.4% 9.6% 20.7% 5.6% 4.1%France 12.3% 6.8% 3.6% 3.4% 3.3%Germany 0.9% 1.6% 2.2% 0.8% 0.9%Italy 8.4% 20.4% 19.1% 2.5% 1.7%Spain 11.1% 4.3% 8.7% 0.6% 0.6%Netherlands 15.3% 5.9% 3.3% 3.1% 3.4%Advanced markets 2.1% 1.5% 3.9% 3.0% 2.8%Emerging markets 5.5% 4.5% 9.1% 10.4% 10.7%World 2.6% 0.5% 4.8% 4.3% 4.2%


Life insurance is a long-term business and new business is an important contributor to industry growth. New business in seven major markets, representing 61% of global premium income, is expected to have increased by more than 5% in 2014 (after inflation), following a 1.5% decline in 2013. The increase has been driven by strong sales in the savings business.

In the US, sales of term insurance products fell 3% in the first half of 2014, having been largely unchanged in the previous two years. Sales of disability and long-term care insurance have weakened also, with demand impacted by higher prices and low income growth. In Canada, term sales were slightly lower (down 1%) in the first half of 2014 following a year of solid growth in 2013.

In the UK, protection premiums declined by 2% in the first half of 2014 compared with the same period a year ago. In Germany, term sales were down 2% in the first three quarters of the year, while sales of disability products have been flat. Long-term care insurance has seen a marked decline of 20% (the first decline ever in this line of business). In Italy, on the other hand, protection sales have increased by around 3%.

13 In 2012, two large pension fund transfer deals with private pension plans boosted direct premiums by more than USD 30 billion.

Premium income in advanced markets has increased by almost 4% this year.

Premium growth in emerging markets has come mostly from Asia.

Table 5 In-force real premium income growth for life insurance

New business volumes have improved in most countries in 2014.

In the US, protection sales have declined.

In Europe, sales of protection products were similarly weak.



There is significant potential for sales growth in mortality and health protection given a large protection gap in many markets and as consumer awareness of underinsurance is rising (see Box: How to reach consumers and close the protection gap). At the same time, in the current environment the mortality and short-tail health protection business is attractive for life insurers because profitability performance is less sensitive to interest rates than it is in the savings product segment.

How to reach consumers and close the protection gapMany people around the world are un- or underinsured, even though they may be well aware of the substantial value that mortality protection and other insurance products provide. The mortality protection gap the extent to which families are insufficiently covered in the event of the death of the primary breadwinner illustrates the far-reaching need for additional protection across societies at large. According to Swiss Re estimates, the gap amounts to around USD 86 trillion globally.14

To help narrow this gap, life insurers need to understand why consumers do not buy life insurance. Evidence from consumer surveys highlights some commonly cited reasons for not buying, including price and value for money, perceived lack of need, product complexity, a lack of trust in the industry, and the often lengthy and convoluted buying process. In addition, the study of behavioural economics sheds light on how consumers make decisions and how different cognitive biases such as overconfidence, information overload, or status quo bias can lead them to view their situation as more benign than it actually is, or push them to postpone purchasing life insurance.15

Understanding these influences can guide insurers to tailor products and the buying experience to the needs and preferences of consumers. Takeaways from consumer research suggest a number of areas for consideration. First, product simplicity and transparency are important, so life insurers should provide a suite of simple and transparent products suitable for every stage of the lifecycle. Also, there is need to improve the purchase experience by advancing the underwriting and policy issue process. The use of predictive analytics, behavioural models, and Big Data already offer significant potential to bring down the costs and time of underwriting. Moreover, life insurers must adapt distribution strategies to the digital age and make the best of technology to reach more consumers on internet, mobile and social media platforms. Companies able to engage consumers in a transparent, easy and speedy application, underwriting, and policy issue experience will be well-positioned to have a positive impact on consumer purchasing behaviour and start to narrow the protection gap.

14 For more detail on mortality protection gap estimates by region see Swiss Res publications The Mortality Protection Gap in the US, Mortality Protection Gap: Asia-Pacific 2011, Customers for Life European Insurance Report 2010, Term & Health Watch 2012, and The Mortality Protection Gap in Latin America 2013.

15 For more details see sigma 6/2013: Life insurance: focusing on the consumer, Swiss Re, 2013, and Term life insurance in Germany The consumers perspective a need for preferences-orientated product design?, Swiss Re, 2014.

There is ample scope to increase sales of protection products, given both demand- and supply-side drivers.

Many consumers are un- or underinsured despite being aware of the need for protection.

To help narrow the protection gap, life insurers need to better understand consumer behaviour.

Many areas need attention, including product design, underwriting and distribution.


Profitability: positive developments in the past four quartersFollowing a post financial-crisis recovery, profitability for a sample of global composite and large life insurers was below 10% for several quarters (see Figure 10). It has improved in the four quarters since mid-2013, and RoE now stands at around 12%. The improvement has been largely driven by sharply stronger profitability for UK insurers, although North American and European insurers profitability has also picked up recently. Positive stock market developments and stronger premium growth, along with cost containment and in some cases gains from derivative positions reflecting a decline in interest rates (eg, in the US), have been the main drivers of the strengthening trend.

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4Q10

2Q10

4Q09

2Q09

4Q08

2Q08

4Q07

Note: Based on IFRS/local GAAP data. Missing Q1/Q3 values are interpolated. Companies in the sample include: Aflac; Allianz; Assurant Inc; Aviva; AXA; China Life; CNP; Generali; Genworth Financial; Great-West Lifeco; Hartford; Legal & General; Lincoln National; Manulife; Metlife Group; Old Mutual; Ping An; Principal Financial Group; Protective Life; Prudential (UK); Prudential (US); St. James Place ; StanCorp Financial Group; Standard Life; Storebrand ASA; Sun Life; Swiss Life; Torchmark; Unum Group; and Zurich.

Source: Company reports, Bloomberg, Swiss Re Economic Research & Consulting.

Outlook for 2015 and 2016: navigating the new normal The macroeconomic and financial market environment along with interest rates will be critical for the future of the life insurance industry. The short- to mid-term outlook remains challenging. Global real premium income will increase in the next two years, by an estimated 4.3% and 4.2% in 2015 and 2016, respectively. Premiums in the advanced markets are expected to grow by 3.0% in 2015 and by 2.8% in 2016. In emerging markets, they are forecast to grow by 10.4% in 2015 and 10.7% in 2016.

The bulk of life insurers premium income (about 85%) stems from saving-type insurance business, in which policyholders are refunded when an insurance contract matures.16 The share of savings (as a percentage of total premiums paid) in advanced countries has declined slightly since 2000 (see Figure 11). In emerging markets, the share has been moving up to levels similar to that in advanced markets as insurance markets develop and household incomes increase.

16 Savings-type insurance combines risk protection and wealth accumulation. Savings-type insurance comprises fixed and variable annuities, universal life and variable universal life, endowment policies, most unit-linked business, and also retirement and pension products to accumulate funds for retirement.

Life insurers profitability has improved since mid-2013.

Figure 10 Return on equity of 30 global composite and life insurance companies

The macroeconomic outlook is critical for the life insurance sector.

The mainstay of life insurance is the savings-type business.



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Savings-type solutions are often more appealing for consumers than pure risk protection products as consumers receive part of the premium and a share of the investment return at maturity. This is in contrast to pure risk products like term-life insurance, which provide no return unless the insured event occurs. Another reason for the success of savings-type insurance is that it often comes along with tax advantages.17

A drawback of savings-type insurance versus other savings vehicles such as mutual funds and bank products is that the costs of insurance and administration can absorb some of the accumulated returns. In times when interest rates were normal, these costs were less visible to policyholders and at maturity, savings-type insurance still offered an attractive return on investment. In recent years, however, record low interest rates have made it more challenging for insurers to earn enough investment income and in many countries, guarantees and profit sharing arrangements have been reduced.

This has made savings-type insurance less attractive forpolicyholders. For example, in China many consumers have moved their investments to so-called wealth management products, including trust loans, which offer higher yields. In the UK, pension reforms are expected to impact demand for annuities also (see Box: UK pension reform and implications for life insurers). In addition to weak demand, the supply of savings-type insurance has become more expensive for regulatory reasons (eg, higher capital requirements for long-term guarantees or asset liability mismatches), reducing insurers willingness to make these kinds of product available.

17 For example, premiums can be deducted from income tax (but will usually be taxed during the payout phase, which allows smoothing and reduces lifetime taxes). In some jurisdictions savings-type insurance can be used for estate planning by reducing inheritance tax. And in some countries capital gains within savings-type insurance are tax free.However, to qualify for preferential tax treatment, which increases the attractiveness of savings-type insurance, insurance products are usuallyrequired to offer a certain minimum level of risk protection or be in force for a minimum duration.

Figure 11 Savings-type business as share of life insurance premium income

Savings-type business offers an attractive value proposition

but less so in the existing environment of very low interest rates.

For this reason, consumers in some countries have moved their investments to higher-yielding products.


UK pension reform and implications for life insurersIn a surprise move, in its March 2014 Budget the UK government announced significant changes to the annuity market which could have far reaching implications for UK life insurers. From April 2015, individuals will be able to take as much or as little as they want from their defined contribution pension pot when they reach the minimum pensionable age (normally 55). Under the existing arrangements, most pensioners are effectively mandated to buy an annuity upon retirement. The market for annuities only generates around one-fifth of UK life insurance sales, but it represents around two-thirds of major UK insurers new business profits.18 Those insurers which rely heavily on annuity business will therefore need to adapt to the new market environment.

There are number of avenues UK life insurers may pursue in order to safeguard income streams and profits. These include: Product innovation: insurers could add replacement products to capture and retain flows in the accumulating or savings phase, and promote alternative retirement products such as income drawdown or fixed-term annuities. The margins on income drawdown are much narrower than annuities even though associated capital requirements are much reduced. So insurers will likely have to invest in developing new propositions. This might include some form of capital/income guarantee products such as US-style variable annuities with living benefit riders (although the experience overseas as well the heavier capital charges they attract could act as a deterrent).

Shift in business mix: UK life insurers may also look to employ more of their capital in other lines. The bulk annuity business whereby company pension funds transfer their assets to an insurer in exchange for taking over pension liabilities is reportedly an attractive opportunity given the limited amount of players in the market.19 According to Towers Watson, 2014 is likely to be a record year for UK pension schemes buying bulk annuities with sales exceeding the previous peak of GBP 8.7 billion achieved in 2008.20

A number of the major UK life insurers own large asset management operations, and this will insulate them to some extent from the heightened competitive pressures facing their insurance businesses. However, one additional consequence of greater freedom/flexibility for policyholders is the potential for increased adverse selection. Previous research has found that the effects of adverse selection in compulsory annuity markets are substantially lower than in the voluntary annuity markets.21

This all raises the question how life insurers can respond to the various challenges and keep their core business running in the new normal environment of lowyields and risk-based regulation. For example, insurers could offer more flexible guarantees that are reset every 10years, according to a reference portfolio yield instead of a lifetime guarantee set at the point of sale. Also, new guarantee concepts are being introduced, such assavings-type insurance that guarantees a certain return only over the full duration of the contract rather than an annual return. This increases investment flexibility and also reduces capital costs as short-term market fluctuations can be absorbed over time. Another strategy observed is to unbundle products, offering savings and risk protection as two separate products. This would result in a shift towards more fee-based (unit-linked) and underwriting-based (life risk protection) business.

18 UK Annuities: The Goose that (used to) lay the Golden Eggs, Autonomous Research, 20 March 2014.19 Friends Life and Scottish Widows are reportedly considering the wholesale annuity market. Legal &

General has also developed a new service to encourage pension schemes from its funds arm, Legal & General Investment Management, to convert their assets into bulk annuities.

20 The timing is right for bulk annuities, Finance Matters, July 2014, Towers Watson.21 Finkelstein, A and Poterba, J, 2002, Selection Effects in the United Kingdom Individual Annuities

Market, The Economic Journal, issue 112, Wiley, Oxford, pp 2850.

Recently announced pension reforms will likely significantly impact the annuities market in the UK.

Insurers will likely look to ...

develop alternative products to support profitability

or shift into other lines/markets such as bulk annuities.

Some UK insurers have asset management arms and are hence well positioned to offer new products. But they will need to be mindful of the potential adverse selection.

New guarantee concepts are being introduced to re-establish the savings-type insurance value proposition.



Other actions life insurers have taken to increase revenues and lower expenses are to improve investment and asset liability management, and reduce operational costs. Also, companies have divested of subsidiaries and closed blocks of savings business. For example, in recent years a number of insurers have sold their asset-intensive business in the US and Canada to consolidators backed by alternative investors.

Stressed companies will continue to seek ways to improve their balance sheets, be that through further optimization of their assets and liabilities, reinsurance, monetization of embedded future profits, or divestiture of some parts of their business. Depending on how long interest rates stay low, weaker companies may be forced to stop writing new business or merge with stronger competitors. As a result, there will likely be more industry consolidation, mergers and acquisitions activity, and sales of run-off business.

Ebola: no material impact on insurance expectedA total of around 9 000 confirmed, probable, and suspected cases of Ebola had been reported in seven countries (Guinea, Liberia, Nigeria, Senegal, Sierra Leone, Spain and the US) as of 12 October 2014. There have been about 4 500 deaths so far. However, Ebola is unlikely to pose a pandemic threat for various reasons:1. significant effort is being put in place to help west African countries contain the

outbreak;2. a sustained transmission into other regions is unlikely;3. developed markets take the necessary isolation and hygiene measures to prevent

the spread of the disease; and4. vaccines, although not fully tested and approved, are already being used. This

buys some time before a tested vaccination is eventually available.

There is a risk that the Ebola virus will mutate into more contagious and/or to strains better adapted to humans. In addition, some aspects of the virus are not well understood and this could be of concern also. Overall, however, Ebola is unlikely to materially impact the insurance sector. Life insurers could be affected if mortality rates increase. Health insurers will be affected if costs for tests, vaccination and treatment increase. Meanwhile, P&C could be affected through the liability business (workers compensation and business interruption). But insurance penetration in the region that Ebola has hit hardest Western Africa is very low, and global insurers have very limited exposure to those markets. Development of a pandemic in which Ebola reaches markets with high insurance penetration is unlikely. And, even if there were to be 100 000 deaths from Ebola in the US for example, that would generate just a 5% increase in the average number of death claims in life insurance, which is well within the means of a well-capitalized and reinsured insurance sector.22

22 Insurance Industry Ramifications of the Spread of the Ebola Virus, Insurance Information Institute, 13 October 2014.

Improved cost efficiency, underwriting, and asset liability management will help offset lower investment results.

Further measures to improve balance sheets will be necessary.

Ebola has hit countries in West Africa hard, but the virus does not pose a pandemic threat.

Mutation could lead to more contagious strains of the virus but overall Ebola is unlikely to be a major issue for the insurance industry.


The life reinsurance market For the seven reinsurers among the Top 10 with available data,23 net premiums earned (in USD terms) in the first half of 2014 were up 0.3% from the same period in 2013. Accident & Health business supported premium growth, but there were fewer large deals and enhanced annuities transactions. Nevertheless, these areas are expected to drive growth in the coming years and also help reinsurers in the UK and North America diversify away from traditional mortality business.

Premiums in traditional life reinsurance consisting of mortality and morbidity are estimated to have grown 0.8% globally in 2014. In advanced markets, a 3.7% decline in premiums in the US due to declining cession rates and weak protection sales was offset by more positive developments in the UK and the large continental European markets. In the emerging markets, premiums grew by just 0.3% due to negative developments in CEE and Latin America.

Region 2012 2013 2014E 2015F 2016F

Advanced markets 0.6% 0.7% 0.8% 0.2% 0.1%Emerging markets 3.8% 5.0% 0.3% 6.7% 6.8%World 0.3% 0.3% 0.8% 0.3% 0.4%


Prospects for 2015 and 2016Traditional life reinsurance is expected to stagnate in the next two years, with advanced markets even seeing a slight decline in premiums. In the US, business opportunities will be impacted by changes in regulation, including increasing scrutiny of the use of captive reinsurance and an expected move towards principles-based reserving. In other advanced markets, where cession rates are usually much lower than in the US and the UK, traditional reinsurance will continue to record low, single-digit growth in line with the protection business on the primary side. In emerging markets, life reinsurance is expected to grow by about 6% to 7% annually. In these markets, life reinsurers main value proposition will be to support primary insurance in product development, underwriting and claims management.

However, life reinsurers will seek non-traditional or less-developed areas of growth. In the next few years, many primary insurance firms will need solutions to manage the capital strain that the macro environment and changes in regulation will inflict. Some primary insurers will shed unprofitable or non-core business while others will look to grow through M&A, creating opportunities for transferring blocks of in-force business to reinsurers and specialised consolidators. Moreover, the shift to high-growth markets will lead to M&A and divestitures in saturated markets, resulting in run-off and closed block opportunities. The need for these large transactions is likely to remain strong, providing a growth opportunity for life reinsurers.

Life reinsurers are increasingly providing solutions to take longevity risk from primary companies with annuity business, and from private and public pension plans. Momentum in the market for longevity risk transfer remains strong, with a record high amount of longevity liabilities transferred or protected via longevity reinsurance and swap transactions in 2014. The market is traditionally most active in the UK. There have also been transactions with Australian, Canadian and French insurers. Longevity reinsurance activity is expected to develop in other markets as well, including in the Netherlands, Switzerland and the US, where there is significant demand potential, particularly from pension funds. The US has an active market for pension buy-outs24 and several large deals have been completed in recent years.

23 These seven companies (Munich Re, Swiss Re, RGA, SCOR, Hannover Re, Berkshire Hathaway and Partner Re) accounted for about 87% of the total life reinsurance market net premiums earned in 2013.

24 In a buy-out, the pension scheme transfers its entire relationship with plan members to an insurance company in return for the payment of an upfront premium to the insurer. All risks, not only longevity, are transferred away from the pension fund.

Among top life reinsurers with available data, net premiums earned edged up 0.3% in the first half of 2014.

Traditional life reinsurance premium income grew by 0.8% in 2014.

Table 6 Real premium income growth for traditional life reinsurance

Premiums in traditional life reinsurance will likely stagnate over the next two years.

Strong demand for block deals and capital relief solutions is expected.

Reinsurers are providing risk transfer solutions for longevity risks.


Emerging markets: steady improvement ahead

Non-life insurance: economic headwinds hold back premium growthNon-life premium growth in the emerging markets has been supported mainly by the strong performance of emerging Asia in 2014. There has been solid growth in China, India and Southeast Asia, with the exception of Thailand where business was adversely affected by economic recession in the first half of the year. In China, non-life premiums rose strongly by 15%, underpinned by an expanding motor sector and faster increases in other sectors including agriculture and liability insurance. Tackling the challenge of natural catastrophes remains a key theme in the region. In the Philippines, for instance, the government is considering the introduction of a compulsory earthquake insurance pool for private residential properties.

Non-life premium growth in Latin America has slowed to 2.4% this year from 7.5% in 2013. Premiums were stagnant in Mexico and grew notably slower in Brazil and Argentina. In Brazil, motor premium growth has remained relatively firm despite a sharp drop-off in vehicle sales. An extension in tax incentives for new car purchases may have buoyed demand in the first half of the year, but the trend is not expected to have sustained into the second half. Other regional markets also fared poorly against the backdrop of a more challenging economic environment.

In CEE, non-life premiums are estimated to have fallen by 5.2% this year, after increasing by 3.1% in 2013.

Global Insurance Review 2014 and Outlook 2015 16

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