Perspective: Life insurance market will be hit hardestExcerpts from a seminal study from SwissRe: World Insurance: Riding Out The Storm. Access the full report here.
The COVID-19 pandemic will spark the deepest recession since the 1930s, and we forecast that global gross domestic product (GDP) will contract by around 4% in 2020. This will lead to a slump in demand for insurance this year, more so for life (we estimate that premiums volumes will shrink by 6%) than non-life (‒0.1%) covers. Overall, however, we expect the industry to ride out what will likely be a short-lived recession, and for premium growth to bounce back as the economy enters more protracted recovery. We see commercial Property&Casualty lines as the main driver of the comeback. Region-wise, it will be the emerging markets, notably China.
In the here and now, we estimate that the COVID-19 crisis will put global premium (life and non-life) growth back by around 3 percentage points (ppt) from the pre-recession growth path. We forecast that combined life and non-life direct premiums written will recover to above pre-pandemic levels over the course of 2021, a strong outcome given the severity of this yearʼs recession. In relative terms, the declines in life and non-life premium growth in 2020 will be of similar magnitude to that seen during of the global financial crisis (GFC) in 2008‒09, even though this yearʼs GDP contraction will be much more severe.
In 2019, global premiums grew steadily at just below 3% in real terms. Life sector growth slowed to 2.2%, stronger than the 1.5% average of the previous 10 years. We estimate that the COVID-19 crisis will slow life premium growth by 4.5 ppt this year and next, leading to 1.5% aggregate market contraction. Demand for group and individual savings business will be hit by rising unemployment and falling incomes; individual mortality business should be more stable.
At 3.5%, non-life premium growth in 2019 was slightly above the 10-year average. We estimate a 1.1 ppt pullback in premium growth, making for aggregate sector expansion of 1.6% over 2020‒21. Motor, trade, travel and commercial rather than personal lines will likely be hardest hit. The emerging markets will outperform in both life and non-life.
Total Premiums Written Will Recover To Pre-Pandemic Levels in 2021
After a solid 2019, global insurance premium growth (life and non-life) will stagnate over the course of 2020 and 2021. Life premiums in advanced markets are set to contract sharply. The non-life sector will be less affected by the COVID-19 crisis as improving rates are supporting premium growth. The emerging markets will outperform in both sectors.
COVID-19 Will Slow Insurance Market Growth By Close To 3 Percentage Points
The lower total insurance premium growth rate outcome in 2020 due to COVID-19 pandemic will be similar to that seen during the GFC. However, the decline in sector growth rates from the preceding year will differ. In life, the decline will not be as sharp as during the GFC, as we do not expect the same lingering financial market turmoil. In non-life, the drop will be more severe because of the stronger economic contraction in contrast to the GFC; growth in 2021 will be stronger, as COVID-19 has hit in a period of rate hardening.
Global Economic Growth And Inflation Outlook
At the time of writing, we forecast that global gross domestic product (GDP) will contract by close to 4% in 2020, double the rate (‒1.8%) seen during the global financial crisis (GFC).2 Growth was on a downward trend even before the onset of the COVID-19 pandemic early this year, having reached a 10-year low of 2.5% in 2019. While drivers of the slowdown like contracting trade and manufacturing had seemed to bottom at the tail end of last year and into January, COVID-19 changed the fate of the global economy completely.
The pandemic shock has hit the demand and supply-side of all economies at the same time, leading to a sudden halt in overall activity. We expect most of the worldʼs 30 largest economies to be in recession in 2020. Due to the lockdown measures taken to contain the virus, we estimate that the fall in GDP in the US and euro area during the first half of 2020 will be twice as large as during the GFC, and will happen more than twice as fast. After sharp downturn in the first half, we expect a protracted recovery in the second half of 2020 and into 2021. Inflation is set to remain low as reduced demand outweighs supply-side disruptions.
Interest Rates And Risky Assets
The level of fiscal and monetary stimulus actioned in 2020 in response to COVID-19 is about as large as all emergency packages over the last 50 years combined. Given the economic outlook, we believe central bank interest rates will remain close to zero or even below, for the next two years at least. The central bank tightening cycle had already turned in 2019 with the Fedʼs “insurance rate cuts”.
Central banks reacted swiftly to the COVID-19 crisis by reducing policy rates to the effective lower boundary and they have also reactivated and/or stepped-up asset purchases. Insurers will need to deal with extremely low interest rates for longer. In 2020, bond yields have fallen further from already low levels, with the US 10-year Treasury yield hitting a record low of 0.4% in early March before regaining some ground.
We expect central banks to keep borrowing costs low to render higher debt burdens more sustainable. We forecast the US 10-year yield to stand at around 1% by yearend 2020 and 2021, and that the German 10-year yield will remain negative. This environment makes investment decisions more challenging and could harm re/insurers solvency positions, with rising present values of long-tail liabilities.
Key Risks And Alternative Scenarios To The Outlook
In our view, the main risks to the global growth outlook are on the downside. For example, while the signing of the ʼPhase Oneʼ deal in January created a hiatus in the trade dispute between US and China, we expect no meaningful resolution anytime soon. In the near term, the US is likely to focus on economic recovery, but the pandemic shock could aggravate tensions between the US and China in the longer term, with the emergence of further protectionist measures, also in other parts of the world. The overall effect of these will drag on growth.
There are also several conflict areas in the euro area, including migration policy, national budgets, and the rule of law. Additionally, the lack of cross-country crisis coordination and the large increase in public debt due to the COVID-19 national policy responses will be contentions among EU member states. Other unresolved issues, such as a relatively fragile banking sector and open sovereign risk sharing approaches, could resurface again stronger in the anticipated downturn.
The Impact Of COVID-19
Insurance markets were on a solid growth trajectory before the COVID-19 outbreak, with total global direct premiums written up near 3% in 2019 from the year before, supported by the non-life sector in advanced markets, and life and non-life insurance in China. Total industry premiums outpaced real GDP growth in more than 60% of all insurance markets worldwide. As of now, sigma includes accident&health (A&H) business written by health insurers in the US to align practices globally. With the revision, total premiums written in 2019 reached USD 6.3 trillion or 7.2% of global GDP, up from the pre-revision total of USD 5.4 trillion.
The COVID-19 crisis will hit the insurance industry with sigma forecasting a near 3 ppt slowdown in annual average global premium growth in 2020 and 2021 from the pre-crisis growth trajectory. The life sector will be more affected than the non-life. There will be a steep contraction in premium levels this year, followed by bounce-back. We expect total global direct premiums written will reach pre-crisis levels in 2021, a strong outcome, considering that this yearʼs recession will be the deepest since the 1930s.