• Stronger profitability enables non-life insurance industry to increase capital and capacity to match growing demand as risks evolve
• Cost of equity capital for global non-life insurance industry raised to highest level in more than a decade
• Benefit of higher interest rates on insurers' investment results far outweighs associated higher cost of capital

Zurich, 9 September 2023 –The non-life insurance industry is adjusting rapidly to the new higher interest rate era ushered in by the most intense monetary policy tightening since the 1980s. Swiss Re Institute expects 2023 to be a transition year – with improving profitability for non-life insurance globally, as the industry continues to adapt prices to an elevated risk landscape, while higher portfolio yields boost net investment income. According to the sigma study "Raising the bar – non-life insurance in a higher risk, higher return world", despite the stronger profitability outlook, non-life insurers' profitability is expected to remain lower than their increased cost of capital in 2023. This suggests that further rate hardening and constraints on capacity are likely to continue throughout 2024.

Jérôme Jean Haegeli, Swiss Re's Group Chief Economist, said: "Our analysis shows that non-life insurers' profitability is set to improve strongly in the coming years as higher interest rates and rate hardening more than offset higher claims costs from persistent inflation. This will be vital to enable industry resources to grow at a rate that will match global demand for insurance protection."

Despite the stronger profitability outlook, Swiss Re Institute expects the disequilibrium in demand and supply of non-life insurance to persist, and thus a continuation of current hard market conditions, especially in property catastrophe lines. Demand for insurance protection has risen since 2017, driven by increased natural catastrophe activity as well as inflation, which is resulting in higher replacement values. 

Higher growth in industry capital is needed to narrow large protection gaps worldwide. Swiss Re Institute estimates that, for example, in the US, property and casualty insurance industry capital has grown by 5% annually on average for the past 10 years. During the same time, the natural catastrophe protection need has grown at about 7% per year on average.

Globally, the value of unprotected risk exposure has risen steadily in the past five years. Swiss Re Institute estimates the global protection gaps for natural catastrophes, crop, mortality and health insurance at USD 1.8 trillion in premium equivalent terms for 2022.

Both primary insurance and reinsurance sectors contribute to closing the protection gaps. In an environment where heightened risk awareness prevails, the role of reinsurance in providing peak capacity for the primary insurance sector is becoming increasingly relevant. This is also reflected in the fact that property re/insurance – the line covering the largest part of natural catastrophes – has seen premium volume growth of 4.3% in primary insurance and 5.9% in reinsurance over the last decade.

Given higher demand, elevated risks and limited capacity, more efficient use of capital becomes key for primary non-life insurers. Reinsurers can offer primary insurers access to their balance sheet at costs below insurers' capital costs as their portfolio is diversified across a broader range of geographies and risks.

Gianfranco Lot, Swiss Re's Chief Underwriting Officer P&C Reinsurance, said: "In the current capital-demanding environment, reinsurance can enable primary insurers to write new business more efficiently, provide certainty for legacy liabilities and support the growth of new business. The elevated risk landscape calls for more frequent adjustments to underwriting practices. Focusing on portfolio quality and margins as well as contractual clarity in the whole industry will be key in this respect."

The insurance industry is sensitive to interest rates through the asset leverage and duration embedded in the business model. Both the low interest rates in the decade pre-COVID and during the pandemic, as well as the current higher interest rate environment, have fundamental effects on insurers' profitability and risk management. Insurers invest underwriting cashflows in a wide range of securities, particularly longer-term fixed income investments, before making claims payments. Therefore, higher interest rates improve the industry's profitability.

How to order this sigma study:

The English version of the sigma 4/2023, "Raising the bar – non-life insurance in a higher risk, higher return world", is available in electronic format. You can download it here.