After a resilient 2023 powered by strong US economic growth, the world economy is expected to slow by 0.4 percentage points to 2.2% real GDP growth in 2024, said Swiss Re Institute in a recent report.
Major economies are diverging with the US continuing to grow, Europe stagnating and China grappling with structural domestic growth challenges. The conflict in the Middle East is heightening risks to the macroeconomic outlook. According to the sigma report “Risks on the rise as headwinds blow stronger”, the global insurance industry’s strengthening financial position offers welcome reinforcement against elevated macroeconomic and geopolitical risks.
Swiss Re group chief economist Jérôme Haegeli said, “Fading economic tailwinds and geopolitical uncertainties reinforce the primary insurance industry’s essential role in risk transfer. While the sector will continue to strengthen its profitability, mainly driven by improved risk-adjusted pricing as well as higher investment returns, it is not yet expected to earn its cost of capital in 2024 or 2025 in most markets as economic inflation will continue to have a negative impact on claims costs.”
The report added that labour market strength has been the main driver of resilience this year, with unemployment rates historically low in the US (3.9% as of October) and euro area (6.5% as of September) despite an increasing labour force.
The outbreak of the Israel-Palestine war in October 2023 has added risks to the global economy. The combination of above-target inflation and near-term economic resilience in some advanced economies implies that central bank policy interest rates will stay restrictive for at least the next two years.
In the P&C insurance sector, a significant repricing of insurance risk in 2023 will result in an estimated 3.4% global premium growth this year and is forecast to soften to 2.6% growth in 2024 and 2025. The impact of economic inflation on claims is forecast to ease further over the course of 2024 and 2025. Non-life insurance profitability will improve to around 10% return on equity in 2024 and 2025, well above the 10-year average of 6.8%, according to sigma findings.
The improvements in profitability are driven by higher investment returns given the higher interest rate environment, as well as better underwriting results due to more commensurate premium rates in both commercial and personal lines. Current investment returns in the non-life segment have surpassed 3.3% in 2023 and will further rise to around 3.7% in 2024 and 3.9% in 2025. Underwriting is also being supported by disinflation and improved terms and conditions, which are expected to increasingly mitigate the effects of inflation on claims costs.
The adjustment to the new normal of higher interest rates is supportive for the global life insurance industry. The report noted that premium growth is on a robust recovery path with 1.5% total real-term global growth in premiums in 2023, after a 0.7% contraction in 2022 and still higher premium growth forecast in the medium term (2024–2025: 2.3%). This is driven largely by emerging markets (+5.1%), but also supported by advanced markets (+1.3%).
About $2.3tn of savings premiums were written globally in 2022. Swiss Re Institute forecasts this will grow to $4.0tn in 2033, a 2.7% average annual growth rate in real terms. This would translate into $1.7tn of additional savings premiums over the next 10 years, a 65% increase in new business premiums compared to the past two decades. Growth forecast for the next decade has increased significantly largely because the past 20 years were negatively impacted by the global financial crisis, the low interest rate era and the pandemic. M