The insurance industry operates at the heart of global financial systems, safeguarding individuals, businesses, and institutions from a range of risks. As we emerge from a period marked by economic disruptions, high inflation, and volatile financial markets, insurers face a dynamic landscape where both challenges and opportunities abound. The  - Global Insurance Market Trends 2023 - report provides crucial insights into the industry's developments in 2022, shedding light on premium growth, investment performances, profitability trends, and the strategic shifts insurers are making to navigate this evolving environment.

Rising Premiums Amid Economic Recovery and Inflationary Pressures

Despite the lingering impact of the COVID-19 pandemic, insurance markets have shown resilience, with a notable increase in gross written premiums in both the life and non-life sectors. In 2022, premiums rose significantly faster in the non-life segment, driven by a mix of economic recovery and inflationary pressures. Non-life insurers faced higher claims costs, leading them to adjust policy rates to maintain profitability. In contrast, the life insurance sector's growth was more subdued, partly due to competition from other financial products and the volatility in financial markets affecting unit-linked products.

The post-pandemic economic recovery, particularly in Latin America and Asia, has spurred the demand for non-life insurance policies, including motor vehicle and property damage coverage. This recovery, coupled with the inflationary surge, pushed insurers to re-evaluate their pricing strategies, making non-life premiums more responsive to market changes.

A Complex Investment Environment: Challenges and Adjustments

The investment landscape for insurers underwent significant shifts in 2022, marked by rising interest rates and falling equity valuations. Given that insurers traditionally allocate a substantial portion of their portfolios to bonds, the increase in interest rates devalued previously issued bonds with lower yields. This, combined with declining equity markets across major economies, led to a challenging year for insurers’ investment portfolios.

Most insurers recorded lower investment performances in 2022 compared to 2021, with real returns turning negative in nearly all reporting jurisdictions. However, nominal rates of return remained positive in several cases due to insurers’ valuation methods. Insurers valued a portion of their assets at amortized cost, which helped cushion the negative effects of market fluctuations.

As the industry transitions to new accounting standards (IFRS 17 and IFRS 9), effective from January 2023, insurers will need to reassess how they value and report their investment portfolios. These standards are expected to bring greater transparency to insurers' financial health and provide a more accurate reflection of asset values in a volatile market.

Profitability Pressures and the Role of Underwriting Performance

Despite the difficult economic environment, insurers managed to record positive profits in 2022, although these were generally lower than in the previous year. The  - Global Insurance Market Trends 2023 - report indicates that the return on equity (ROE) remained positive for most insurers, albeit at lower levels compared to 2021. Non-life insurers, in particular, faced significant profitability pressures due to higher claims costs and inflation-driven operating expenses.

One of the key indicators of profitability in the non-life sector is the combined ratio, which measures the underwriting performance by combining the loss and expense ratios. A combined ratio below 100% indicates an underwriting gain, while a ratio above 100% signifies a loss. In 2022, the combined ratio deteriorated in more than half of the reporting jurisdictions, highlighting the challenges insurers faced in maintaining profitability amid rising costs.

Life Insurance: Navigating Market Competition and Policyholder Behavior

The life insurance sector faced unique challenges in 2022, stemming from rising interest rates and the subsequent competition from other financial products. Traditional life insurance products, such as annuities, benefited from the higher interest rates, as they offer guaranteed payments that appeal to risk-averse policyholders. In markets like the United States and Latin America, rising interest rates led to an uptick in the demand for annuity products, reflecting a shift in consumer preferences towards guaranteed income streams.

However, not all life insurance products fared well. Unit-linked products, which expose policyholders to investment risks, experienced declining demand due to volatile financial markets. This trend was particularly evident in Ireland, where unit-linked business is a dominant line in the life sector. The cost-of-living crisis, driven by elevated inflation, also constrained households' ability to purchase life insurance products, further impacting premium growth in several countries.

The Impact of Inflation on Claims Payments and Underwriting Performance

Inflation played a significant role in shaping the insurance landscape in 2022. As the cost of goods and services increased, so did the cost of claims payments. In the non-life sector, inflation fueled higher payouts across various insurance classes, including motor vehicle, health, and property insurance. For instance, the rising costs of vehicle repairs and construction materials directly translated into higher claims payments for motor and property insurers.

The resumption of economic activity post-pandemic also contributed to an increase in claims frequency. With movement restrictions lifted, road traffic returned to pre-pandemic levels in many countries, leading to a rise in motor insurance claims. Similarly, health insurance claims surged as more individuals sought medical treatments and elective surgeries that were delayed during the pandemic.

Natural disasters, which have become more frequent and severe, also had a significant impact on insurers' claims payments in 2022. Events such as floods, hurricanes, and earthquakes resulted in substantial economic losses, and in turn, higher payouts for property and casualty insurers. Insurers must continue to account for the growing threat of natural disasters in their risk assessments and pricing strategies.

Strategic Shifts in Asset Allocation and Risk Management

In response to the evolving economic environment, insurers have been making strategic adjustments to their asset allocations. Bonds remain the dominant asset class for most insurers, particularly life and composite insurers, given their long-term liabilities. However, the rising interest rates and increased market volatility have prompted insurers to diversify their portfolios and explore alternative investments.

Equities continue to play a smaller but significant role in insurers' portfolios, with countries like Denmark, Lithuania, and Sweden reporting relatively high allocations to equities. Insurers in these jurisdictions have shown a willingness to take on more equity risk to achieve higher returns. Additionally, insurers are holding a portion of their assets in cash and deposits, which offer liquidity and flexibility in meeting policyholder obligations.

The Outlook for 2023: Navigating Uncertainty and Embracing Innovation

As the insurance industry moves forward in 2023, insurers will need to navigate a complex landscape characterized by economic uncertainty, regulatory changes, and evolving consumer preferences. The adoption of new accounting standards, combined with the ongoing impact of inflation and geopolitical risks, will require insurers to remain agile and proactive in managing their portfolios and pricing strategies.

One of the key areas of focus for insurers will be the continued integration of digital technologies and data analytics. Advanced data analytics and AI-driven risk assessment models can help insurers better understand policyholder behavior, detect fraudulent activities, and enhance underwriting accuracy. Additionally, blockchain technology is gaining traction in the industry, with its potential to streamline claims processing and improve transparency.

In conclusion, the global insurance market is undergoing significant changes as it adapts to a new set of economic and market conditions. By embracing innovative technologies, refining their investment strategies, and staying attuned to policyholder needs, insurers can position themselves for sustained growth and profitability in the years ahead.

References:

• OECD Global Insurance Market Trends 2023.
• Insights from the Insurance and Pensions Unit, OECD Directorate for Financial and Enterprise Affairs.