View from the Top: Insurers' growth prospects

Looking back at 2010, most insurance companies have restored their capital to pre-crisis levels. This favourable development applies to life and non-life insurers in both the developed and developing economies.

Euro-zone risks
However, there are risks that the industry needs to be continually aware of: the sovereign debt difficulties facing some Euro-zone countries and over-regulation of the insurance sector in the wake of the financial crisis.

While the industry welcomes the 2013 introduction of the Solvency II regulatory initiative, there is nevertheless a danger of overly burdensome regulation of the insurance industry. It is important that the implementing measures do not stray too far from the original economic-based principles.

Continued growth
When looking ahead to 2011 and 2012, we forecast that the world economy should expand, a development led by the emerging market countries. Inflation will not pose a threat in the short to medium-term in developed economies.

There are, however, risks to the recovery, not least of which is the possibility of fresh turmoil in the financial markets caused by the sovereign debt problems besetting some Euro-zone countries. Despite the support received from the International Monetary Fund and the European Union, there are still concerns as to whether Greece and Ireland can cope with the problems they face.

Challenges ahead
Among the challenges facing the insurance industry, even though its capitalisation has improved significantly since the crisis, are low investment yields resulting from very low interest rates coupled with a conservative investment strategy. When looking at the negative impact of low interest rates generated by expansionary monetary policies in the developed world, we now see that insurers, pension funds and private savers are paying for the cheap financing of governments, and for households and corporations that borrow. A way to offset this situation is to support profitability through more disciplined underwriting.

Premium growth in non-life and life insurance is expected to accelerate in 2011, benefiting from the economic recovery and further improvements in financial markets. On the non-life reinsurance side, growth expectations are moderate but profitability is expected to erode as rates decline. Here, too, superior underwriting skills would be the way to gain a competitive edge in the coming years. Regarding life reinsurance, stagnation in the developed countries would be offset by annual growth of around 10% in emerging markets.

Thomas Hess is chief economist for Swiss Re