Insurers’ profitability to remain lower than cost of capital

Swiss Re Institute has predicted 2023 will 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.

But despite the stronger profitability outlook, Swiss Re Institute’s analysis of return on equity has resulted in the body predicting non-life insurers’ profitability will remain lower than their increased cost of capital in 2023.

This suggests that further rate hardening and constraints on capacity are likely to continue to be a feature of the market throughout 2024.

Jérôme Jean Haegeli, Swiss Re's Group’s 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, Swiss Re Institute noted, but greater 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 but during the same period, the natural catastrophe protection need has grown at about 7% per year on average.

Key drivers

Given higher demand, elevated risks, and limited capacity, Swiss Re Institute stated more efficient use of capital is becoming a key consideration for general insurers.

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."

Swiss Re's insight came as LCP’s seventh annual analysis of Solvency II reporting of 100 of the largest non-life insurers in the UK and Ireland highlighted the financial strength of the market remains strong but that insurers continue to face new challenges.

The average eligible own funds ratio across LCP’s sample was 180%. Total eligible own funds increased from £97bn at the end of 2021 to £101bn at the end of 2022.

The risks that firms are still navigating include inflation, the Ukraine invasion and cyber risk.

There was also increasing emphasis on climate change and other emerging risks like cyber risk and people risk.

Swiss Re's forecast also came after Allianz and Axa held on to the top two spots on the Insurance Post Top 30 European Insurers 2023 list and accounted for slightly under a quarter of total gross written premium in the dataset, which was produced by AM Best.

In an in-depth data analysis of this year’s Top 30 European Insurers, AM Best noted the Top 10 remained unchanged from 2021.

Allianz, Lloyd’s, Chubb, and Zurich maintained their clear dominance in the top five spots, while reporting low-to-mid-teen average premium growth for the year while Axa reported mid-single digit growth.