A year for preserving capital
On 9 December 2008 a group of economists and industry experts gathered at Swiss Re’s Economic Forum in London. They painted a rather gloomy picture for the insurance industry going into 2009. “Due to the worst financial crisis since the 1930s, the world will see a severe recession. A rebound of the economy cannot be expected before mid 2009 and market uncertainty will continue well into 2010. Insurers are not immune to the crisis,” said Kurt Karl, Swiss Re’s chief US economist.
Swiss Re doesn’t believe that emerging markets (South Africa included) will follow the West into recession; but rather struggle with declining growth. Under these conditions insurers will have to make some changes to the way they do business. A practice that is sure to be shelved is the once-popular ‘share buyback’ programme that so many listed insurance companies employed in recent years. Insurers will have to focus on preserving capital going forward.
There are plenty of supplies in the insurance ‘fort’
Although 2008 has been difficult insurance companies started the year in good conditions. Thomas Hess, Swiss Re’s chief economist, notes: “The insurance industry came into the crisis with very healthy balance sheets. Despite the asset meltdown, the insurance industry is able to weather the financial turbulence.” A snapshot of the financial position at 31 December 2007 shows that insurance companies held approximately $18 trillion in global assets. To place this number in perspective, Swiss Re mentions that global pension funds with $22 trillion and mutual funds with $19 trillion are only slightly larger.
“There can be no ‘run’ on an insurance company because pay-outs are triggered by hazardous events, not by policyholders’ will,” says Hess. It’s an interesting observation that distinguishes insurance companies from other financial institutions. When rumours do the rounds that a bank is about to collapse, queues of worried depositors demand their savings back. Insurance companies don’t have to worry about such situations because the assets they hold are there to cover insured liabilities. Policyholders make specific long-term commitments when they take up insurance and investment products through a life company!
There’s always an exception thought. Hess says policy cancellations in the life insurance industry are generally kept in check by strict withdrawal penalties. “Moreover, insurers can hold assets until maturity, and are therefore not forced to sell assets just because the stock market falls,” says Hess
What lies in wait in 2009?
Swiss Re expects a “sharp drop in demand for unit-linked business” next year. They say the short-term insurers will focus more than ever before on the underwriting results. This is something we’ve already seen from the likes of Mutual & Federal which aggressively restructured its business earlier this year. The group cut a number of its ‘non-performing’ insurance books to address previous underwriting losses! With new business under fire we also expect the short-term insurers to focus on costs – so expect some job losses in the New Year. The impact of a drawn out financial crisis will vary between life and short-term companies. Swiss Re believes that life insurers will be hit harder due to “the falling value of invested assets, along with a marked slowdown in sales.” “Non-life insurance has been less affected because of its lower asset leverage,” says Swiss Re. Although both forms of insurance are discretionary, the demand for non-life cover tends to remain stable through recession.
The good news for Swiss Re is that “non-life and life underwriting remains sound due to a continued focus on economic profitability.” They will take the necessary steps to make sure this situation persists. Thus reinsurance prices are expected to harden through the course of the year. Prospects in the emerging market remain positive. “While reinsurance in emerging markets is expected to grow at a slower pace in 2008 and 2009, its longer term prospects remain positive,” said Clarence Wong, Swiss Re’s chief economist in Asia. “Between 2008 and 2013, life growth in emerging markets is estimated to land in the range of 7% to 10%, and non-life growth between 3% and 8% – after adjusting for inflation.”
You can do business when growth slows
The lesson for the insurance industry is that a slowdown in domestic growth doesn’t mean the end of your business. You have to actively manage your business through the economic turmoil. In Swiss Re’s view there will be steady growth in demand for insurance products in the emerging markets. It’s your job to find that business and write it. And while you do that, don’t forget to strip unnecessary costs from your operations – and keep a close eye on your book.
Editor’s thoughts:Swiss Re provides a balanced view of the insurance industry for 2009. Times will be tough; but there’s still plenty of work for those who go the extra mile. Are you confident that you’ll be able to grow your practice in 2009? Add your comments below, or send them to [email protected]
