A pricey outlook for the future
Over the past year, the insurance industry has faced a challenging operating environment.
Globally, this has been driven by the increased frequency in catastrophic events which left insurers with a significant bill to foot. Added to this is an economic climate which, when suppressed, may cause policyholders to claim more often.
While the latter is changing because of a general upswing in the global economy, the sting in the tail of the catastrophic events has had an impact on the insurance industry. Premiums are going up.
Draining effect
According to a report by global reinsurer Swiss Re, premiums in non-life insurance and reinsurance are expected to increase, and the outlook 2018/19 shows a similar trend.
According to the report, the multiple large natural catastrophe events that occurred in the second half of 2017 have drained capital from the Property & Casualty (P&C)sector.
A string of large natural catastrophes in the second half of 2017 – hurricanes Harvey, Irma, Maria, earthquakes in Mexico, and the wildfires in Californi – resulted in significant losses in P&C insurance and reinsurance.
The report points out that the three hurricanes and earthquakes in Mexico resulted in estimated insured losses of $95 billion, and non-life re/insurers' full-year underwriting results are likely to be severely impacted.
The report adds that this is also happening because prices have fallen so low over the past few years. In reinsurance, the above-mentioned catastrophes have drained capacity from both the traditional and alternative capital sectors. Prices in loss-affected accounts could rise significantly.
On the local front, we are seeing the effects of the devastating drought in the Western Cape which is showing no signs of abating. Added to this, South Africa has had its own share of cat events in the Knysna Fires and the recent storms in Gauteng and KwaZulu Natal.
Unintended consequences
The Swiss Re report points out that the large losses are expected to lead to rate hardening in both non-life insurance and reinsurance.
"Price rises in loss-affected segments are already happening and could be substantial" said Kurt Karl, Swiss Re's Group Chief Economist, "the ultimate volume of losses is not yet known, but appears to be large enough to cause price increases beyond the affected sectors.”
At the same time, prices have been low, having fallen substantially over the past several years. The global economy is in a cyclical upswing, and the forecast is for moderate growth in 2018 and 2019.
This should further support growth in the insurance markets, with global short term premiums forecast to rise by at least 3% and life premiums by about 4% in real terms annually in 2018 and 2019.
The emerging markets, particularly in Asia, will continue to be the main driver of premium volume gains.
A steady increase
The Swiss Re report shows that the improved global economic outlook is expected to boost demand for non-life insurance. Global short term insurance premium growth is forecast to be at least 3% in 2018 and 2019 and could be substantially higher, depending on the magnitude of the expected price increases.
Emerging markets will continue to be the main driver of growth, with premiums forecast to rise by 6% to 7% in real terms annually over the next two years, little changed from 2017. The overall emerging market short term premium growth reflects the stabilising economic conditions in most regions. In addition, short term business will continue to benefit from urbanisation, and rising home and car ownership.
The anomaly here is that while the rest of the world is experiencing growth, South Africa is lagging in this department. Will international trends ring true in South Africa or will the premium increases in the South African market be driven by something else?
Editor’s Thoughts:
While insurance premiums are increasing, it is important to appreciate the value of insurance. One of the most devastating realities of the South African catastrophic events was that many people were either underinsured or completely uninsured. This only increases the cycle of poverty among improvished communities. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
Ends
