Global insurance industry remains healthy

MANILA, Philippines - The global insurance industry has remained healthy despite the financial crisis and major insured catastrophes, as evidenced by rising equity prices and-price to book ratios.

But increasing levels of insured losses arising from natural and/or man-made disasters, and the volatile of the low interest environment poses challenges to the sector.

According to the International Association of Insurance Supervisors (IAIS) in its Global Insurance Market Report (GIMAR) 2014 report, total insured losses for the global insurance industry from natural catastrophes and man-made disasters amounted to $45 billion.

It is lower than the $81 billion in 2012 and below the inflation-adjusted 10-year average of $61 billion.

However, economic losses were reported in the vicinity of $140 billion last year.

The bulk of the economic losses were accounted for by floods in Germany and some neighboring European countries and by hailstorms in Germany and France.

Typhoon Haiyan, which struck the Philippines in November 2013, recorded economic losses of at least $13 billion.

But insured losses from the strongest typhoon in recorded history remained low at an estimated $1.5 billion.

“Typhoon Haiyan is a stark reminder of the fact that in emerging market and developing countries, a large part of economic losses related to natural catastrophes and man-made disasters tends to be uninsured as the insurance penetration rates – the ratio between premium income and GDP – is usually low in these countries,” the report pointed out.

It added that the poorest and developing countries are most exposed and vulnerable to all kinds of natural disaster risks, including in particular climatological risks.

The GIMAR 2014 said that exposure to disaster risks, including climatological hazards such as typhoons, is in many countries not or not fully recognized.

“In applying appropriate analytical tools, such as tailored stress testing exercises, supervisors can contribute to better identifying, assessing and addressing disaster risks. For example, by requiring from potentially exposed entities that they stress and assess themselves against a one in 100 years disaster event. This could also contribute to better recognizing disaster risks within a risk based regulatory framework,” it added.

Global premium growth was modest in 2013, having been on a declining trend since at least 2007. Insurers’ balance sheets remain solid.

Underwriting profitability in non-life insurance is stable, being supported by benign claims trends that enable insurers to release loss reserves.

Growth of gross premiums written (GPW) in non-life insurance has been on a declining trend for about 10 years, partly the result of lower gross domestic product (GDP) growth and soft market conditions, but reflecting also the impact of the global financial crisis of 2007-2008.

For life insurers, low premium growth and low interest rates form a challenging business environment.

At the same time the entire insurance sector experienced declining investment yields.

The investment environment remains challenging for insurers, the IAIS said.

Fixed income securities offer low yields and are also exposed to a multitude of risks, e.g. reinvestment and credit risk.

Investment yields, calculated as the ratio of total investment income to average total investments, declined in recent years, partially due to feeble capital gains or losses.

In 2013, the average investment yield of a sample of 20 global composite and non-life insurers was 3.6 percent, down from 3.7 percent in 2012, and compared to an average for the years 2000-13 of 4.1 percent.

Industry profitability, as measured by its return on equity, improved slightly compared to the previous year, hovering around 11 percent in 2013.

In the life insurance sector, premium growth has been on a declining path since the global financial crisis of 2007-08.

According to a sample of 30 global composite and life insurance companies, GPW increased by 1.6 percent in 2013 in nominal terms.

 On average between 2008-13, life premiums grew by only 2.1 percent (nominal), whereas between 2000-07, average growth was at 11.7 percent per year.

Weak economic growth, volatile financial markets and the interest rate environment continue to affect the life insurance industry.

A potential area of growth for the insurance industry is the exposure to longevity risk. Longevity risk is the risk of paying out pensions and annuities for longer than expected and is systematic in nature.