Insurers face tough conditions in 2012 thanks primarily
to low interest rates and economic uncertainty in the European
Union and the US. Even if politicians muddle through, life
insurance industries in developed markets are likely to experience
no more than subdued growth for at least another two
years.
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With a tough year behind them, Swiss Re predicts that life
insurers can expect more of the same in 2012 thanks to multiple
problems on the economic and political fronts in 2012.
Articulating Swiss Re’s view on the
year ahead, its chief economist Kurt Karl said: “The insurance
industry faces three main challenges from the current economic and
political environment: the euro debt crisis, low government bond
yields and slowing growth with elevated inflation in the emerging
markets.”
Kurt was speaking at Swiss Re’s
Economic Forum held in London in early-December.
He continued: “Currently, the
greatest risk to the economic outlook stems from political
developments in Europe, which could result in disorderly sovereign
defaults or even exits from the European Monetary Union.”
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By GlobalDataPutting figures on damage a 50%
write-down of sovereign debt would do to European insurers, Swiss
Re estimates that confined to Greece it would amount to €14bn
($18.5bn) or 2.4% of insurers’ total shareholders’ funds. If
Ireland, Portugal and Spain are added the cost would rise to €58bn
or 9.8% of total insurers’ shareholders’ funds.
On a positive note, Darren Pain,
Swiss Re senior economist, research and consulting, told conference
delegates that European insurers’ capital buffers appear adequate
to cope with direct losses on their sovereign bond holdings. But,
he stressed, this assumes that debt restructurings are limited to
smaller peripheral European countries.
With Italy added, the potential
consequences appear to be dire. According to Swiss Re, if a 50%
write down of Italy’s sovereign debt was added to those of Greece,
Ireland, Portugal and Spain, the impact on European insurers would
be €143bn, a massive 24.3% of shareholders’ combined funds.
Ominously, Italy has more than €300bn in sovereign debt maturing in
2012, Swiss Re notes.
For Europe as a whole this is just
the tip of the vast debt refinancing iceberg. According to
independent risk management consultant Satyajit Das, European
governments will be looking for a total of €1.9trn in debt
refinancing in 2012 and European banks for another €775bn.
Also ominous is that despite
efforts by European Union leaders to calm investor concerns, the
yield on the Italian 10-year sovereign bond remains firmly above
7%. At this level it will be difficult, if not impossible, for the
country to increase its GDP growth.
Political and interest rate
risk
As the biggest risk overhanging
global markets, the debt crisis in Europe is followed closely by
risks associated with the political stalemate in the US, warned
Karl.
“The situation in these two major
regions has increased the risk that they will both experience a
prolonged period of low growth, low inflation and low interest
rates,” he stressed.
Swiss Re believes interest rates
will remain low for at least a couple more years, particularly in
the US and Germany.
Looking at the prospects for
inflation, Karl added: “Inflation risk is still a few years down
the road in developed markets. But as weak growth makes fiscal
consolidation difficult, the incentive to deliberately allow
inflation in order to reduce sovereign debt levels is
strengthening.”
Echoing Karl’s view, Ernst &
Young (E&Y) believes interest rates in the US will remain low
until at least 2013. This, the professional services firm notes,
will hamper efforts to increase sales of fixed annuities and
universal life insurance.
Doug French, E&Y’s financial
services and insurance and actuarial advisory services leader,
warns that there is another risk lurking in the current low
interest rate environment.
“They [interest rates] could climb
rapidly after the Federal Reserve’s treasuries buying spree comes
to an end.”
Should this happen, he added, there
is a risk that policyholders will jettison existing products in
favour of investing in new ones with higher rates.
Emerging
markets
Swiss Re sees emerging markets as
remaining the global economic “growth engine”. But emerging markets
are not devoid of risks, with the insurer predicting that in
general their economic growth is expected to slow and their
inflation rates remain elevated. The key to stability, believes the
Swiss insurer, will be the success major emerging economies achieve
in avoiding the “bursting of asset bubbles”, something which is
largely dependent on sound government policies.
So far, notes Swiss Re, this
appears to be working, with many countries such as India, Malaysia
and, until recently, Brazil tightening their monetary policies and,
particularly in the case of China, attempting to dampen asset price
gains.
Where to premium income
growth?
After a 3.7% recovery in inforce
global life premium income in 2010, Swiss Re estimates that it
resumed its negative trend in 2011, falling by 1.4%, a decline
eclipsing the 0.2% fall seen in 2009.
However, premium income performance
was far from uniform across the globe in 2011. In the US and UK,
for example, Swiss Re notes that the steep decline in inforce
premium income that began in 2008 ended in 2011. In terms of new
business, Swiss Re estimates that the US and UK will have recorded
growth of 0.7% and 0.6%, respectively, in 2011. In Japan, Swiss Re
estimates that new business in 2011 increased by 2.4%.
Other than the UK, the picture in
2011 was very different in the three largest European markets:
Germany, Italy and France. After holding up well during the
financial crisis and in 2010, inforce premium income in these three
countries fell sharply in 2011 with declines of 8.2%, 14.3% and
16.4% recorded in Germany, Italy and France, respectively,
estimates Swiss Re.
New business in Germany fell by an
estimated 17.7% in 2011, and in Italy the decline is estimated at
26.4%. In another key market, the Netherlands, Swiss Re estimates
that new business fell by 13.4% in 2011. Swiss Re could not provide
an estimate for the decline in new business in France.
In developing markets, inforce life
premium income growth slowed sharply, from 10.5% in 2010 to an
estimated 0.6% in 2011. Swiss Re attributes lower growth in 2011
primarily to a 6% fall in new business in China triggered by a new
bancassurance regulation. Specifically, in early-2011, the China
Banking Regulatory Commission put a halt to insurers seconding
sales personnel to bank branches, restricting insurance sales to
bank personnel only.
Swiss Re notes that had it not been
for the setback in China, inforce premium income in Asian emerging
markets would have reflected a rise of 4.2%. Notably, India has
also been a weak performer in 2011, with life insurance premium
income in the six months to September down 21% compared with the
same period in 2010, reports India’s Insurance and Regulatory
Development Authority.
On the developing market front the
really bright spot in 2011 was Latin America where growth in
inforce life premium income was particularly robust, increasing by
almost 10% compared with 2010, estimates Swiss Re.
Looking ahead, Swiss Re sums up the
outlook as characterised by an “unfriendly business environment”.
Negative factors include weak growth in GDP, employment and
consumer income. Added negatives will come from low interest rates,
financial market volatility and regulatory changes, many of which
bring with them stricter capital requirements.
In developed markets, Swiss Re
forecasts that inforce premium income will grow at 2.2% in 2012,
lifting to 2.9% in 2013. In developing markets, real inforce
premium income growth is forecast to rebound to 8.4% in 2012 and
ease slightly to 8.3% in 2013.
Swiss Re warns that although in a
low interest rate environment new business with interest-linked
guarantees can be adjusted to cope, this cannot be done for
existing business. The insurer sees the highest exposure to this
risk being in savings business in Germany, annuity business in the
UK and savings products with guarantees in the US. This will act as
a drag on the profitability of insurers in these countries, as will
more stringent capital requirements flowing from regulatory change,
notes Swiss Re.
All in all a tough year undoubtedly lies ahead for life insurers
in developed markets in particular even if politicians in Europe
and the US manage to muddle through a dangerously poised economic
situation of enormous proportions and complexity. Failure to find a
solution could result in even Swiss Re’s conservative life industry
forecast being optimistic.
