Key economies are diverging, with the US sustaining growth, Europe experiencing stagnation, and China grappling with internal growth challenges. The escalating Middle East conflict adds to the macroeconomic uncertainties. As highlighted in the sigma report, “Risk on the rise as headwinds blow stronger,” the insurance industry’s fortified financial position becomes a crucial safeguard against heightened macroeconomic and geopolitical risks.

Jérôme Jean Haegeli, Swiss Re’s Group Chief Economist, says: “Fading economic tailwinds and geopolitical uncertainties reinforce the primary insurance industry’s essential role in risk transfer. While the sector will continue to strengthen its profitability, mainly driven by improved risk-adjusted pricing as well as higher investment returns, it is not yet expected to earn its cost of capital in 2024 or 2025 in most markets as economic inflation will continue to have a negative impact on claims costs.”

The Swiss Re Institute attributes this year’s resilience primarily to the robust labor market, with historically low unemployment rates in the US (3.9% as of October) and the euro area (6.5% as of September), despite a growing labor force. This has significantly bolstered consumer demand, particularly in the US, where real consumer spending is expected to increase by 2.4% in 2023. However, the sigma report cautions that labor market resilience doesn’t signal a re-acceleration but underscores the uneven impact of monetary policy, which often takes longer to affect labor markets than other aspects of the economy.

There’s a higher risk of recession in Europe compared to the US. The October 2023 conflict between Israel and Hamas has introduced additional risks to the global economy. The presence of above-target inflation and short-term economic resilience in certain advanced economies suggests that central bank policy interest rates will remain restrictive for at least the next two years.

Charlotte Mueller, Swiss Re’s Chief Economist Europe, says: “The full impact of higher interest rates on the real economy is still to filter through. For corporates, a higher cost of capital and labour input costs will increasingly erode profit margins and could induce layoffs. Europe’s economy will be the key underperformer over the next two years, with some large economies like Germany already in contraction.”

Investment results more important component of industry returns

In the Property & Casualty insurance sector, a significant repricing of insurance risk in 2023 will result in an estimated 3.4% global premium growth this year and is forecast to soften to 2.6% growth in 2024 and 2025. The impact of economic inflation on claims is forecast to ease further over the course of 2024 and 2025. Non-life insurance profitability will improve to around 10% return on equity (ROE) in both 2024 and 2025, well above the 10-year average of 6.8%, according to sigma findings.

The improvements in profitability are driven by higher investment returns given the higher interest rate environment, as well as better underwriting results due to more commensurate premium rates in both commercial and personal lines. Current investment returns in the non-life segment have surpassed 3.3% in 2023 and will further rise to around 3.7% in 2024 and 3.9% in 2025. Underwriting is also being supported by disinflation and improved terms and conditions, which are expected to increasingly mitigate the effects of inflation on claims costs.

High rates, higher demand: US$4 trillion savings premiums in 2033

The adjustment to the new normal of higher interest rates is supportive for the global life insurance industry. Swiss Re Institute anticipates strong growth in savings products in the next two years, driven by a growing global middle class with individuals increasingly looking to insurers for their retirement planning.

According to the sigma report, premium growth is on a robust recovery path with 1.5% total real-term global growth in premiums in 2023, after a 0.7% contraction in 2022, and still higher premium growth forecast in the medium term (2024–2025: 2.3%). This is driven largely by emerging markets (+5.1%), but also supported by advanced markets (+1.3%).

Approximately US$2.3 trillion of savings premiums were written globally in 2022. Swiss Re Institute forecasts this will grow to $4.0 trillion in 2033, a 2.7% average annual growth rate in real terms. This would translate into $1.7 trillion of additional savings premiums over the next 10 years, a 65% increase in new business premiums compared to the past two decades.

Swiss Re Institute growth forecast for the next decade has increased significantly largely because the past 20 years were negatively impacted by the global financial crisis, the low interest rate era and the pandemic.