Global insurance premiums to grow 3% after catastrophe-filled year: Swiss Re

Large losses of 2017 will motivate higher pricing in near future

Moderate economic growth, increasing urbanization and rising home and auto ownership on a global basis could produce an annual increase in P&C premiums of 3% in real terms for both 2018 and 2019, according to a report by Swiss Re.

Gross domestic product (GDP) in the U.S. is expected to remain steady at around 2.2% in 2017 and 2018. The euro area is forecast to grow by around 2% this year and 2018 before slowing in 2019. The Chinese economy grew by an estimated 6.8% in 2017 but it is anticipated that will slow to 6.2% by 2019.

Related: Companies increasingly want cover for intangible assets, earnings: Swiss Re

There are risks to the economy, notes Swiss Re in its report entitled, Global insurance review 2017, and outlook 2018/19. These include protectionist trends and the possibility that the unwinding of quantitative easing programs by central banks could spark a negative financial market reaction.

Other elements that will contribute to an improved insurance market over the next two years are increasing urbanization and rising home and car ownership. Concerns about environmental protection, food safety and underinsurance in property are also expected to start to filter through to sturdier demand for associated liability and property covers, according to the report.

This positive forecast follows a difficult year for the global insurance industry that was marked by hurricanes Harvey, Irma and Maria; earthquakes in Mexico; and wildfires in California.

The size of the catastrophes will lead to a significant increase in combined ratio. For example, the combined ratio in U.S. P&C insurance for 2017 is forecast to rise to 109% from 101% in 2016. In global reinsurance, assuming no further large catastrophe events, the combined ratio for this year is estimated to be around 115%, up from 92% in 2016, the report states.

These large losses are expected to lead to rate hardening in insurance and reinsurance. In reinsurance in particular, the catastrophes have drained capacity from both the traditional and alternative capital sectors.

Related: Current economic factors and technology make Swiss Re’s list of key risks

“Price rises in loss-affected segments are already happening and could be substantial,” said Kurt Karl, Swiss Re’s group chief economist, in a statement. “The ultimate volume of losses is not yet known, but appears to be large enough to cause price increases beyond the affected sectors. This is also happening because prices have fallen so low over the past few years.”

The profitability of the global P&C market has also been affected by low investment yields. Insurers’ investment income has continued to be weak given the ultra-low interest rate environment over recent years and will not recover soon, according to the report.

“As such, while profitability in [P&C] insurance is expected to strengthen in 2018 and 2019 as underwriting conditions turn more favourable, the improvement will be modest with industry [return on equity] at around 7% to 8%,” the report states.

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