The analysis shows that insurers in major western markets and Japan need to improve underwriting margins (underwriting profit as a percentage of premiums) by around 5 to 9 percentage points if they are to deliver desired return on equity (ROE) of 10% in the future. Current economic conditions will benefit future profitability through higher interest rates and investment returns but it won't be enough to close the gaps. At the same time, tighter labour markets are expected to push up wage and claims inflation. Thus, premium rates need to increase more than claims trends to achieve sustainable improvement in profitability.
The global non-life insurance sector is at a weak phase of the profitability cycle, reflecting soft underwriting conditions, weak investment performance and the high level of capital funds.
According to Swiss Re's Sigma, underwriting conditions are still soft in 2018, particularly in commercial insurance, but seem to be passing through an inflection point. This is on account of the large hurricane losses in 2017 which set the stage for a price correction. Commercial line premium rates started to rise at the end of 2017.
"The catastrophe losses in 2017 sparked a modest change in market dynamics", says Edouard Schmid, Swiss Re Group Chief Underwriting Officer. "However, it remains to be seen how strong and sustainable the market firming is. Rate increases for accounts and commercial lines of business not affected by the catastrophe losses, for instance, have been below initial expectations." In personal lines, there has been moderate rate hardening in several key markets for a few years already.