Despite continuing market volatility and uncertainty, we are fundamentally optimistic about the future of the insurance industry, which has demonstrated resilience through the pandemic and in the face of inflation, losses, and reserve capital requirement headwinds.
As COVID-19 became a global pandemic in March 2020, the resulting economic slowdown caused insurance industry valuations to drop suddenly, but those declines were brief. With customers seeking safety in uncertain times, insurers saw increases in demand in many lines of business, particularly in Asia Pacific, Middle East, and Africa markets, which all experienced outsized growth. By April 2021, the global insurance market cap average was back to its pre-pandemic level.
The industry’s resilience was also reflected in its financial performance. Thanks in large part to a strong equity market, insurers grew their retained earnings to new heights. And insurers in both North America and Asia Pacific markets achieved more than $1 trillion in surplus for the first time.
This growth in capital has since offered insurers the capacity to deal with an evolving risk landscape in an increasingly complex and volatile world. But market dynamics are shifting, and insurers will have to shift their strategies to remain resilient.
Inflation impacts the whole value chain
The impacts of prolonged inflation loom large, and insurers will need to prepare. For example, the high cost of repairing a vehicle after an accident or a building after wind or water damage is increasing claims cost for insurers. In parallel, fierce competition for workers drives up operating costs everywhere, but compounds the challenge in lines of business like disability and long-term care that depend on a shrinking pool of care workers.
These rising claims costs flow through to underwriting—driving further rate increases and continuing hardening market conditions. Those rate increases may keep combined ratios where they need to be short-term, but they won’t keep pace as claims costs exceed what the market will tolerate in premium increases.
It’s not all dark clouds
There’s one silver lining in the dark cloud of inflation. As equity markets weaken, interest rate increases driven by inflation may provide insurers with much-needed investment income they can use to buffer underwriting results.
We also see in our research that the investor community is bullish when looking at the top 50 insurers by segment. Expected normalized earnings per share (EPS) are currently seeing a rebound and growth trend to 2024 compared to 2021, with P&C insurers at +10.6% CAGR, Multi-line insurers at +4.3%, and Life and Health insurers at +0.5%.
We remain optimistic about the insurance industry’s operational and financial strength and continuing resilience in the face of market volatility. With heightened awareness of risk and underinsurance across the globe and growing concerns related to health and mortality, demand for insurance products that offer holistic protection increases. Insurers who innovate in these areas help to safeguard their own future and that of their customers.