In 5 charts: cautious insurance outlook in challenging economic market

As we close out a volatile 2022, we see major economies like the US and Europe heading towards "inflationary recessions" in the next 12 to 18 months. In our latest sigma, we forecast global real GDP growth to fall from 2.8% this year to 1.7% in 2023. Generally, global real GDP growth of about 1-2% or less is considered a global recession.

In advanced markets, we expect real GPD growth to decline from 2.4% this year to 0.4% in 2023. This is the largest annual slowdown since the 1980s outside of the global financial crisis, which logged 0.3% in 2008 and -3.4% in 2009, and the COVID-19 crisis, which recorded -4.5% in 2020.

We expect emerging markets will also weaken. Excluding China, we forecast emerging market real GDP growth of 2.9% in 2023. Slowing global demand, rising debt levels, higher interest rates and a strong US dollar are raising emerging market debt burdens, shrinking their exports and limiting room for fiscal policy to support the economy. While we don't forecast real GDP contraction in 2023, we expect growth rates to be substantially lower than their pre-COVID trend, which will feel like a recession in terms of impact on businesses and consumers.

There are signs that stress in financial markets is rising as monetary policy tightens. In the US, liquidity in the US Treasury bond market – possibly the most systemically important asset market worldwide – has deteriorated to spring 2020 levels. We believe demand is thinning from a range of investors, from global pension funds to domestic commercial banks and even the Federal Reserve, which is selling as part of quantitative tightening. Non-bank corporations are experiencing widening credit spreads. We see relatively higher risk among non-bank financial institutions, and lower risks in the banking sector, which has been more regulated since the global financial crisis.

Real estate has also taken a hit. The interest-sensitive housing market has rapidly entered a recession this year as demand fell dramatically amid a historic rise in mortgage rates. But we don't see a repeat of the US housing market crisis like in 2008.

We see below-trend growth in global insurance premiums for the next two years as a negative macroeconomic environment, inflation pressures and volatile financial markets weigh on premium growth and profitability. We forecast a 0.2% decline in total premiums in 2022 and below-trend growth of 2.1% annually on average over 2023 and 2024 in real terms, specifically 1.5% for 2023 and 2.8% for 2024.

But ongoing rate hardening in non-life insurance should support premium growth in nominal terms and profitability for both life and non-life insurers. Fuelling this trend is higher inflation, large losses from Hurricane Ian and the war in Ukraine, fiscal support to relieve consumer cost-of-living pressures, and rising interest rates.

Inflation is a double-edged sword for insurers. On the downside, it typically increases the cost of claims and expenses, and hurts demand for products as affordability declines. On the upside, it generally pushes up nominal premiums and interest rates, thereby generating higher nominal investment returns – albeit with a lag.

We expect inflation to affect non-life insurance the most, as we forecast higher costs for car parts and construction that would increase motor and property claims severity. Higher fuel prices also have an effect, as more expensive transportation adds to the final cost of claims. We anticipate that long-tail business, such as liability claims and health insurers, will be more impacted by wage and healthcare inflation in the long term.

Weakness in both underwriting performance and investment results will challenge global non-life profitability in 2022, we forecast. Using a sample of the largest non-life insurance markets – the US, Canada, Japan, Australia, the UK, Germany, France and Italy – as a proxy for global profitability, we estimate global non-life after-tax return-on-equity (ROE) at 3.4% in 2022, down from an average of 7.3% between 2017-2021. From 2023, however, we expect a rebound in global non-life ROE to 6.5% in 2023 and to likely above 8% in 2024, about the highest in a decade.