Industry outlook for the insurance market (Q4 2022)

Author: MAPFRE Economics

Summary of the report’s conclusions:
MAPFRE Economics
2022 Economic and Industry Outlook: Fourth Quarter Perspectives
Madrid, Fundación MAPFRE, October 2022

The current geopolitical and economic situation presents a complex outlook for the insurance industry. The tightening of monetary policy in the main developed economies and most of the emerging economies (except for Japan and China) is causing significant corrections in the financial markets, and its effects are beginning to be passed on more strongly to the real economy in the form of lower growth. Although labor markets continue to be strong. For the time being, restrictive monetary policies are failing to reverse the process of the loss of purchasing power, and inflation remains high, making it increasingly likely there will be an aggressive monetary policy in the coming months and a recession in the world’s major economies, which will have a negative impact on insurance markets. In general, insurance markets have been experiencing growth in premium volumes. Although this is not enough to offset the upturn in inflation, which is also affecting profitability.

As for the insurance sector’s balance sheet, the correction in the financial markets is negatively affecting the valuation of sovereign and corporate bonds of higher credit quality (its main investment), especially those of longer duration, and risk assets (equities and high-yield fixed income). On the positive side, the business environment continues to improve for traditional life savings and annuities with interest rate guarantees and for health insurance, as households and companies are becoming more aware of the need to hedge against inflation and complement the health coverage offered by public health systems. The automotive sector is beginning to overcome the problems of semiconductor and supply shortages that were weighing down registrations, but it is now facing a tightening of conditions in financing new vehicle purchases, which may continue to slow down the auto insurance business that is still showing no clear signs of recovery.

The forecast for the Eurozone for 2023 points to a marked economic slowdown, with real aggregate GDP growth likely to be around 0.0% (compared to the 3.1% growth forecast for 2022). The uncertainty caused by the war in Ukraine and the tension in energy prices continue to have a marked effect on Europe, with inflation continuing to set record highs in the Eurozone (10.7% in October), further complicating the outlook for business in the insurance sector, whose premium growth is unable to overcome high inflation, putting pressure on insurance prices and undermining their profitability.

Additionally, the European Central Bank (ECB) continues to tighten its monetary policy with new rate hikes in July and September of 50 and 75 basis points (bps), respectively, both higher than initially expected, and a new 75 bps hike in October due to the strong rebound in inflation. These latest increases have left interest rates at 2% for the main refinancing operations and 1.5% for the deposit facility (already far from negative territory), with inflation at 10.7% in October, pointing to further rate hikes in the coming meetings. As for the quantitative easing program of bond purchases, the ECB has stopped increasing its balance sheet in this quarter (reinvesting only maturing bonds flexibly by country), without beginning a process of quantitative tightening and has stated its intention to use a tool to avoid the risk of fragmentation of the Eurozone, which maintains a controlled tension on the risk premia of sovereign bonds, especially those of southern European countries.

The risk-free interest rate curves produced by the European Insurance and Pension Authority (EIOPA) show a new and sharp rise in interest rates in all tranches, remaining at levels well above those reached at the end of June 2022, with positive rates in all maturities, a far cry from the negative interest rates shown by the curve at the end of the previous year (see Chart 1). Risk- free interest rates remain significantly below inflation, but levels are moving on an upward path, continuing to improve the outlook for insurers’ traditional Life savings and annuity business. A similar situation can be seen in the United States, where interest rate hikes and the withdrawal of other monetary stimuli (particularly the reduction of the Federal Reserve’s balance sheet) is more aggressive than in the Eurozone (see Chart 2).

Furthermore, the Euro Stoxx 50 and S&P500 indices (and, in general, the major global equity markets) have experienced a sharp contraction since the beginning of the year by -22.9% and – 25%, respectively, at the end of the third quarter of 2022 and a spike in volatility. This situation, together with a probable entry into recession in an environment of tightening monetary policy, complicates the outlook for the operations of life insurance products in which the policyholder assumes the investment risk, which have to adapt to a new environment of falling equities and fixed income that offers higher interest rates and risk premiums more in line with issue credit risk (which is increasing).

In emerging markets, particularly in Latin America, growth estimates for some of its major economies have been revised upward for this year and downward in 2023, with forecast continuing to point to a significant slowdown driven by tighter financing conditions and the loss of household purchasing power as a result of high inflation. This is the case in countries such as Brazil and Mexico, where the improved economic performance in 2022 is being reflected in their respective insurance markets, especially in the Non-Life business, with significant growth in the first half of the year, and a remarkable recovery in all lines of business, some of them beating high inflation. In addition, the high interest rate environment resulting from the tightening of monetary policy by their respective central banks, in their fight against inflation, is driving the Life savings business (see Graphs 3 and 4). However, the insurance industry’s outlook for the coming year is complicated as a result of the economic slowdown in an environment of tightened financing conditions due to high interest rates that could weigh on growth, particularly in the Non-Life insurance market.

In Spain, the economic slowdown forecasts, the effects of inflation, and the tightening of financing conditions on household available income continue to present a complex outlook for the insurance sector. For the time being, the Spanish economy continues to be dynamic with the help of the recovery in tourism and a labor market that remains strong, seen in the performance of the insurance industry, which is experiencing significant growth in premium volumes (5.7% and 5.6% in Non-Life and Life business, respectively, in year-on-year terms up to September). However, this growth in the insurance business is not enough to offset the average inflation, which, so far this year up to October, is at around 8.8%. Moreover, this inflationary process continues to erode insurance companies’ profitability and keeps pressure on insurance prices high. The shortage of supplies that had been weighing down the automobile sector seems to be showing signs of improvement, and the auto insurance business is showing a slight recovery. Although the year-on-year growth up to September (1.4% for liability coverage and 5.1% for other coverage) is far from beating inflation.

With regard to Life insurance, the context for the savings-linked Life insurance and traditional annuities business continues to improve, as the ECB’s monetary policy tightening materializes, raising the market interest rate curve for sovereign debt and, particularly, for Spanish sovereign bonds in all maturities and offering an increasing positive term premium at longer maturities (still at levels below inflation, so that the environment of real negative interest rates continues, albeit lower than in the previous quarter).

Full analysis of the economic and industry perspectives with additional information and interactive charts on the Eurozone, Germany, Italy, Spain, the United Kingdom, the United States, Brazil, Mexico, Argentina, Turkey, Japan, China and the Philippines can be found in the report entitled 2022 Economic and Industry Outlook: Fourth Quarter Perspectives, compiled by MAPFRE Economics and available at the following link:

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