Industry Outlook for the Insurance Market (2Q-2021)

Author: MAPFRE Economics

Summary of the report’s conclusions:
MAPFRE Economics
2021 Economic and industry outlook: second quarter perspectives
Madrid, Fundación MAPFRE, April 2021

In the wake of the severe economic downturn caused by the pandemic, the outlook for both the insurance industry and the economy in general is improving thanks to a return to global economic growth in 2021 and reduced uncertainty due to progress in vaccination. However, recovery is increasingly uneven. In many emerging countries, the pace of vaccination remains slow, with fiscal leeway virtually exhausted and an increasing inflation rate, which—in some cases—is forcing a reversal of the accommodative monetary policies that were being pursued, delaying the recovery process of their economies and the development of their insurance business, especially those lines of business more linked to trends in the economic cycle.

The rapid intervention of central banks with their ultra-accommodative monetary policies and extensive fiscal aid packages, in those economies with sufficient fiscal and monetary leeway to continue to implement them, is unprecedented and these continue to support financial markets, governments, households and businesses in a way that was not possible in previous economic crises. As a result of this, the larger economic declines initially forecast have been avoided, while investment and consumption levels continue to recover and major economies are beginning to regain confidence. Insurance markets, for their part, have benefited from these measures and continue to show themselves to be solvent and resilient, with less pronounced declines in business levels compared to previous global crises. Nonetheless, insurance market profitability may be negatively impacted by an increase in loss experience in some segments, such as Life Protection, health, and business interruption insurance, as well as reinsurance. This may put pressure on the prices of these coverages.

Further, the first quarter of 2021 saw a generalized upswing in market risk-free interest rates globally, with a steeper gradient being observed in interest rate curves (as can be seen in the graphs produced by EIOPA [the European Insurance and Occupational Pensions Authority]). This has created an improved environment for Life savings and annuity insurance products in some markets (principally emerging), with the ability to offer guaranteed rates in the medium- to long-term that are higher than short-term rates (term premium). However, interest rates in the eurozone remain low, despite the rebound in the first quarter (see Chart 1), and this is expected to remain the case for a long time. In the United States, the rebound was greater (see Chart 2) as a result of inflation data, which are increasing uncertainty about the direction that interest rates will take as a result of decisions the Fed may make in the coming quarters, which in turn will depend on whether or not inflationary pressures and labor market trends persist. It should be noted that Life investment insurance products are common in the US insurance market, and these are more closely linked to the performance of the stock markets, which continue to perform well, although they are also subject to greater uncertainty because of the effect that tapering could have on stock prices.