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- ©Davies Stephen ALLIANZ INSURANCE REPORT 2020 SKYFALL 01 July 2020 02 Looking back: License to insure 10 Coronomics: Tomorrow never dies 16 Money? Penny? Outlook for the coming decade 22 No time to die: ESG as the next business frontier in insurance
Allianz Research
The global insurance industry entered 2020 in good shape: In 2019, premiums increa- sed by +4.4%, the strongest growth since 2015. The increase was driven by the life seg- EXECUTIVE ment, where growth sharply increased over 2018 to +4.4% as China overcame its tem- porary, regulatory-induced setback and mature markets finally came to grips with low interest rates. P&C clocked the same rate of growth (+4.3%), down from +5.4% in 2018. SUMMARY Global premium income totaled EUR3,906bn in 2019 (life: EUR2,399bn, P&C: EUR1,507bn). Then, Covid-19 hit the world economy like a meteorite. The sudden stop of economic activity around the globe will batter insurance demand, too: Global premium income is expected to shrink by -3.8% in 2020 (life: -4.4%, P&C: -2.9%), three times the pace wit- nessed during the Global Financial Crisis. Compared to the pre-Covid-19 growth trend, the pandemic will shave around EUR358bn from the global premium pool (life:
Michaela Grimm, Senior Economist EUR249bn, P&C: EUR109bn). [email protected] In line with our U-shaped scenario for the world economy, premium growth will re- bound in 2021 to +5.6% and total premium income should return to the pre-crisis level. The losses against the trend, however, may never be recouped: although long-term growth until 2030 may reach +4.4% (life: 4.4%, P&C: 4.5%), this will be slightly below previous projections. Covid-19 is seen as a game-changer but in insurance it may rather reinforce existing
Arne Holzhausen, Head of Wealth, Insurance trends, namely digitalization and the pivot to Asia, which will emerge faster and stron- and Trend Research ger from Covid-19. With growth of +8.1% p.a. until 2030, Asia (ex Japan) is expected to [email protected] grow almost twice as fast as the global market. It will add a massive EUR1,277bn to the global premium pool, twice as much as North America and four times as much as Western Europe. Asia's rising middle class will increasingly play the role of the consu- mer of last resort with huge pent-up demand, reflecting weak social security systems and protection gaps in natural catastrophes, health, retirement and mortality. As a consequence, the region’s share (without Japan) of the global premium pool will rise Patricia Pelayo Romero, Expert, Insurance [email protected] from 24.2% (2019) to 35.3% (2030). Another trend that may “benefit” from Covid-19 is ESG. If the corona crisis taught the world anything, it is the need for more resilience. Increasingly, ESG will be seen not only as an indispensable tool to screen long-term risks to improve investment returns but also as an insurance business-enabler. As more and more companies implement ESG strategies, the demand for accompanying products and services is set to rise rapidly. A Markus Zimmer, Senior Expert, ESG new era of “impact underwriting” emerges. [email protected]
2 01 July 2020
LOOKING BACK: LICENSE TO INSURE
Golden year: 2019, the year before growth of +4.3% for P&C and +4.4% in for P&C the figure was EUR250 and for Corona life. Growth dynamics, however, were life EUR398. When looking at the The Covid-19 pandemic has had an different: P&C slowed down from +5.4% density (premium income per capita), unprecedented effect on the global in 2018, reflecting the soft patch of the this statistic varies widely from market economy and the insurance industry. world economy in the second half of to market, ranging from EUR6 in Nonetheless, looking back at last year, the year, whereas life increased from Nigeria to EUR7,915 in Hong Kong we had a normal year of growth in +2.8% as China overcame its temporary (which owes its crown partially to the global insurance income. In 2019, gross regulatory-induced setback in 2018 fact of being an off-shore market for written premiums for property-casualty (when the market shrank by -3.4%) rich Chinese). Insurance density is a (P&C) and life (without health) came to and mature markets in North America good indicator for the maturity of the EUR3,906bn or 5.4% of global GDP. and Europe finally came to grips with market. Additionally, insurance pene- The year-on-year growth after adjus- low interest rates. The share of life tration (gross written premiums as a ting for foreign exchange effects was premiums in the total market is around percentage of GDP) in 2019 shows the a remarkable +4.4%, mainly due to a 61%. same story: Hong Kong as the largest recovery in growth in China (+9.2%) spender, with about 17.8% of output and the U.S. (+4.2%). Both lines of In 2019, the global per capita expendi- and Nigeria with 0.3% of GDP. business grew in sync in 2019, clocking ture on life premiums was EUR648;
Figure 1: Gross Written Premium* growth, by region (in %)
Rest of the world 5.8 6.8 -0.5 Japan -2.3 Asia ex Japan 9.7 6.8 Western Europe 1.7 4.3 North America 2.2 4.2 World 3.2 4.3
USA 2.0 4.2 China 13.1 9.2 -3.0 0.0 3.0 6.0 9.0 12.0 15.0
CAGR 2009-2019 2019
*The conversion into EUR is based on 2019 exchange rates. Sources: National financial supervisory authorities, insurance associations and statistical offices, Thomson Reuters, Allianz Research
3 Allianz Research Figure 2 Top ten insurance markets by density and penetration
Gross Written Premiums per capita (in 2019 EUR) 18.0 17.8
15.0
12.0 9.9 9.8 8.9 8.6 9.0 7.4 6.8 6.4 6.1 6.0 5.2
3.0
0.0 HKG UK DEN FR SGP SWE CH US IRL NOR
Life P&C Total
Gross Written Premiums in % of GDP
7,915 8000
7000
6000 5,239 4,972 4,888 5000
4000 3,610 3,465 3,285 3,199 2,712 3000 2,345
2000
1000
0 HKG DEN CH SNG UK SWE FR KOR JP IT
Life P&C Total
*The conversion into EUR is based on 2019 exchange rates. Sources: National financial supervisory authorities, insurance associations and statistical offices, Thomson Reuters, Allianz Research
For your eyes only – a lost decade World GDP (+4.7%) outpaced insu- Over the last decade, P&C was the of growth rance premium growth (+3.2%) by a main growth driver (+4.2%). Generally, wide margin. The result of this growth we can observe a more stable demand The Global Financial Crisis (GFC) had disparity was an ever-widening cove- for P&C insurance as it moves in line a significant impact on the insurance rage gap: Despite increasing global with economic activity and financial industry, not only through the direct risks due to climate change, demo- stability. Thus, the relatively stable exposure in financial markets, but also graphic changes, business interruption, growth environment of the last couple in the change of growth trends across cyberattacks or geopolitical shifts, com- of years supported demand for P&C developed markets. In the decade panies and individuals worldwide spent insurance. preceding the crisis, the insurance a smaller proportion of their income in market as a whole (P&C, +4.5%; and life coverage products, whether for natural without health, +5.2%) grew more or catastrophes, cyber risks, healthcare or less in line with GDP (+4.9%). However, retirement savings. This is partly due to the trend in gross written premium lackluster and non-inclusive growth growth never recovered from the blow: and partly due to risk attitudes. 4 Figure 3: Nominal global Gross Written Premium and GDP growth* (y/y, in %) 01 July 2020
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
GWP (Life and P&C) GDP
*Based on 2019 exchange rates. Sources: National financial supervisory authorities, insurance associations and statistical offices, Thomson Reuters, Allianz Research On the other hand, the persistent design – flexible guarantees that allow events that might reshape their low-yield environment has continued for higher returns. And savers have attitudes towards saving and spending to drag down the demand for life realized that demographic change – the longer the situation drags on, the insurance products in the market; in doesn’t stop and that their retirement more these changes will be anchored. most cases it has deterred savers from goals can best be achieved with long- engaging in long-term maturing assets. term investments. Consequently, the In the past decade, the regional As a consequence, life premiums have life business rebounded in 2019, distribution of insurance markets has grown by a meagre +2.7% annually almost doubling the previous year’s changed considerably echoing the rise over the last ten years; life demand was growth rate (2019:+4.4%; 2018: +2.8%). of some Emerging Markets, first and particularly weak in mature markets foremost China. Its world market share such as Western Europe (+1.8%) and Thus, 2019 can serve as a reminder that more than doubled during this decade. North America (+1.1%). However, the behavioral patterns are not set in stone. In contrast, the share of mature longer extreme low interest rates per- The Covid-19 pandemic might further markets such as North America, Wes- sisted, the more savers and insurers accelerate behavioral changes. tern Europe and Japan declined by adjusted to the “new normal”: Insurers Risk awareness has certainly risen. about 12pp over the course of ten have changed their investment beha- A generation of supersavers might be years. Western Europe, North America vior – more alternative assets that earn in the making: Millennials have now and Asia (ex Japan) account for around illiquidity premiums – and product lived through two significant economic 85% of global insurance premiums.
Figure 4: Total Gross Written Premiums, by region (based on 2019 EUR, in %)
6% 2019 9% 5% 12% 34% North America 12% 36% Western Europe 5% 2009 Asia ex Japan & China 9% China Japan 12% rest of the world
33%
27%
*The conversion into EUR is based on 2019 exchange rates. Sources: National financial supervisory authorities, insurance associations and statistical offices, 5 Thomson Reuters, Allianz Research Allianz Research Advanced economies region (68% of the total premium The P&C market in Western Europe The aftermath of the GFC left deve- income or EUR722bn). This line of stagnated after the GFC and in 2019 loped markets with stagnant GDP business plays an important role in grew by +2.5%, only slightly faster than growth, persistently low interest rates social security systems across Western the annual average since the GFC and austerity measures impacting Europe. Nonetheless, there is an impor- (+1.6%). The German market grew by social investment and public health tant heterogeneity in terms of insu- +3.1%, the British market clocked systems. The upshot: household income rance penetration in Western Europe: growth of +2.3% and the French a was more or less stagnant. But as it varies from a high of 7.8% in the UK meager +1.7%; growth in Italy was even household expenditure is the largest and 6.9% in Denmark to lows of 1.0% in more subdued (+0.4%). GDP expenditure component in the Greece and 1.4% in Austria. Moreover, Euro area (54% of GDP), if this fails bancassurance strategies and legisla- Regarding insurance density (pre- to grow, the economy and insurance tive changes often drive life insurance miums per capita, life and P&C combi- expenditures follow suit. revenues. The Italian life market is the ned) and penetration (premiums as a embodiment of this phenomenon: percentage of GDP, life and P&C Therefore, life insurance penetration in over the last decade, growth rates combined), however, Germany lags the region has dramatically declined, varied from +48.7% to -18.0%. Another behind the others. In 2019, insurance from 5.6% back in 2007, just before the mature market that experienced a density stood at EUR2,031 in Germany GFC, to 4.6% in 2019. (Penetration in similar level of volatility was Sweden, (against a regional average of P&C remained more or less the same: where growth rates changed between EUR2,520) and penetration at 5.0% 2.2% vs 2.4% before the crisis). Against +18.5% to -11.9%. (against 6.8%). In neighboring France, the backdrop of the demographic for example, people and companies change, which leaves no doubt about The Western European life insurance spend EUR3,285 per year on insurance the necessity of private provision, this market had a good year in terms of and penetration is almost twice as high sharp decline is disturbing. Low interest growth in 2019 (+5.1%), way above the as in Germany (8.9%). The European rates go a long way to explain the average growth p.a. of the last decade economic giant has yet to reach subdued demand. (+ 1.8%). German life insurance grew by the coverage of its regional peers. a whopping +8.6% while the other Euro- Still, life insurance in Western Europe pean giants (i.e. Italy +2.7% and France holds the largest market share in the +3.2%) exhibited more modest growth.
Figure 5: Gross Written Premium* growth, by region (in %)
2.1 Italy 4.2 2.7 Germany 2.3 2.7 France 1.9 7.6 UK 1.2 4.2 US 2.0
4.3 Western Europe 1.7 4.2 North America 2.2 0.0 2.0 4.0 6.0 8.0
2019 CAGR 2009-2019
*Based on 2019 exchange rates. Sources: National financial supervisory authorities, insurance associations and statistical offices, Thomson Reuters, Allianz Research
6 01 July 2020
The U.S., the largest insurance market changed considerably: low productivity as Hong Kong is an off-shore insurance worldwide (34% global market share), growth, pervasively low interest rates market for mainland China). This gap is closed last year in a favorable state: and stricter regulation. Recovery was set to aggravate in the short-term as overall insurance premium income rose slow to come, but every crisis brings the lockdowns due to Covid-19 were by +4.2%. Although the performance opportunities: resilience, digitalization managed differently throughout Asia. varied in both lines of business (life: and customer centricity became the Insurance market growth in Asia was +5.1%; P&C: +3.3%), the total premium core values of the industry. Notwith- strong in 2019: Excluding Japan, premi- income rose by EUR49bn. standing the curveball that the Covid- ums rose by +6.8%, the market recover- 19 pandemic has thrown in insurers’ ing from the meager growth of 2018 For another year, the U.S. cemented its way, the strategies the industry is hav- (+2.7%). Life premium income in Asia status as the leading insurance market ing to implement to finally complete its (ex Japan) – accounting for 70% of the in the world: At EUR1225bn, the U.S is digitalization process and evolve to fit total regional premium pool – grew by the largest single market, followed by the new normal will pave the way for a +6.5% in 2019, after a mere +0.2% in China, which stands behind at rebound and recovery that will not 2018 due to the slump in the Chinese EUR455bn. The market share of the U.S. come tomorrow, but soon enough. market. P&C premiums, on the other in P&C is a whopping 41%. The market hand, grew by +7.5%, slightly down share in life insurance is a bit over a Emerging Markets from +9.0% in 2018. quarter of global premium income Total premiums in Asia (ex Japan) (25%) This reflects one of the peculiari- came to EUR947bn in 2019, of which It is no surprise that the largest growth ties of the U.S. market: As far as the 48% were written in China. Ten years came from the countries with the less spending structure goes, the distribu- ago, the size of the Chinese market developed insurance markets where tion of expenditures between P&C and represented only 40% of the Japanese there is still room for improvement. life is quite balanced, fluctuating at one in terms of premiums. Today, it is by Overall, the best performers in 2019 around 50% each. In most mature mar- far the largest in the region, around were Indonesia and Laos, which had kets, life insurance products are clearly one third bigger than that of Japan, y-o-y growth of +15.4% and +14.8%, dominating. which it surpassed in 2017. In compari- respectively. Vietnam and India also son, India, the other potential heavy- clocked double-digit growth in 2019. Reflecting the dismal growth over the weight in the region, saw total premium At the other end of the spectrum sit the last decade (and a growing popula- income amount to EUR79bn in 2019, developed markets of the region such tion), life insurance density in the U.S. roughly a sixth of the size of the Chi- as Singapore (+2.9%) and Taiwan (total premiums per capita) has more nese market. This gap has increased (-1.6%). The Asian story post-crisis was or less stagnated since the last crisis, over time: In 2009, the Indian market different from that in the West, one of from EUR1,806 in 2008 to EUR1,848 in was one-fourth the size of the Chinese fast-growth and market development: 2019. In P&C, at the height of the GFC, one. The Chinese market is still the The average annual growth rate for the the premiums per capita were at dragon market: fast development, a region stands at +9.7%. EUR1,426; as of last year they were growing middle class, but still relatively EUR1,873. As far as insurance penetra- low insurance density. The pent-up de- Talking about Latin America as a single tion goes, the overall premium as a mand for insurance products will be an market would be as reckless as assum- percentage of GDP has consistently asset for insurers trying to tap into the ing economic convergence in the Euro declined over the last decade, from market. Coupled with technological area. However, there are numerous 7.5% in 2008 to 6.4% in 2019. This devel- progress – it is also the clear front- characteristics that bind countries to- opment was mostly driven by falling runner in the application of AI and data gether. In 2019, there was a wave of penetration in the life segment. analytics – China is the market to anti-government protests from Rio watch. Grande to Fire Land, many of which In Canada, overall insurance expendi- ended in violence. This social unrest tures per capita were EUR2,424 last In Asia, there is clearly no homogeneity was due to extreme inequality and a year. Gross written premiums grew by in the evolution of insurance markets. lack of social protection. The region has +3.9% in 2019 (P&C: +3.8%; lfe: +3.5%). Countries like Laos, with deficient finan- been riddled by economic and public Over the past decade, the annual post- cial infrastructure, barely reach an in- policy uncertainty for a few years now. crisis growth in Canada has been +4.1% surance income of 0.4% of their GDP, As a response to the lack of social secu- (CAGR life: +3.5%; P&C:+4.9). The Cana- while neighboring markets such as Chi- rity, the private market for protection dian market represents roughly 6.9% of na and Hong Kong have an insurance promises a solution to the institutional the region’s premium income at penetration of 3.7% and 17.8%, respec- shortcomings. In 2019, the countries in EUR91bn. tively. The density gap is equally wide: our scope1 saw an increase in the total premiums per capita per annum span insurance market of EUR7.5bn or The bottom line: The GFC had a long- from a meager EUR9 in Laos and +10.4% y-o-y. This is the largest increase lasting effect on the insurance market EUR58 in India to EUR4,888 in Singa- since 2015, but on par with the CAGR of in North America and Europe as the pore to a whopping EUR7,915 in Hong the past decade of +10.3%. environment it had to operate in Kong (although this figure is distorted
7 1 Argentina, Brazil, Chile, Colombia and Mexico Allianz Research Figure 6: Gross Written Premium* growth, by region (in %)
2.9 Singapore 6.9 5.7 Hong Kong 10.2 11.2 India 9.9 -1.6 Taiwan 5.4 5.1 South Korea 6.2 9.2 China 13.1
6.8 Asia ex Japan 9.7 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0
2019 CAGR 2009-2019
*The conversion into EUR is based on 2019 exchange rates. Sources: National financial supervisory authorities, insurance associations and statistical offices, Thomson Reuters, Allianz Research
The development of the region in terms One of the core issues and vulnerabili- Emerging Europe2 tells a similar story of GWP per capita has been astound- ties in Latin America is informal labor. as there has been consistent growth in ing in the last ten years. In 2009, the Nearly 140 million Latin Americans – premium volume in the past decade: insurance density was barely EUR67 on about 55% of the working population – The overall regional market grew +8.6% average in the region. As of 2019, it toil in the so-called “informal” economy. in 2019 and the overall CAGR was almost increased threefold to reach Around 241 million have no access to +5.1% in the decade following the GFC. EUR164 per capita. In terms of insur- social protection, according to the Both lines of business saw different ance per GDP, ten years ago the region World Economic Forum. It is a growth development throughout the decade: had 1.7% of premiums as a percentage market where most of the premium While the life business grew only +2.8% of GDP. Last year, the penetration ratio expenditure (around 58%) goes into annually – reflecting the renationaliza- was 2.1%. The three largest markets in P&C products. There is room for im- tion of private pensions in some Latin America are Brazil (EUR25.5bn), provement for the pension systems in countries – P&C products experienced Mexico (EUR22.5bn) and Chile the region; life insurance and retire- a rally of +6.3% annually. (EUR11.5bn). ment products are high in demand in countries like Mexico and Chile.
Figure 7: Gross Written Premium* growth, by region (in %)
9.3 Peru 11.2 11.6 Mexico 9.8 9.6 Colombia 10.0 7.3 Chile 8.9 4.5 Brazil 8.8 38.3 Argentina 31.5
10.4 Latin America 10.3 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0
2019 CAGR 2009-2019
*The conversion into EUR is based on 2019 exchange rates. Sources: National financial supervisory authorities, insurance associations and statistical offices, Thomson Reuters, Allianz Research 8 2 Bulgaria, Croatia, Czech Republic, Hungary, Kazakhstan, Poland, Romania, Russia, Slovakia, Turkey and Ukraine. 01 July 2020 In terms of gross written premium vol- The countries where we find the highest Bulgaria, the Czech Republic and Po- ume, the largest players in the region ratio of premiums as a percentage of land, all with 1.9% of GDP, and Croatia are Russia (EUR20.7bn), Poland GDP are Slovakia (1.3%), Hungary with a ratio of 1.7%. As the region (EUR14.1bn), Turkey (EUR9.2bn) and (1.1%), the Czech Republic (1.0%) and entered 2020, it was well-positioned to the Czech Republic (EUR6.4bn). How- Poland (0.8%). grow in line with GDP. However, Covid- ever, when looking at the market devel- 19 spread to every corner of the planet opment indicators we find that Russia is In Emerging Europe, there is much high- and will impact the development of the nowhere near the top. In the life mar- er expenditure on P&C products Emerging Markets for the foreseeable ket, the highest density is in Slovakia (EUR44.5bn) than in life insurance future. (EUR225 per capita), the Czech Repub- products (EUR19.4bn). We observe lic (EUR212 per capita) and Poland higher levels of market maturity in P&C (EUR103 per capita), while bigger mar- in the region. Density is the highest in kets like Russia (EUR51 per capita) and the Czech Republic (EUR388 per capi- Turkey (EUR18 per capita) lag behind. ta), Poland (EUR269 per capita), and In terms of life penetration, the more Croatia and Slovakia (both with developed countries have seen their EUR222 per capita). In terms of pene- ratios fall slightly for the past decade. tration, the ratios are similarly higher in
Figure 8: Gross Written Premium* growth, by region (in %)
1.4 Slovakia 4.6 2.1 Hungary 10.6 1.5 Czech Republic 4.2 16.9 Turkey 20.8 0.4 Poland 7.4 11.1 Russia 6.0
5.1 Emerging Europe 8.6 0.0 5.0 10.0 15.0 20.0
CAGR 2009-2019 2019
*The conversion into EUR is based on 2019 exchange rates. Sources: National financial supervisory authorities, insurance associations and statistical offices, Thomson Reuters, Allianz Research
9 Allianz Research
CORONOMICS: TOMORROW NEVER DIES
Like a meteorite: The economic worst recession since WWII: we expect tionism will be a key feature of the life environment growth of -4.7% in 2020, more than after Covid-19 and may jeopardize the The Covid-19 outbreak will send the twice as bad as the 2009 GFC. The recovery. A desire for industrial autono- global economy into a sharp recession trough in activity is now expected to my (not least in Europe and the U.S.) in 2020. Since January, the impact of stand between -10% and -20% q/q and hidden subsidies for re-shifting pro- the outbreak has unfolded from a in Q2 depending on the strictness of duction back home signal a potential China-centered supply shock, which lockdowns across countries. This follows trend of the shortening of supply sent shockwaves across global trade an already sharp recession in Q1 (from chains, more investment protection and and disrupted supply chains, to an -2.5% to -8% q/q). thus a costly rebound. unraveling of financial markets as in- vestors realized the unavoidability of a Global trade losses could total Despite unprecedented support, insol- recession, to a violent demand shock USD3.5tn in 2020. We expect two quar- vencies are set to increase in 2020. hurting consumption and investment ters of recession in trade in goods and Looking at historical sensitivity to the as governments put the world on an services (Q1 and Q2), which will bring economic cycle and government inter- unprecedented pause to flatten the the annual volume contraction to -15% ventions to support corporates (tax de- contagion curve. in 2020. In value terms, plummeting ferrals, state loans and guarantees) commodity prices and a stronger USD and avoid top insolvencies and their In fact, full-fledged lockdowns for more will weigh on prices. We expect global domino effects, we expect global insol- than half of the global population and trade in value to fall by -20%. However, vencies to increase by +20% in 2020. GDP hit the world like a meteorite, a smooth return to the status quo ante This fourth consecutive year of rising pushing the global economy into its is not on the cards: Increasing protec- insolvencies would result from a +25%
Table 1: Global GDP growth forecasts
2017 2018 2019 2020 2021
World GDP growth 3.3 3.1 2.5 -4.7 4.8 United States 2.4 2.9 2.3 -5.3 3.7
Latin America 1.0 1.0 0.1 -6.8 3.1 Brazil 1.3 1.3 1.1 -7.0 3.0
United Kingdom 1.8 1.3 1.4 -13.3 5.0 Eurozone members 2.7 1.9 1.3 -9.0 6.0 Germany 2.8 1.5 0.6 -7.0 4.5 France 2.4 1.8 1.5 -10.8 7.4 Italy 1.7 0.7 0.3 -11.2 6.6 Spain 2.9 2.4 2.0 -11.0 7.0
Russia 1.8 2.5 1.3 -5.2 3.0 Turkey 7.5 2.8 0.9 -4.7 4.2 Asia-Pacific 5.2 4.7 4.2 -1.3 5.9 China 6.9 6.7 6.1 1.5 7.6 Japan 2.2 0.3 0.7 -5.7 2.2 India 7.0 6.1 4.7 -3.6 7.5 Middle East 1.4 0.9 0.3 -6.3 2.2 Saudi Arabia -0.7 2.4 0.3 -4.0 2.0 Africa 3.1 2.7 1.9 -3.1 4.0 South Africa 1.4 0.8 0.3 -7.8 5.4
* Weights in global GDP at market price, 2019 NB: fiscal year for India 10 Source: Allianz Research. 01 July 2020 increase in the U.S., a +15% rise in China start. What is important to understand fully recouped by year-end. As a result, and a +19% surge in Europe. is that managing the reproduction rate U.S. equity markets could post a 10-20% of the virus effectively (R0) will mean yearly performance for 2020 and grad- Up to one quarter of the jobs under most economies will function at 70% to ually start recovering to previous levels partial unemployment are at risk of 90% of their potential for two-three within 2021. Similarly, we expect Euro- being lost jobs. In the Eurozone, where quarters, with transport, travel, retail pean equity markets to follow the exact more than 70 million people are likely and hospitality on Covid-19 mode for same path but with a strongly negative to benefit from partial unemployment longer. As a result, activity in the manu- performance for 2020. schemes, the very gradual reopening of facturing and construction sectors may economies will mean fixed costs would pick up faster than in services. Lessons On the other hand, U.S. long-term bond need to be reduced by companies, learned from China show us that one yields are expected to finish 2020 at notably those in sectors where de- month after the number of domestic around 1.0%. Global long-term sover- confinement is very slow (hotels and Covid-19 infections dropped close to eign markets have calmed down after accommodation, travel, retail). Conse- zero, production activities are still regis- several weeks of erratic behavior. quently, many on partial unemploy- tering at 80%-85% of their usual pre- The mix of bad and good news both ment could become unemployed by crisis levels, while consumer spending from a pandemic and fiscal and mone- year-end, pushing the Eurozone unem- on durable goods remains at c.65% of tary perspective has led markets to ployment rate up by +2pp to 9.5% in normal levels. Globally, a return to a perpetual hunt for their anchor or 2020. The U.S. job market, on the other business as usual is not on the table fundamental forward-looking value, hand, is highly flexible. After skyrocket- before mid-2021 (+4.8% GDP growth in which they seem to have now found. ing jobless claims in April, we estimate 2021) and will be dependent on a Beyond 2020, we expect long-term U.S. the unemployment rate to reach 9.4% vaccine being in place. yields to converge to pre Covid-19 on average in 2020. fair-value levels (1.4%) by the end of Against this backdrop of a more gradu- 2021. Similarly, 10y Bund yields are Substantial excitement about exiting al recovery, markets seem rather to be expected to remain trading around from the Covid-19 lockdowns is over- pricing in a quick V-shaped recovery. -0.5%. Mirroring the U.S., we expect rated. Although major economies have The main reason for this cognitive gap long-term German yields to converge started reopening, de-confinement is might be the unshakable belief in over- towards -0.3% by the end of 2021. set to proceed in a gradual manner, activist central banks. But given the which can be divided in four different risks involved – in particular the likeli- stages: from full lockdown to gradual hood of a second outbreak in autumn national reopening, to gradual interna- or winter – we still believe that the tional reopening and finally a full re- ground lost since February will not be
11 Photo by Moritz Mentges on Unsplash Allianz Research A view to a crater: Covid-19 and crease in premiums of +4.4% in 2020), ey and simply keep it in their bank insurance demand lost premiums amount to EUR109bn at accounts or stash it away under the The slowdown in economic activity and the global level. mattress. It might be only in future the slump in equity markets will certain- years that the insurance industry may ly weigh on top-line growth in the insur- The life market has become much more benefit from this cash hoarding. ance industry. On the other hand, insur- volatile in recent times as single premi- ers might benefit from greater risk ums play an increasing role. Double- Overall, global life premiums are set to awareness. That was, at least, the expe- digit swings in both directions – even for decline by -4.4% in 2020, shaving off rience of SARS: In its aftermath, de- mature markets like France and Italy – around EUR106bn from the 2019 glob- mand for health and care insurance in are not uncommon. Moreover, besides al insurance premium pool. Similarly to Asia grew by double digits. But SARS economic activity (employment and the situation in the P&C segment, also showed that this boost is rather wage growth, for example) other fac- markets in Europe and North America short-lived; moreover, even if the will- tors, too, influence demand: legislation will suffer the most. However, in life, ingness to buy more insurance cover such as tax incentives, strategy such as even Asia (ex Japan) might not be able exists, it might not be matched by the product design and distribution (banc- to avoid a premium recession, as premi- ability to do so. For 2020, without assurance), and last but not least ums are set to decline by -2.0%. doubt, the negative effects will prevail capital markets – the performance of Compared with our pre-Covid-19 base (with only a few exceptions like health many “modern” life products is closely case (assuming an healthy increase or life protection). related to capital market movements. in premiums of 6.2% in 2020), lost pre- Unit-linked products, for example, will miums amount to EUR249bn. In the longer run, the industry will come be battered: Not only new business will under increasing pressure – from come to an abrupt halt, but large out- clients, policymakers and regulators – flows can also be expected. to come up with more comprehensive and simpler solutions. This might even In times of crisis, however, households compromise their ability to price risk become more risk-averse and may shy properly. Hence, a hardening market away from consuming or investing, because of the crisis cannot be taken building up precautionary savings for granted. instead. In 2009, for example, savings in the EU28 jumped by EUR100bn. With In the P&C business, the link between Covid-19, this behavior might be even economic activity and insurance de- more pronounced as lockdowns made mand is particularly close. Therefore, consumption in many areas – from eat- we expect all lines of businesses to see ing out to travelling – literally impossi- lower premium income in 2020 as new ble. Private consumption is set to drop business is set to decrease markedly. like a stone, by an estimated -35% Even in lines where appetite for risk on average during the lockdowns. cover might increase – in cyber, for ex- Although household income, too, is set ample, given the increase in cyber- to decline (because of rising unemploy- attacks – the sheer lack of money ment), the blow is widely mitigated by (or the need to build internal capital government programs (“Kurzarbeit”). buffers for highly uncertain times) Total household income may thus de- might deter many prospective clients cline by “only” -8% to -16%. The upshot: from increasing insurance cover. Saving rates could increase by around +6pp above pre-crisis levels in 2020; All in all, global P&C premiums are set this means about EUR400bn, or 3% of to decline by -2.9% in 2020, shaving off GDP in the EU28. This is by no means a around EUR44bn from the 2019 global European phenomenon. Even in the insurance premium pool. Although the normally spendthrift U.S., the personal coronavirus spared no region, mature savings rate hit a historic 33% in April markets (with their strict lockdowns) will 2020. be the hardest hit, with premium in- come falling by around -5% and -4.5% Where will these additional savings end in North America and Western Europe, up? In calmer times, capital markets respectively. Most Emerging Markets, (investment funds) and modern insur- on the other hand, will manage to in- ance products may benefit, as recent crease their premium pools, albeit by experience in, say, Germany has shown. very low rates. Compared with our pre- In turbulent times, however, households Covid-19 base case (assuming an in- may shy away from investing their mon-
12 01 July 2020
Table 2: Impact of Covid-19 on GWP by different lines of businesses Line of business Trigger Expected impact (2020)
Life unit linked Equity market slumps lead to strongly negative sudden stop in new business, large outflows Life traditional Low yields deter savers; slightly negative partially offset by flight to safety? Life protection Higher risk awareness slightly positive (memento mori) Health Higher risk awareness slightly positive
Motor New business collapsed due to negative lockdowns and reduced frequen- cies will weigh on pricing (rebates); partially offset by catch-up effects in H2 Fire and property Slowdown in investments and negative housing starts Business interruption Rising demand for pandemic risks – slightly negative but reputational issues Travel Travel collapsed during lockdowns strongly negative and will only gradually recover Credit Declining trade and higher risk pro- negative files; (partially) offset by govern- ment programs Cyber Higher risk awareness but compa- slightly negative nies’ ability to buy risk cover nega- tively affected by recession Liability, D&O Higher risk awareness but compa- slightly negative nies’ ability to buy risk cover nega- tively affected by recession
Source: Allianz Research
13 Photo by Matthieu Gouiffes on Unsplash Allianz Research
Corona topping Katrina: Covid-19 inspired losses
The direct loss impact of Covid-19 differs from one line of business to another. Some lines might even temporarily benefit as the lockdowns lowered activity (e.g. traffic). But the relief on the motor side might be short-lived and offset on the premium side by rebates and cash-backs.
So overall, the effect of Covid-19 will be clearly negative. Visibility on claims, however, is still low for three reasons: First, there is no precedent for such a sudden stop of economic activity on a global scale; the monetary and fiscal countermeasures are also unprecedented. Hence, how businesses and people react is hardly predictable. Second, a wave of litigation can be expected as some companies (and their lawyers) will try to find ways to get around exclusions for communicable diseases – in some juris- dictions with support by policymakers – and also to find fault in how companies have handled the pandemic (e.g. hotels, airlines or essential sectors). Third, in some lines (e.g. travel, business closure for restaurants) insurance will show goodwill (or may be coerced to do so…) and make (partial) payments.
Generally, Covid-19 cannot be compared with a property-related catastrophe such as a hurricane or earthquake, which strikes once and where losses and estimates are available within days. Losses from Covid-19 will evolve over a much longer time horizon. True, there are also immediate losses from coverages directly triggered by the pandemic such as health, travel and event cancellation. But the bigger driver of losses may be litigation (coverage interpretation, finding fault) and credit-exposure (bankruptcies). Thus, it is not surprising that estimates of losses differ widely. Lloyd’s of London, for example, estimates that global underwriting losses will amount to USD107bn in 2020 alone3.
To add insult to injury, Covid-19 does not only impact the liability side of the insurance business but the asset side as well. Falling interest rates, widening spreads and deteriorating stock markets weigh on investment income as well as on the balance sheet of insurers. A surge in downgrades and corporate defaults will make impairments necessary. Given the volatility of markets and the huge fiscal rescue and stimulus packages, the final losses for insurers are almost impossible to predict. Again, Lloyd’s of London tries to give a ballpark figure: global losses in investment portfolios might total USD96bn (2020)4.
Pandemic insurance: The case for a Ex-ante risk protection schemes, be it necessary infrastructure, processes and European solution against pandemics, natural catastro- knowhow to check the claims (to detect A pandemic is essentially uninsurable. phes or terrorism are instrumental in fraud) and make pay-outs fast and effi- By definition, it hits all households and ensuring that all participants retain skin cient. businesses at the same time. There is no in the game and thus have a strong diversification over space or time. self-interest in taking preventive and Fortunately, successful examples of Covid-19 is a case in point: how could preparatory measures. There is a long private-public-partnerships in closing an economic crisis which is likely to list of measures businesses should take risk coverage gaps exists. In the U.S., shave off USD9 trillion from this year’s to strengthen their resilience against TRIA (the Terrorism Risk Insurance Act) global output be insured privately? future outbreaks: from stronger was passed in the wake of 9/11 to That’s why the insurance industry, balance sheets and more robust, diver- kickstart a private insurance market for aware of the possibly devastating sified supply chains to broader succes- terrorism. Previously the demand for impact of a pandemic, excluded com- sion planning; from infrastructure to terrorism coverage had been extremely municable diseases from most of its enable remote working and regular limited and insurers would generally standard policies. health checks of employees to new neither charge for nor exclude it. After standards of hygiene. True, these the September 11 attacks resulted in The story, however, should not end measures come with additional costs, a $40 billion insured loss, reinsurers here. Societies – with only a few excep- while the next pandemic might only quickly pulled out of terrorism cover- tions in East Asia – were woefully ill- happen in years or decades. Therefore, age, leaving primary insurers with no prepared for the advent of Covid-19. it is of utmost importance to have the other choice than to stop offering it. It is now becoming increasingly clear right incentives in place by harnessing This left businesses, with a newfound that in the years since the SARS epi- the market dynamics of private insur- appetite for terrorism coverage, demic nothing has been done to estab- ance: pandemic insurance with risk- exposed and vulnerable to future lish effective pandemic risk protection. adjusted prices would go a long way to attacks. . This time, lessons should be learnt. First promote risk-mitigation strategies and and foremost, societies must boost their nudge businesses to lower their risks. economic resilience. Insurance can and Another advantage would be that should play a role here. private insurers could provide the
14 3 https://www.lloyds.com/news-and-risk-insight/press-releases/2020/05/covid19-will-see-historic-losses-across-the-global-insurance-industry 4 ibid. 01 July 2020
In response, the Terrorism Risk Insu- entering into any other insurance con- pandemic. This guarantee could be rance Act was signed into law by Presi- tract. The client buys insurance from an backed by the EU budget, similarly to dent George W. Bush in November of insurance provider, pays the premiums the arrangement of the Macron-Merkel 2002. and, in the event of a claim, gets paid plan for the Covid-19 recovery fund. out by the insurer. The insurer is then The TRIA program provides a govern- later reimbursed by Flood Re. Many questions remain open. How ment backstop. Participating insurers much capital would such a re-insurance are encouraged to price coverage Flood Re has been very successful in vehicle need? How much should accurately through insurer deductibles increasing the availability of flood insurers be charged for passing pande- ($200 million as of 2020). The pro- insurance. While only 9% of households mic risk to Pandemus? How big does gram’s annual cap amounts to $100 that had made previous flood claims the public guarantee need to be? billion, after which no further payments were able to attain quotes from two or Should capital markets play a role via will be made and insurers, having met more insurers before the inception of cat-bonds? How should pay-outs be their deductibles, are relieved of any Flood Re, afterwards that number rock- managed? The last question seems excess liability. eted to 100%. This matters as Flood Re particularly thorny, given the highly has the clear vision to reduce risk of varying degree of pandemic impact So far, TRIA has proven successful at future floods by incentivizing preventa- and loss profiles. Parametric solutions raising what is now basically a self- tive measures. might be an option i.e. linking the trig- sufficient and profitable market in ger for pay-outs, for example, to the terrorism insurance. Under protection of Both examples are suitable to be ad- number of cases or deaths per millions the backstop, insurers were embolde- justed to pandemic insurance. There is, of inhabitants in a certain region – pro- ned to underwrite terrorism policies however, a strong reason to opt for a vided these statistics are reliable and while the insurer deductibles ensured re-insurance solution: the European harmonized. The volume of pay-outs, adequate research and sustainable dimension. If Covid-19 has taught us on the other hand, could be pre- pricing models were encouraged. anything, it is that no country will be determined lump sums, staggered by spared by a pandemic. So it is better to business size. Measuring losses on a Another template would be Flood Re in set-up a joint solution in the first place, more granular level might render the the UK. Insurance companies do not avoiding haggling over European soli- scheme unduly complicated. like to underwrite flood coverage darity afterwards. because of the high level of adverse Given these difficulties, it is understan- selection. Flood Re is a reinsurance The newly created re-insurance vehicle dable that pandemic risk insurance scheme where insurance companies – let’s call it “Pandemus” – could be schemes are discussed first and fore- and the UK government work together established as Societas Europaea (SE), most at the national level; that way, in order to offer coverage the market responsible for all EU members and they might be easier (and faster) to would otherwise be hesitant to provide funded by all European (re)insurers and implement. But the danger remains while simultaneously keeping pre- member states. To be credible, how- that Europe will end up with a miums low. Insurers contribute a combi- ever, Pandemus would need a public hotchpotch of solutions that cannot be ned £180 million a year to Flood Re guarantee – up to a certain limit, be- easily integrated and may only deepen and in turn can pass claims on for a cause even the EU cannot indemnify all differences in the reaction to future fixed sum. For the client, it is like businesses for all losses caused by a pandemics.
Covid-19 and social security
While the impact of Covid-19 on private insurance is quite dramatic, social security systems have not been spared either. Public pension schemes are a case in point.
In most countries, the regular pension adjustment depends on the development of the average wage level. With unemploy- ment and short-time work increasing during the crisis, the average wage level in 2020 is probably going to be lower than last year´s. Thus, in the best case, pensions are not going to increase in the next year. In countries where there is no indexation, this will leave retirees with real purchasing power losses. Future retirees might also be affected by this sudden drop of the average wage level, in case their future pension is linked to the relation of their own income to the average income level. Thus, if no cor- rective measures are applied, in the U.S. “a middle-income worker born in 1960 could have his annual Social Security benefits in retirement reduced by around 13%, with losses over the retirement period in excess of $70,000” due to this effect, for example5.
The pandemic also affects the tax and contribution payers. In order to meet the pension obligations, in the short-term, higher tax subsidies will be necessary to cover the declines in contribution income of the national social security agencies due to higher unemployment rates and short-time work. However, if labor markets do not recover in the short- to mid-term, increasing contribution rates will be inevitable.
5 Biggs, Andrew G. (2020), p. 1, assumed a 15% decline in the Social Security Administration's measure of economy wide average wages in 2020. 15 Allianz Research
MONEY? PENNY? OUTLOOK FOR THE COMING DECADE
The changes that the Covid-19 pande- China – and states may wish to reduce not mean that the industry is off the mic has brought on to the insurance their foreign reliance on “strategic” hook. Covid-19 will lead to a new regu- industry is nothing short of game- goods (from drugs to batteries) while latory and supervisory sentiment, with a changing. There were immediate issues companies may want to shorten their renewed focus on systemic risk – resul- that insurers had to tackle when the supply chains – resilience trumps effi- ting in more stress testing and reporting pandemic spread to every corner of the ciency. For insurance, these develop- – and market conduct – leading to a world. The multifaceted role of em- ments are ambivalent. On the one more consumer-friendly regulation, as ployers, claim payers, asset managers hand, many business lines (e.g. marine, a reaction to recent disputes about and business meant that insurers had transport, credit) thrived in the past on clauses and claims regulation as well to prioritize, rebalance and move on. globalization, on the other hand, a new as premium refunds and discounts. As employers, the most important focus on resilience, on-shoring projects There is the undeniable risk that new measure was to make sure that remote and more infrastructure investments regulations in that field might even work was made available for every em- creates new business opportunities. compromise the industry’s ability for ployee. As claim payers, new risks emer- policy exclusions and pricing. ged, and refining underwriting prac- More challenging might be another tices became of the utmost importance. trend: the relation between business The upshot: The years after the pande- The asset manager role is still tricky as and the state is set to change, with a mic will be as challenging as the years this is the most direct channel in which more assertive and interventionist role after the GFC. This is reflected in our Covid-19 will potentially affect insurers. of the latter. This will also have reper- long-term forecasts. With growth of The irrationality of the capital markets cussions for insurance, not least in regu- +4.4% p.a. until 2030, global insurance makes it even more challenging for lation. So far, the regulatory framework markets will very likely trail behind insurers. The only thing that can be ta- for insurance worked quite well during economic activity for another decade. ken for granted is that yields will stay the crisis. As a consequence, insurance This pace, however, is a good 1pp fas- very low (or even negative in some lo- regulators have been far less accom- ter than in the previous decade as the cations) for the foreseeable future. modating than their peers in banking industry has become battle-tested and who, for example, lowered capital some silver linings are also visible. But What will the world look like after Co- requirements (to make credit readily before discussing them, let’s turn to the vid-19? Some trends have already available). In insurance, regulatory re- outlook for the different regions and become apparent. Globalization will lief came mainly in the form of reduced markets. change: global rivalries may increase – operational burdens, such as data col- first and foremost between the U.S. and lection and consultations. But that does
16 Photo by Lei Jiang on Unsplash 01 July 2020
You only live twice – advanced econo- globe. Underwriting excellence is of the (2019: EUR96bn). mies navigating the crisis utmost importance to maintain loss The U.S. will continue to be the uncon- ratios stable as increasing demand and Life insurance expenditure in Europe tended market leader for the next de- increasing risk exert opposite forces. was EUR1,712 per capita in 2019. We cade. Our long-term prospects look a find heterogeneity in the region as the little brighter than the current situation. The emerging risks arising in the next expenditure is much higher in Ireland Insurance markets should recover over years to look out for are: social inflation, (EUR3,697), Denmark (EUR3,663), and the long-run. We expect the life market disruptive tech, pricing and product line Switzerland (EUR3,136) while in Austria in the U.S. to reach EUR855bn by 2030, profit, legislative and regulatory it is EUR630 and in Greece EUR189. increasing its volume by EUR247bn in changes and the persistently low inte- We expect the density to change only the next decade with a CAGR of +3.1%. rest rates. Along with these we can also marginally in the next decade as the We estimate a slight deterioration of list emerging risks concerning the envi- largest players will be in the the life insurance penetration from 3.2% ronment: climate-related disasters, Scandi-navian and Anglo markets in 2019 to 3.0% in 2030. Despite suffe- food safety and food security. to drive the regional density to ring a deeper downturn in the P&C lines EUR2,146 (Denmark: EUR4,695; Swe- in the U.S., we expect the market to In Western Europe we foresee negative den: EUR4,406; and Ireland: EUR4,382). grow by EUR313bn over the next ten growth in 2020 for both lines of busi- years with a CAGR of +3.3% to reach an ness at -4.5% for P&C and -4.8% for life In terms of gross written premium as a estimated EUR930bn in 2030. Thus, the insurance. We expect, however, to ob- percentage of GDP, the regional ave- penetration in P&C will have slightly serve a recovery of sorts in 2021 at rage is 4.6%. We expect the insurance improved from 3.2% in 2019 to 3.3% in +3.4% for P&C and +3.0% for life insu- penetration to slightly worsen over the 2030. rance. Over the next decade, we will next ten years to 4.4%. The big players observe positive CAGRs for both lines of are the UK at 7.8%, Denmark with 6.9% There will be increased demand in business at +2.2% for life insurance and and France at 6.0%. We also find some some lines of commercial and personal +2.1% for P&C. We foresee Germany to regional differences as penetration is business due to the Covid-19 pandemic. overtake France as the biggest player lower in Greece (1.0%), and the Nether- We will observe an increased demand in the region for P&C in 2030 at lands (1.6%). We expect the penetra- in professional liability, especially in the EUR91bn and EUR90bn, respectively. In tion to deteriorate in the UK to 6.9% as cyber security and medical malpractice the realm of life insurance, France will well as in Switzerland, where we expect products. Political risk is another pro- continue to be the European market it to go from 4.3% in 2019 to 3.5% duct that is expected to rise in the leader in terms of premium volume at in 2030. specialty lines as uncertainty continues EUR185bn (2019: EUR145bn), followed in developing countries and across the by Germany at EUR118bn in 2030
Figure 9: Gross Written Premium* growth, by region (in %)
4.4 World 4.5 4.4 3.2 North America 3.8 3.5 2.2 Western Europe 2.1 2.2 8.1 Asia ex Japan 8.0 8.1 0.9 Japan 1.5 1.1 5.8 rest of the world 5.4 5.6
3.1 USA 3.8 3.5 9.8 China 8.8 9.5 0.0 2.0 4.0 6.0 8.0 10.0 12.0
CAGR 2020-2030 Life CAGR 2020-2030 P&C CAGR 2020-2030 Total
*Based on 2019 exchange rates. Sources: National financial supervisory authorities, insurance associations and statistical offices, Thomson Reuters, Allianz Research 17 Allianz Research
Insurance and tech—shaken not stirred
For the better part of the last decade, the insurance industry had been trying to play catch up with technology. However, just as Covid-19 spread across the globe, insurers were forced to adopt digital measures that would have under normal cir- cumstances taken years to implement. While there are several reasons why insurance has been deemed a laggard – mainly the dependence on legacy systems – the current situation and incumbent technological innovations will push the insurance industry to speed up the adoption of new tech across their ecosystems.
The undisputable quick win in technological adoption for insurers is client communications. The pandemic bolstered the popu- larity of online platforms and remote interaction where the applications range from advertisement to real-time quoting. Big data can help to target potential customers, while chatbots can be used to improve customer satisfaction by redirecting them to the relevant department they wish to contact. Text and image recognition and extended reality can help eliminate human interaction and promote automation and the elimination of human error when filing a claim. Another scalable technology is voice and speech recognition, which can be used for authentication purposes or data mining.
Through the increase in communication channels, insurers can profit from the data access and create new analytical tools for pricing and underwriting. One of the most popular applications is machine learning, which is currently used for customer ser- vice, fraud detection and increased operational efficiency. There are no bad risks just bad pricing and algorithms are used to support classification risks and to calculate more accurate predictive pricing models that ultimately drive lower loss ratios. Ma- chine learning-powered tools can also be used to create insights from massive volumes of health data to deliver lower costs, a higher quality of customer care, and fraud detection. Other scalable technologies that will help drive this change are 5G net- works and the Internet of Things (IoT) to help share and monitor data. Another prominent field where new technology can play out is policy management claims handling. Here we can expect an increase of the use of smart contracts, blockchain and dis- tributive ledger technologies, automation and predictive analysis. The process will change from policy inception to first notice of loss to algorithms that detonate digital payments.
Lastly, the increased use of analytics, automation and risk management will help the industry transform into a more customer- centric business. It will become increasingly important to create strategic alliances and partnerships to move away from tech- nology late adopters into innovators. The surge of innovation labs and transition from legacy systems into new ways of working will become the new normal for insurance. Business strategies coming out of the crisis will make the sector look funda- mentally different. With the pandemic we can expect a reshuffling of priorities in technology spending in insurance. Not only at the product level or at individual components of the value chain, but across the entire value chain. Building in-house and deve- loping digital capabilities with alliances and partnerships are going to be the way forward. While this crisis has brought many challenges, it also provided opportunities to come out of it stronger, more efficient and digitally enabled.
Figure 10: Gross Written Premium* growth, by region (in EUR)
0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000
2019
China
North America
Asia ex JP & CHN
Western Europe
Latin America
Eastern Europe
Japan
Middle East & Africa
Oceania
2030
*The conversion into EUR is based on 2019 exchange rates. Sources: National financial supervisory authorities, insurance associations and statistical offices,
18 01 July 2020
Photo by zhang kaiyv on Unsplash
From China with growth – emerging the Emerging Markets of the region, political uncertainty which may put its market growth driven by China such as Indonesia, the Philippines, Laos role as off-shore financial center in jeo- Despite the fact that China saw one of or Sri Lanka, where total premium in- pardy. For the whole region, excluding the weakest first quarters in insurance come is still below 2.0%. As a conse- Japan, we expect an average com- market growth within the last 20 years quence, China is no longer going to be pound growth rate of +8.1%. this spring due to the Covid-19 lock- the frontrunner in the region with res- down – a fall of -0.7% and thus a far cry pect to expected growth over the next In most countries, market growth will be from the compound average growth decade: With a compound average mainly driven by life insurance and sa- rate of +17.7% since the turn of the cen- growth rate of +9.5% it will surely re- vings products. This reflects the fact tury – it is set to remain one of the main in the upper half of the analyzed that there is one overarching topic in growth engines of the region. Already countries, but will be outpaced by coun- the region: demographic change. Most being the largest insurance market by tries with higher backlog demand, like countries will face the challenge of a premium income in Asia, we expect Indonesia, the Philippines, Sri Lanka rapidly aging population within the China to increase its market share and Vietnam, where we expect double- next decades, putting existing social in emerging Asia (ex Japan) further, digit growth rates over the next security systems under pressure and from 48% today to 55% in 2030. The ten years. The same holds true for India, increasing the need to build up sustai- main driver will be pent-up demand. where the reform efforts of the govern- nable and adequate ones in those The sheer size of the Chinese market ment might help in transforming the countries, where today’s pension sys- distracts from the fact that when it Indian insurance market from a pro- tems are best described as rudimenta- comes to insurance density and pene- mise to a success story. ry. At the same time, long-term insu- tration, China still ranks midfield in Asia rance providers have to adjust their like Malaysia and Thailand. Asia is set to remain the continent of portfolios and products to the capital two paces with respect to market market environment to ensure long- In 2019, every Chinese person spent on growth: There are the Emerging Econo- term stability, while managing the im- average EUR317 for life and P&C insu- mies with double-digit insurance pre- plementation of new technologies. Suc- rance coverage and total premium in- mium growth and the tiger countries cessfully managing this challenge will come amounted to 3.7% of GDP. On the Hong Kong, Singapore, Taiwan and be crucial to provide the aging popula- one hand, this is still markedly less than South Korea, where the insurance mar- tion in the region with the tools to build- in the mature markets of the region, kets are more mature and compound up sufficient additional occupational such as Singapore, where premium average growth is expect to range bet- and private pension provision for a income corresponded to 8.6% of GDP, ween +3.9% in Taiwan and +5.5% in more carefree retirement – at least with or Taiwan and Hong Kong, where the Hong Kong over the next ten years – respect to retirement income. share is almost 18%. But on the other which is only half the rate of expansion hand, it is already much higher than in of the previous decade, reflecting the
19 Allianz Research We estimate that the largest insurance vement in the realm of insurance densi- swift recovery and a CAGR of +6.1% markets in Latin America will continue ty, the per capita annual expenditure in from 2020 to 2030. We expect the to be Brazil, Mexico and Chile. In Brazil life insurance premiums in the region total insurance premium income and Mexico, the Covid-19 pandemic was only EUR68 in 2019; though we volume to increase by EUR58bn to has hit especially hard. Before the ac- estimate that by 2030 the density will reach EUR122bn in 2030. tual pandemic started in Latin America be EUR139, this still falls short of the these countries experienced severe ideal coverage. Life insurance in emerging Europe in commodity volatility. The region is ge- 2019 was set to recover from a few nerally commodity dependent and the Non-life insurance is the largest line of years of stagnation as we entered fluctuations in oil prices, as well as business in the region (EUR46bn): as of 2020. We expect the region’s life insu- supply-chain interruptions and subdued 2019 it accounted for 58% of the total rance income to decrease by -1.0% in trade, had an enormous impact on insurance market. In the coming de- 2020 and to swiftly recover to a CAGR economic stability. Nonetheless, the cade we expect the life insurance and of +6.2% (2020 - 2030). We expect insu- greatest challenge during the Covid-19 P&C distribution to remain the same rance density to increase almost 40% to pandemic will be informal labor and and P&C will represent 57% of the total EUR97 in 2030 as some of the markets the insufficient social protection as premiums in 2030 (EUR96bn). We ex- like the Czech Republic and Slovakia around 70% of the population face the pect a CAGR of +6.8% in the next de- mature. Over the course of the next trade-off of income for survival and cade, after dropping by 7pp by to decade, we expect insurance penetra- health. +3.5% in 2020 and recovering by +6.2% tion to remain stable at 0.5% in the re- in 2021. Over the next 10 years, we ex- gion. In 2019, the Latin American life insu- pect the per capita expenditures to rance market stood at EUR33bn, up increase almost double from EUR94 in We expect a similar development in 10.6% from 2018. The need for private 2019 to EUR183 in 2030. Innovation in non-life insurance penetration with a provision is significant in the region. The the product portfolio and government slight decrease from 1.2% to 1.1%. We Latin American insurance market ente- partnerships will be crucial for resilient expect the region’s P&C insurance in- red the Covid-19 pandemic in generally and inclusive growth after Covid-19. come to grow only very slightly (+0.4%) good shape. Overall, we expect the in 2020 due to Covid-19, but then to impact of the pandemic to tamp down Thanks to early lockdown measures, bounce back to a CAGR of +6.0% (2020 the growth in the region until 2021. We Emerging Europe has suffered less from - 2030). Non-life insurance represents expect a growth of +6.5% – mainly the Covid-19 pandemic than their Wes- around 69% of emerging Europe’s pre- driven by inflation – and a deeper set- tern neighbors. Reponses from Slovenia mium income. We expect the line of back in 2021 at -0.5%. However, over and the Czech Republic were used by business distribution to remain the the course of the decade, we estimate some western neighbors as “best prac- same over the course of the next de- that the region will experience a CAGR tices”. Nevertheless, the pandemic put cade. In terms of expenditure per capi- of +7.4%, lower than the 10 year CAGR the real economy in lockdown and our ta, we estimate that it will almost of +10.5% following the financial crisis. growth estimates are subdued for the double from last year’s EUR115 to We expect the region’s penetration to region for 2020 as we expect the total EUR220, driven by Turkey and Poland. deepen slightly from last year’s 0.9% to insurance market in emerging Europe 1.0% in 2030. There is room for impro- to be stagnant. However, we expect a
Photo by Ulises Baga on Unsplash
20 01 July 2020 Figure 11: Total Gross Written Premiums, by region (based on 2019 EUR, in %)
2030 7% 6% 6% 9% 30% North America 34% 2019 Western Europe 12% 20% Asia ex Japan & China China Japan 12% rest of the world
27% 16% 21%
Sources: National financial supervisory authorities, insurance associations and statistical offices, Thomson Reuters, Allianz Research
Emerging customers: Quantum of solace
A significant percentage of the population in Emerging Markets find themselves in a paradoxical position: they have modest levels of revenue and yet high levels of economic vulnerability. This is an ailment in the low-income segment of the population, meaning they are economically active but have no access to social protection and/or financial services. Nonetheless, they are on the path of integrating into the middle class of Emerging Markets with income well above the poverty line. Emerging custo- mers’ incomes may range anywhere between USD2-20 PPP per day. However, this special market segment is not defined merely by their earnings but by what their special characteristics: a qualified labor force that thrive to make each generation better than the one before.
Emerging customers make complex economic decisions every day; they are brilliant economists maximizing their very scarce resources and will – in a decade or two – be drivers of global consumption - the next generations’ middle class. Nonetheless, they lack social protection: one big financial shock such as a fire, a drought or even a death might set them back into poverty. Emerging customers are micro-entrepreneurs, artisans, farmers, informal workers, etc. The nature of their risks is the same as the population from mature markets: climate change and economic externalities. They need P&C insurance for crops and fires, health insurance for major medical expenses, life insurance in case of the death of the head of the households and savings products because they also face future uncertainties. Nevertheless, the products emerging customers demand are substantially different. To avoid adverse selection, insurance companies could partner up with other institutions/companies operating in Emerging Markets that pool people for reasons unrelated to insurance. For instance, a good market for flood pro- tection might be an agro-products distributor. Another good example of a distribution channel is telecom: Emerging Markets alone contribute to 59% of global smartphone shipments. Even excluding China, Emerging Markets contribute to 32% of the global smartphone market.
Covid-19 uncovered a tragic truth: informal workers face the decision of choosing between health and money. Insurance com- panies should aim at distributing products that cover loss of revenue and/or profits. However, it must be offered with an inte- gral approach: not only using digital channels for payments and distribution, but also for financial literacy. Not deploying these programs successfully might increase informal and insecure low-income jobs that alleviate temporary financial needs but might ultimately result in increased poverty.
As much needed as insurance products are, it is a hard market to enter. In order to thrive, insurance companies must offer ad- ded value for emerging customers, the products must be accessible, and they should be distributed and designed dignifying their aspirational status: emerging customers are not charity work, they are untapped business potential. Parametric insurance might be a possible solution for emerging customer confidence in insurance, but improvements must be made in the design of products and underwriting practices to decrease the protection gap. Fortunately, big players in the market have realized that tending to the emerging customers’ risk protection needs not only fosters inclusive growth, but it also makes business sense. It extends social protection and it fosters socio-economic growth, which in turn creates more business opportunities and brand loyalty for generations to come.
21 Allianz Research
NO TIME TO DIE: ESG AS THE NEXT BUSINESS FRONTIER IN INSURANCE
ESG (Environmental, Social and (European Insurance and Occupational If these criteria for sustainable insu- Governance) does not only affect the Pensions Authority) and Prudential Re- rance products are applied to the three asset side of insurers’ balance sheets gulation Authority (PRA) in the UK and ESG risk components of: but increasingly the liability side as well. need to be included and reported wi- As ESG methodologies and frameworks thin the regular Solvency II stress- physical risk: e.g. tangible losses develop and start to get incorporated testing exercises. To stay competitive in from natural catastrophes, disrup- in risk evaluation, the once non- the market, insurance players must not tion of supply chains or rising mor- financial and intangible perception of only adapt to current and future regu- bidity and mortality ESG is more and more evolving to a lations, but also satisfy investors’ increa- transition risk: e.g. disruptions of financial and tangible factor for the sing demand for sustainable products. business models by changing de- decisions of customers, suppliers, em- mand preferences, technologies or ployees, regulators, analysts, and other At the same time, however, ESG offers regulation stakeholders. While ESG metrics are also new market opportunities. Part liability risk: e.g. claims of third par- already established within insurers’ in- of the increasing demand results from ties who have suffered loss and vestment decisions, they still demand companies changing their reporting damage from an ESG hazard much more attention in ‘impact under- practices to better reflect their a long list of potential business op- writing’ insurance solutions. ESG factors commitment to ESG factors, aiming at portunities emerges. Table 4 lists to be considered in impact underwri- measuring their resilience to long-term, some of the examples. ting include the attitude and behavior: financially relevant risks. This involves (1) on environmental issues such as different product lines of insurance, The upshot: ESG does not only help resource depletion, climate change, including employers’ liability, D&O, insurers to better understand their long- waste and pollution, (2) regarding product liability, and public liability and, term risks but also opens new business people, workers and local communities, related to these risks, the increasing models and opportunities. Embracing including health and safety issues and demand for mitigating factors that can ESG goes far beyond burnishing the (3) referring to corporate policies and cause significant reputational harm. “green reputation” – it goes straight to governance, including tax strategy, cor- Information travels quickly due to social the bottom line. ruption, structure and remuneration. media and negative publicity related to environmental, social or governance That means that all potentially ESG- aspects is an increasing threat to com- critical business transactions have to be panies. screened and ESG risks or reputational impacts have to be assessed. Further- Specific trends and developments will more, underwriters need to be trained undoubtedly result in increasing de- for engaging in an ESG risk dialogue mand for specific insurance products with clients with the aim of finding solu- and services. Examples include the tions that improve the understanding of transition to a low-carbon economy the risk on both sides and result in ade- with its massive infrastructure in- quate risk mitigation and management. vestment needs, greater environmental protection and social inclusion. Table 3 The growing role of ESG factors in risk lays out criteria and definitions for sus- assessments is also starting to feature tainability in the context of ‘impact un- in insurers’ regulatory regimes. The derwriting’ in insurance. The scope of quantification of ESG impacts to insu- the definitions covers environmental rance companies has been demanded and social criteria and spans from miti- by the European Union’s EIOPA gation over adaptions to resilience.
22 01 July 2020 Table 3: Criteria for sustainable insurance solutions Focus on… Environmental criteria Social criteria … reducing the Support the development of a technolo- Raises awareness through various activi- risk of gy/market focusing on the environment ties (e.g. cause-related marketing or sup- possible, future and/or climate change (e.g. renewable port schemes) to prevent and mitigate occurrence of energy, environmental goods and ser- social challenges in relation to socially hazard event vices, green infrastructure) and further disadvantaged groups. (mitigation) activities in the mitigation of climate change (e.g. encouraging or rewarding environmentally responsible behavior that improves energy efficiency or avoids pollution).
… reducing the Reduce the client’s exposure to financial Fosters socially responsible behavior by inventory of ele- (risk reduction) and/or regulatory risks offering specifically tailored solutions for ments that may (e.g. CO2 regulations, environmental socially disadvantaged groups (for e.g. be affected by pollution liability). reducing the risk of underserved groups hazard event Protection from environmental risks and by providing otherwise unavailable access (adaptation) adaptation to climate change impacts to financial services). A discount on such through managing clients’ risks (e.g. policies would partly apply. weather risks) and/or fostering risk awareness and/or providing incentives for reducing risk exposure.
… reducing the Conservation of at least one of the fol- Enable and/or support those that tackle impact to ex- lowing: natural resources, biodiversity, social challenges and issues faced by so- posed elements environment. Activities and structural cially disadvantaged groups. These in- when they suffer changes that reduce the impact of ex- clude products that ‘help the helper’ (for hazard event treme events or accelerate the recovery e.g. travel insurance for charity workers, (resilience) from those. insurance solutions tailored for social val- ue-adding products/services that would otherwise not be insured).
Source: Allianz Research
23 Allianz Research Table 3: Criteria for sustainable insurance solutions
24 Source: Allianz Research 28 May 2020 OUR TEAM
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Director of Publications: Ludovic Subran, Chief Economist Allianz and Euler Hermes Phone +33 1 84 11 35 64
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FORWARD-LOOKING STATEMENTS
The statements contained herein may include prospects, statements of future expectations and other forward -looking statements that are based on management's current views and assumptions and involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such forward - looking statements.
Such deviations may arise due to, without limitation, (i) changes of the general economic conditions and competitive situa- tion, particularly in the Allianz Group's core business and core markets, (ii) performance of financial markets (particularly market volatility, liquidity and credit events), (iii) frequency and severity of insured loss events, including from natural ca- tastrophes, and the development of loss expenses, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi ) particularly in the banking business, the extent of credit defaults, (vii) interest rate levels, (viii) currency exchange rat es including the EUR/USD exchange rate, (ix) changes in laws and regulations, including tax regulations, (x) the impact of acquisitions, including related integration issues, and reorganization measures, and (xi) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences.
NO DUTY TO UPDATE
The company assumes no obligation to update any information or forward-looking statement contained herein, save for any information required to be disclosed by law.
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