sigma No 2/2011 World insurance in 2010 Premiums back to growth capital increases 1 Executive summary

Transcription

1 sigma No 2/2011 World insurance in 2010 Premiums back to growth capital increases 1 Executive summary 3 Global economy: uneven recovery, interest rates remain very low 7 World insurance: recovery on track 13 Industrialised countries: recovery at diverging speeds 19 Emerging markets: China leads growth 27 Methodology and data 29 Statistical appendix

2 Published by: Swiss Reinsurance Company Ltd Economic Research & Consulting P.O. Box 8022 Zurich Switzerland Telephone Fax New York Office: 55 East 52nd Street 40th Floor New York, NY 10055, US Telephone Fax Hong Kong Office: 18 Harbour Road, Wanchai Central Plaza, 61st Floor Hong Kong, SAR Telephone Fax Authors: Daniel Staib Telephone Lucia Bevere Telephone Editor Brian Rogers Managing editor: Thomas Hess, Head of Economic Research & Consulting, is responsible for the sigma series. The editorial deadline for this study was 30 May sigma is available in English (original language), German, French, Spanish, Chinese and Japanese. sigma is available on Swiss Re's website: The internet version may contain slightly updated information. Translations: CLS Communication Graphic design and production: Swiss Re Logistics / Media Production 2011 Swiss Reinsurance Company Ltd All rights reserved. The entire content of this sigma edition is subject to copyright with all rights reserved. The information may be used for private or internal purposes, provided that any copyright or other proprietary notices are not removed. Electronic reuse of the data published in sigma is prohibited. Reproduction in whole or in part or use for any public purpose is permitted only with the prior written approval of Swiss Re Economic Research & Consulting and if the source reference Swiss Re, sigma No 2/2011 is indicated. Courtesy copies are appreciated. Although all the information used in this study was taken from reliable sources, Swiss Reinsurance Company Ltd does not accept any responsibility for the accuracy or comprehensiveness of the information given. The information provided is for informational purposes only and in no way constitutes Swiss Re's position. In no event shall Swiss Re be liable for any loss or damage arising in connection with the use of this information. Order no: 270_0211_en

3 Executive summary Real premium growth 2010 Life Non-life Total Industrialised countries 1.8% 1.0% 1.4% Emerging markets 13% 8.5% 11% World 3.2% 2.1% 2.7% After two years of falling premium volume, the global insurance industry returned to positive growth in Total premium volume rose by 2.7% in real terms¹ to USD 4 339bn, above pre-crisis levels. Capital has been fully restored in the non-life sector. While capital continued to recover in life, solvency remained below pre-crisis levels. Because interest rates remained at historically low levels, investment returns and therefore overall profitability were adversely affected. In 2010, the global economy continued to recover, which supported demand for insurance. GDP growth was particularly strong in developed and emerging Asia. Capital markets continued to stabilise due to the low interest rate environment and rising corporate profits. Figure 1 Real premium growth since % 20% 15% 10% 5% 0% 5% 10% Real growth rates Total Non-life Life Source: Swiss Re Economic Research & Consulting Life premiums are growing, but profitability is still low. Non-life growth is still weak in the industrialised countries, but strong in Asia. Global life insurance premiums increased by 3.2% in Asian emerging markets and a number of large continental European markets contributed the most to growth. In the US and the UK, premiums continued to decline, although at a slower pace compared to The capital position of life insurers continued to recover. Improved sales, lower lapses and higher capital gains on financial assets supported operating margins. However, profitability continued to remain low due to low interest rates. Global non-life insurance premiums rose by 2.1% in In emerging Asia and the newly industrialised countries in the region, the strong economic rebound pushed up non-life premium growth, while soft pricing continued to slow growth in Europe and the US, except in a few countries in selected lines of business. Consequently, underwriting results deteriorated further in 2010, despite average natural catastrophe losses and continuing reserve releases. Overall profitability remained low, as capital gains on invested assets only partially offset low investment yields. Nevertheless, capitalisation reached record highs. In 2011, the economic recovery is expected to continue, supporting premium growth in life and non-life insurance in the industrialised countries and emerging markets. Profitability in both sectors will continue to be low, as interest rates are expected to rise slowly. The devastating earthquakes in Japan and New Zealand are likely to result in higher prices in those countries and help to stop the trend of softening rates worldwide. ¹ All premium growth rates provided in this study are in real terms, ie adjusted for inflation, which is measured by local consumer price indices. Swiss Re, sigma No 2/2011 1

4 Executive summary The insurance industry has recovered well from the crisis, but challenges remain. Overall, the insurance industry has recovered well from the crisis. Demand for insurance in the emerging markets is expected to continue to grow strongly in the coming years. Ageing societies will provide ample opportunities for life insurers. However, insurers face a number of challenges ahead, such as: The economic recovery could be derailed by an escalation of the European sovereign debt crisis or an oil price shock. Regulatory reform, eg Solvency II, could lead to overly stringent capital requirements, which would undermine profitability, but also affect policyholders. As market risks will also be considered under Solvency II, life insurers and non-life insurers active in long-tail business lines will face higher capital requirements. An escalation of the public debt crisis in the peripheral European countries would lead to a significant write-down of insurers assets, as insurers hold sovereign debt and bonds issued by banks, which are also likely to suffer under such a scenario. This study contains the latest market data available at the time of going to press. For most insurance markets, final 2010 figures were not available. Therefore, this sigma also contains provisional data released by supervisory authorities and insurance associations, or Swiss Re Economic Research & Consulting estimates. Overall this study is based on data for the countries which account for more than 99% of global life and 98% of non-life premiums. 2 Swiss Re, sigma No 2/2011

5 Global economy: uneven recovery, interest rates remain very low The economic recovery from the deep recession continues The economic rebound continued in 2010, driven by Asia and Latin America. The recovery of the world economy that began in mid-2009 continued in 2010, supporting the growth of insurance premiums. World gross domestic product (GDP) grew by 4.0%² in real terms to USD 63tr in In the US and Western Europe, growth was solid, but varied significantly by country. Due to the severity of the recession, overall growth has been slow, especially in comparison to past recovery phases. The recovery was weak in Central and Eastern Europe, which suffered from a severe recession in 2009, but much stronger in Asia and Latin America. Figure 2 Real GDP growth by region Real growth rates World Industrialised countries North America Western Europe Japan and newly industrialised Asian economies Oceania Emerging markets South and East Asia Latin America and the Caribbean Central and Eastern Europe Africa Middle East and Central Asia 2% 0% 2% 4% 6% 8% 10% Growth rate 2010 Annual average growth rate Remarks: Countries' GDP weighted with market exchange rates. Source: Oxford Economics, WIIW, Swiss Re Economic Research & Consulting Emerging market GDP accounted for 35% of global GDP. The crisis has accelerated the shift of economic power to the emerging and newly industrialised Asian countries, where the economies recovered swiftly and currencies strengthened. The GDP of emerging Asia increased to 18% of global GDP (see Figure 3), while emerging market GDP accounted for 35% of world GDP in 2010 (2000: 21%). During the same period, real GDP per capita in the BRIC (Brazil, Russia, India, China) economies increased sharply, from 30% in Brazil to 150% in China. The demand for insurance is likely to rise as wealth in the emerging markets increases. ² The aggregation of countries is weighted by US dollar GDP (gross domestic product) based on market exchange rates. International statistics using purchasing-power parity show higher world GDP growth rates because of their heavier weighting of fast-growing countries such as China and India. Swiss Re, sigma No 2/2011 3

6 Global economy: uneven recovery, interest rates remain very low Figure 3 Contribution to world GDP by main regions 100% 80% 60% % of global GDP 11.6% 9.6% 17.9% 16.6% 15.1% 11.0% 16.8% 17.7% 12.1% 40% 20% 60.8% 57.3% 53.4% 0% Non-Asian Emerging Markets Emerging Asia Developed Asia North America, Western Europe and Oceania* * Excluding Turkey Source: Oxford Economics, WIIW, Swiss Re Economic Research & Consulting Higher inflation, particularly in the emerging markets, was mainly driven by rising food and energy prices. While inflation rose in 2010, except in a few countries, it remained below the levels observed in 2008, and was mainly driven by rising food and energy prices. Inflation increased more in the emerging markets, as food and energy represent a higher share of consumer expenditure. Because unemployment in the developed countries remained high and capital utilisation in the industry remained relatively low, core inflation in the developed countries was contained. As a result, it was not expected to significantly drive up claims costs for non-life insurers. Equity markets continue to recover while interest rates slowly rise The stock market recovery continued in Stock markets around the world continued their recovery in As a result, the capital positions and investment returns of insurers improved. Demand for unit-linked life insurance products strengthened. However, volatility remained high due to concerns about the strength of the economic recovery and the sovereign debt of the peripheral European countries. Figure 4 Stock market recovery in 2010 interrupted by the looming European sovereign debt and banking crisis in the first half of the year 150 Share index, local currency, 31 December 2009 = Jan 08 Mar 08 May 08 July 08 Sep 08 Nov 08 Jan 09 Mar 09 May 09 July 09 Sep 09 Nov 09 Jan 10 Mar 10 May 10 July 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11 US (DJ Industrials) Germany (Dax 30) Japan (Nikkei 225) France (MSCI France) UK (FTSE 100) MSCI Emerging Markets Source: Datastream 4 Swiss Re, sigma No 2/2011

7 Interest rates continued to be very low; this undermined profitability, but supported the accounting capital position of insurers. Interest rates remained at historically low levels in In fact, at the end of 2010, long-term interest rates were between 0.2pp and 0.6pp lower than at the end of the previous year. This has bolstered the accounting capital of insurers by increasing the value of bond portfolios, although the resulting low investment returns have also hurt profitability. While the narrowing of credit spreads in 2010 was interrupted by the euro sovereign debt crisis, default rates on corporate bonds decreased significantly. This development has improved insurers balance sheets and led to reduced write downs on the corporate bond portfolio. Figure 5 Long-term government bond yields remained extremely low throughout the year 14% 12% 10% 8% 6% 4% 2% 0% Long-term interest rates US Germany France Japan UK Source: Datastream High oil prices and the euro area debt crisis pose risks to the economic outlook, low interest rates remain a challenge Turmoil in the MENA region and the earthquake in Japan have increased uncertainty, but the economic recovery is likely to continue. While the world economy is expected to continue to recover, the political turmoil in the Middle East and North Africa (MENA) and the euro area debt crisis have increased uncertainty. The main threat to the global economy from the events in the MENA region is rising oil prices. A further price shock could be triggered by a spillover of the turmoil to Saudi Arabia, which accounted for 12% of global oil production in Though this is unlikely, a disruption of the oil supply from Saudi Arabia would have a much bigger impact on prices than the disruption of the oil supply from Libya, which accounts for 2% of global oil production. In contrast, the triple disaster (earthquake, tsunami and the severe nuclear accident) in Japan is most likely to have only a minor and temporary effect on the global economy, as long as nuclear pollution does not spread to a much larger area. The natural catastrophes in Japan, Australia and New Zealand in early 2011 will affect the underwriting results of domestic and global insurance companies, and could lead to higher prices in those markets. This could in turn stop the trend of softening rates in the global non-life insurance sector. Swiss Re, sigma No 2/2011 5

8 Global economy: uneven recovery, interest rates remain very low An escalation of the euro sovereign debt crisis would have severe consequences for insurers. Low interest rates will likely hamper profitability for some time. A slowdown of the economic recovery would undermine growth in insurance demand. If the slowdown is triggered by an escalation of the sovereign debt crises of Greece, Ireland and Portugal, it would have wider consequences for insurers. An uncontrolled default in one of these countries would likely impair European banks, which are large holders of sovereign debt securities. This could reignite a banking crisis similar to that in autumn Insurers would be affected in several ways. For example, if there are write-downs on corporate bonds issued by banks, insurers would be affected because they hold significant amounts of these securities. Second, insurers would face writedowns on their direct holdings of sovereign debt securities. Third, other risky assets would also lose value as economic growth would falter, further impairing the asset side of insurers balance sheets. Finally, another crisis would also have important mediumterm consequences: interest rates would likely remain low for a prolonged period of time, depressing insurers investment returns and profitability. Governments could levy extraordinary taxes on the financial sector to restore fiscal balance sheets, as Hungary did in Excessive capital requirements would restrict the insurance industry and lead to negative consequences for policyholders and the economy. While central banks have started to raise interest rates to curb inflationary concerns, there is no clear trend that long-term yields are rising. As interest rates are expected to rise only gradually, insurance sector profitability will be under pressure for some time. This is because it often takes several years for higher interest rates to impact profitability. 6 Swiss Re, sigma No 2/2011

9 World insurance: recovery on track Global insurance premiums return to growth Total premiums grew 2.7% to USD 4 339bn in The insurance sector has successfully emerged from the financial crisis, and the growth prospects for both life and non-life are strong. Direct premiums written in the global insurance industry rose 2.7% in 2010 to USD 4 339bn after two years of contracting premium volumes. While premiums in the emerging markets grew strongly (+11%), premium growth was still weak in the industrialised countries (+1.4%). The capital base of the industry continued to strengthen in Demand for insurance is expected to rise as the recent natural catastrophes in Japan and Oceania have highlighted the importance of non-life insurance in mitigating the financial impact of catastrophic events, which are still underinsured in the emerging market countries. Due to the ageing of the population, the role of life insurance is also likely to increase, especially as governments are under pressure to reduce budget deficits and address the huge liabilities of their old-age provision. Figure 6 Premium growth strengthens in mature and developing markets 20% 15% 10% 5% 0% 5% 10% Real growth rates Total Industrialised countries Emerging markets Source: Swiss Re Economic Research & Consulting Overly stringent capital requirements could harm the insurance sector, policyholders and economic growth. Excessive regulation of the insurance sector could slow growth. While modern regulatory regimes, such as Solvency II, which takes a risk-based and economic view, would support insurance growth, policy makers may be tempted to adopt overly stringent capital requirements and other measures to make the industry 100% crisis-proof. This could affect the profitability of insurance companies, leading to negative consequences for policyholders and the economy. While onerous capital requirements may appear to provide additional protection for policyholders, they can create distortions that ultimately harm policyholders. For example, excessive capital charges for asset risk will force life insurers out of higher performing yet more volatile corporate bonds and stocks, reducing returns attributable to policyholders and insurers profitability. In addition, excessive capital charges could also be undesirable from a macroeconomic perspective, as less risk capital would be available to finance growth.³ Life insurance: growth in developed markets remains sluggish, while emerging markets resume growth Global life premiums rose 3.2% in 2010 after falling 0.8% in Premiums In 2010, global life insurance premiums grew by 3.2% to USD 2 520bn. This is higher than the ten-year average (see Figure 7) and just below the pre-crisis average ( ). Growth in the industrialised countries was in line with the ten-year average. In some continental European countries growth was strong, driven by singlepremium products with attractive guarantees. This growth is, however, likely to eva porate once interest rates rise. In the US and the UK, the decline continued in 2010, although at a significantly reduced pace. Among the industrialised Asian economies, Japan stagnated, while Taiwan, Singapore and Hong Kong experienced double-digit increases. ³ Swiss Re, sigma No 3/2010 Regulatory issues in insurance. Swiss Re, sigma No 2/2011 7

10 World insurance: recovery on track Figure 7 Life insurance: growth resumes, but below pre-crisis level Real growth rates World Industrialised countries North America Western Europe Continental Europe Japan and newly industrialised Asian economies Oceania Emerging markets South and East Asia Latin America and the Caribbean Central and Eastern Europe Africa Middle East and Central Asia Growth rate % 0% 5% 10% 15% 20% Annual average growth rate Source: Swiss Re Economic Research & Consulting Growth of life insurance in the emerging markets in 2010 nearly reached the precrisis level, although large differences exist among regions and countries. Growth continued to be strong in emerging Asia (+18%). In China, the largest emerging market, premiums expanded by 26%, while elsewhere in the region, premium growth was more moderate. In Latin America, growth was solid and broad based. In Central and Eastern Europe, premium growth rebounded after a sharp decline in 2009, driven in many countries by strong sales of unit-linked savings products. Figure 8 Life: real premium growth in 2010 No data > 20% 20% 10% 10% 5% 5% 0% 0% 5% 5% 10% 10% 20% > 20% Source: Swiss Re Economic Research & Consulting 8 Swiss Re, sigma No 2/2011

11 Life insurers' profitability and risk capital continued to recover in Life insurer profitability and capital position Statutory risk capital improved in 2010 driven by stronger earnings and inflows from the capital markets. The capital recovery was partially amplified by accounting effects that tend to overestimate the assets (valued at market value) and undervalue the liabilities (valued at book value). These unrealised gains on fixed income portfolios, which make up the largest share of life insurers assets, will disappear once interest rates rise or bonds mature, partially offsetting the capital recovery. Figure 9 Risk capital and solvency development in life insurance (based on sample of countries: UK, Germany, France, Italy, Netherlands, Switzerland, US, Canada, Japan, Australia, China, India, Brazil, Chile, Turkey, Poland) % 60% 50% 40% 30% 20% % % Risk capital [2010 USD bn, LHS] Solvency ratio [risk capital/premiums, RHS] Source: Supervisory authorities The operating margins⁴ of life companies stabilised below pre-crisis levels in The main drivers of profitability were improved sales, low lapses (except in the UK), higher realised capital gains and the stock market recovery, which contributed to the strong performance of the variable annuity business. On the negative side, low interest rates resulted in low investment yields. Also, the low equity exposure limited the extent to which life insurers were able to benefit from improving stock markets. Life premiums should continue to expand in but profitability will remain below pre-crisis levels. Life outlook Premium growth in life is expected to continue in Growth is expected to remain strong in the emerging markets and turn positive in the US. In Western Europe, premium growth could slow slightly, as rising interest rates will make life policies with interest rate guarantees less attractive. Profitability will remain below pre-crisis levels for some time. In the medium to long term, the macro environment will be crucial for life insurance profitability. However, regulatory reforms could adversely impact profitability. With higher charges on risky investments (under Solvency II), life companies will be forced to shift assets into less risky asset classes, such as highly rated government and corporate bonds. Insurers will also be required to set aside more capital for long-term guarantees under the new regulatory environment. This might reduce profitability and partially erode the attractiveness of savings products with fixed guarantees. ⁴ Operating margin is defined as operating profit as a % of premiums written. Operating profit equals operating income minus operating expenses, where operating income is the sum of premiums written, the investment result, other technical income and fees. Operating expenses equal the sum of benefits paid, the increase in technical provisions, allocated surpluses and other technical expenses. Swiss Re, sigma No 2/2011 9

12 World insurance: recovery on track Non-life: global premiums growing, but only slowly in the US and Western Europe Non-life premiums increased again in Premiums After declining in 2008 and 2009, global non-life premiums grew by 2.1% to USD 1 819bn in This is only slightly below the ten-year average, but clearly below the pre-crisis average. Growth was solid in the newly industrialised Asian economies, particularly in Korea (+15%) and Singapore (+8.1%). In contrast, the flat development of premium volume in the US continued to drag on average growth in the industrialised countries. Premiums in Western Europe and Oceania grew, but only slightly. Sluggish premium growth overall in the industrialised countries reflected the ongoing softening of prices in many countries and lines of business. Figure 10 Non-life insurance premium growth: recovering, but still below the long-term average in the industrialised countries Real growth rates World Industrialised countries North America Western Europe Continental Europe Japan and newly industrialised Asian economies Oceania Emerging markets South and East Asia Latin America and the Caribbean Central and Eastern Europe Africa Middle East and Central Asia 4% 0% 4% 8% 12% 16% 20% 24% Growth rate 2010 Annual average growth rate Source: Swiss Re Economic Research & Consulting On the back of a very solid economic performance, non-life premiums in emerging Asia sharply increased by 22%, boosted by a 28% premium increase in China. Within emerging Asia, China accounted for 73% of the region s non-life premiums in Growth was solid in the Middle East and Central Asia as well as in Latin America. In Central and Eastern Europe, non-life premiums continued to decline overall and in most of the major countries, with the exception of Poland. Figure 11 Non-life: real premium growth in 2010 No data > 20% 20% 10% 10% 5% 5% 0% 0% 5% 5% 10% 10% 20% > 20% Source: Swiss Re Economic Research & Consulting 10 Swiss Re, sigma No 2/2011

13 Insured losses from natural catastrophes were around the ten-year average. Profitability remained low due to softening prices, low interest rates and above-average losses from natural catastrophes in Australia. Catastrophe losses⁵ Natural catastrophes cost the global insurance industry roughly USD 40bn in 2010, while man-made disasters triggered additional claims of more than USD 3bn. By comparison, overall insured losses totalled USD 27bn in Despite notably higherthan-average earthquake losses, overall catastrophe claims in 2010 were roughly in line with the ten-year average due to unusually modest US hurricane losses. The 11 March Tohoku Earthquake, which falls into Japan s 2010 financial year, is expected to be the most costly event for Japan s insurance industry. Profitability⁶ In 2010, the overall profitability of the non-life industry remained low. The after-tax return on equity was 6% due to soft pricing and low interest rates. Underwriting results deteriorated further in The average combined ratio of the eight leading markets rose to 103 %, compared to 101% in 2009, but was 95% as recently as The actual underwriting profitability, however, was likely to be even worse, as 2010 results from the US and large European insurers suggest that the 2010 underwriting results were supported by reserve releases of about four percentage points. Figure 12 Underwriting results worsened further in Aggregate of US, Canada, France, Germany, Italy, UK, Japan and Australia estimates / forecasts Capital gains/losses as a % of net premiums earned Underwriting result as a % of net premiums earned Current investment income as a % of net premiums earned After-tax return on equity (%) Source: Swiss Re Economic Research & Consulting Underwriting results fell in the US and in some European markets, although rates are beginning to rise in some lines of business. Underwriting results fell the most in the US and turned negative in the large European markets due to dismal motor results. Earnings were stable in the European personal lines and commercial businesses. In some markets, such as Italy and the UK, rates began to rise in 2010, most notably in the personal motor business. This will positively influence the 2011 performance. In Australia, a series of natural catastrophes (bush fires, floods, storms) led to high insured losses and negative underwriting results. Investment income as a percentage of net premiums earned fell slightly, as interest rates remained very low. On the positive side, the industry benefited from capital gains on invested assets, in contrast to the two previous years. ⁵ Swiss Re, sigma No 1/2011 Natural catastrophes and man-made disasters in 2010: a year of devastating and costly events. ⁶ The following section describing the performance of non-life insurance is based on the aggregate of eight important markets (US, Canada, UK, Germany France, Italy, Japan and Australia). Swiss Re, sigma No 2/

14 World insurance: recovery on track The recovery of capital in the non-life industry continued to strengthen but challenges remain. Industry capitalisation reaches record high By the end of 2010, P&C insurers capital and solvency had set a new record. The average solvency of the eight leading markets increased from 109% to 118%, exceeding the previous peak of 115% achieved in This more than compensated for the 20% drop in global capital funds during However, the P&C industry s capital base is likely to be reduced by several developments: Rising interest rates will lead to mark-to-market losses on the bond portfolios. Current capital requirements have risen due to market risks not considered before the crisis. Rating agencies are also monitoring the industry more closely. Additionally, the EU Solvency II regulations, which explicitly incorporate capital market risks, are expected to tighten capital requirements for asset and underwriting risks. Reserve adequacy has weakened due to low prices in the recent past. Catastrophe losses have been significantly above average in the first half of Figure 13 Non-life insurers' solvency recovered further in Aggregate of US, Canada, France, Germany, Italy, UK, Japan and Australia estimates / forecasts 140% 120% % % % % % Premiums earned, USD bn Shareholders' equity, USD bn Solvency (Capital/Premiums) right-hand scale Source: Swiss Re Economic Research & Consulting Growth of non-life insurance is likely to strengthen, but will be restricted by softening prices. A number of factors could lead to higher prices. Non-life outlook As the global economic recovery is likely to continue, premium growth in 2011 is expected to remain strong in the emerging markets and improve in the developed markets, although the recovery will be restricted by further rate decreases, particularly in commercial lines of business. In motor, however, increases in rates are likely to drive premium growth. While the costs to insurers of the devastating earthquakes in Japan and New Zealand in the first quarter of 2011 are still unclear, the size of the likely insured loss suggests that rates could rise going forward. Additional factors which could lead to rising prices are: Reserving may soon prove to be insufficient, as aggressive reserve releases in past years have thinned reserve adequacy. This could lead to adverse reserve developments in Rising interest rates will reduce the value of bond portfolios under gap accounting and reduce the capital base significantly. Stricter solvency regulation (Solvency II) and higher capital requirements will be implemented by rating agencies going forward. However, since underwriting results will only improve with a lag if rates rise, combined ratios are expected to continue to deteriorate in Swiss Re, sigma No 2/2011

15 Industrialised countries: recovery at diverging speeds Diverging developments in life, non-life growing but at low levels Total premiums in the industrialised countries rose slightly in Life insurance premium income increased by 1.8% in 2010 In 2010, total insurance premiums in the industrialised countries increased by 1.4% to USD 3 689bn. In most of these countries, premiums rose. The expansion was strongest in Japan and the newly industrialised Asian countries, but weaker in the US and some European countries. Industrialised countries accounted for 85% of global insurance premiums in 2010 versus 87% in Life insurance After falling 1.6% in 2009, life insurance premiums in the industrialised countries recovered in 2010, rising 1.8% to USD 2 156bn. The expansion was primarily driven by the newly industrialised Asian economies and a number of large continental European markets (eg Germany, Italy and Ireland). However, premiums in the UK, US, Spain and the Netherlands fell in In half of the industrialised countries, premium growth surpassed economic growth, increasing insurance penetration. Figure 14 Life and non-life premium growth versus GDP growth in the industrialised countries in 2010 Real premium growth % 30% 20% 10% 0% rising penetration 10% 20% falling penetration 5% 3% 1% 0% 1% 3% 5% 7% 9% 11% 13% 15% Real GDP growth 2010 Non-life insurance Life insurance GDP Source: Swiss Re Economic Research & Consulting while non-life premiums increased 1%. Insurance density increased to USD 3 527, while insurance penetration remained roughly constant at 8.7%. Non-life insurance Non-life premiums in the industrialised countries increased by 1% to USD 1 533bn in 2010 after slightly decreasing in As in life, strong demand in the newly industrialised Asian economies supported growth, while soft pricing continued to drag on growth in the US and many Western European markets. In the majority of markets, premium growth fell short of economic growth, suggesting falling insurance penetration. Insurance density and penetration An average of USD per capita was spent on insurance in the industrialised countries in 2010 (see Figure 15); of this amount, USD was spent on life insurance while USD was spent on non-life insurance. Since economic growth was higher than overall insurance market growth, insurance penetration decreased marginally to 8.7%. In fact, insurance penetration in the industrialised countries is now lower than at the turn of the century. The main factors behind this are the ongoing soft pricing conditions in non-life and the declining premium volumes in the UK and the US for the second consecutive year. Swiss Re, sigma No 2/

16 Industrialised countries: recovery at diverging speeds Figure 15 Insurance density and penetration in the industrialised countries in 2009 Premiums per capita in USD Switzerland Netherlands Luxembourg Denmark United Kingdom Japan Ireland France Finland Sweden Belgium G7 United States Norway Japan and newly industrialised Asian economies Hong Kong Average Canada Australia Taiwan Euroland Germany Singapore Italy EU, 27 countries Austria Liechtenstein South Korea Portugal New Zealand Spain Israel Cyprus Iceland Malta Greece 0% 5% 10% 15% 20% Premiums as a % of GDP Non-life premiums per capita Life premiums per capita Premiums as a % of GDP Source: Swiss Re Economic Research & Consulting 14 Swiss Re, sigma No 2/2011

17 North America: US life premiums continue to shrink, non-life flat Life premiums in the US continued to contract, but some products showed improvements. Annuity sales began to recover in the last quarter of In Canada, growth slowed on the back of declining sales of fixed annuities. US life growth should rebound in 2011, but will remain below the long-term average, while Canada is expected to resume trend growth. Premiums grew modestly in the US, but profitability of P&C insurers deteriorated. In Canada, profitability declined on the back of low investment results. Premiums in 2010 in North America World USD bn market share Life % Non-life % Real premium growth 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 0.5% 1.0% 1.5% Life Non-life Life insurance Life premiums in North America declined by 0.6% to USD 558bn in 2010 (2009: 12%). In the US, life premiums fell 0.7% (2009: 13%) due to the still challenging economic environment. New business premiums contracted for the third year in a row, mainly due to the slow recovery of employment and wage growth, although the decline was much less severe than in Individual life premiums increased modestly as a result of lower lapses and a rebound in sales of universal life and whole life products, while sales of term products experienced their worst decline on record. Individual annuity premiums declined, as consumers scaled back their purchases of fixed annuities due to unattractive return guarantees and the prospect of rising interest rates. Annuity sales began to recover in the last quarter of 2010, helped by the strong equity market, which has shown renewed interest in variable annuities as a retirement savings vehicle. Group life and annuity premiums increased marginally, reflecting the modest rise in employment and wages. The industry's capital position continued to strengthen in 2010 and capital exceeded its pre-crisis level. L&H profitability improved slightly, driven by stronger earnings from equity-linked business, but remained below its pre-crisis level. In Canada, life premium growth slowed to 1.3% in 2010 (2009: +3.5%). Strong gains in sales of individual life insurance were partially offset by a decline in annuity sales as consumers reduced purchases of fixed annuities. Canadian life companies maintained capital levels well above statutory requirements. Profitability continued to rebound in 2010, driven by improved investment results, but remained below historical norms. Going forward, US life premiums are expected to rebound in 2011, but growth is projected to be below its long-term trend due to the likelihood of a slow and protracted recovery of employment. In Canada, life premiums are expected to resume trend growth in 2011, due to the stronger economy. Profitability will benefit from rising equity markets and interest rates, but will remain pressured by low investment yields. A return to pre-crisis levels of profitability is expected in 2012 at the earliest. The industry's outlook will also be challenged by regulatory and accounting risks and uncertainties related to US government pressures to raise tax revenues, the capital rules that will apply to systemically important life insurers, and the convergence of global accounting rules. Non-life insurance Premiums written in the non-life sector increased 0.5% to USD 724bn in Growth of 0.2% in the US marked the first increase since 2006, while Canada saw strong premium growth (+4.3%), driven largely by personal lines. Meanwhile, the profitability of the non-life insurance industry in North America deteriorated in The combined ratio of US property & casualty insurers, excluding health insurers, rose to 103% in 2010 from 101% in This was primarily attributable to higher catastrophe losses, sizable underwriting losses in commercial lines, and additional losses from mortgage and financial guaranty insurers. Canadian property & casualty insurers reported a combined ratio that worsened to 101% in 2010 (2009: 100%). While interest rates remained low in 2010, insurers investment portfolios continued to recover much of the value lost during the financial crisis. US and Canadian P&C insurers' statutory ROEs fell to 6% and 7%, respectively, only slightly lower than in The normalisation of capital markets supported the industry's capital strength. The US and Canadian statutory surplus increased by 9% and 7%, respectively, during the year. Looking ahead, the recovery in premium growth in 2011 is expected to continue as the economic expansion gains momentum. Softening of commercial rates has eased slightly and might be halted further by the first quarter 2011 catastrophe losses. However, the industry's growth outlook for 2011 will continue to be mired by competitive market pricing, low investment yields, and decreasing reserve adequacy levels. Growth rate 2010 Annual average growth rate Swiss Re, sigma No 2/

18 Industrialised countries: recovery at diverging speeds Western Europe: life premiums continued to recover, non-life stagnated Premiums increased 2.8% in Western Europe. In most countries, premiums recovered and the industry is back on track. However, life premiums fell in the UK, Netherlands and Spain. The fundamental outlook is positive but there are some challenges ahead:... the euro crisis may negatively impact life insurers balance sheets;... Solvency II will spur insurers to develop new products;... the EU Gender Directive will have farreaching consequences, likely to be unfavourable for insurance customers. Premiums increased slightly by 0.6%, while combined ratios worsened to 100.4% (2009: 98.3%) Premiums in 2010 in Western Europe World USD bn market share Life % Non-life % Real premium growth 6% 5% 4% 3% 2% 1% 0% 1% Life Life excl. UK Non-life Growth rate 2010 Annual average growth rate Life insurance In 2010, life insurance premiums in Western Europe grew by 2.8 % (2009: +4.0%) to USD 946bn. While growth in the L&H industry overall has resumed, it varied by country. In countries like Italy, Germany and France, life insurers continued to offer relatively attractive interest guarantees in light of the historically low interest rates, thus attracting money from maturing policies as well as from the banking sector. In Denmark, Norway and Belgium, moderate growth resumed in 2010, while in Luxembourg, the premium volume increased by more than 22% in real terms, mainly driven by cross-border business. However, two Western European countries experienced a further decline, although at a slower rate than in In the UK, the largest life insurance market, premiums fell by 3.3%. The most severe decline was observed in the Netherlands, where premiums fell by 13%, due to continued strong competition from tax privileged bank savings products, which grew strongly for the fourth consecutive year. In Spain, life premium volume fell by roughly 9%, after rising 3.3% in The outlook is positive, driven by increased demand for protection, savings and pension products as well as reductions in social security benefits. The environment for life insurers is expected to further improve in Western Europe as interest rates increase and macroeconomic conditions improve. While trend growth should resume, insurers will face certain challenges. First, the euro crisis is still looming. Direct write-downs on peripheral European government bonds in the event of a debt restructuring would likely be manageable for the vast majority of life insurers, but the resulting stress in the banking sector could potentially wreak havoc on life insurers, which are significant holders of bank debt. Second, Solvency II, which is economic and risk-based, represents a positive step in terms of insurance regulation and may be adopted by other regulatory regimes around the world. However, key parameters have been significantly tightened in the wake of the crisis and have led to high capital requirements for the most important life insurance products. Insurers are currently looking to develop new products that are more compatible with Solvency II. Third, the EU Gender Directive prohibits insurers from setting prices based on gender, despite the fact that research shows that differences exist in terms of the insured risks. The likely outcome will be that prices will increase for both men and women; there is an additional risk that this directive will trigger even more regula - tory changes. Non-life insurance Non-life premiums in Western Europe increased slightly by 0.6% to USD 587bn in 2010 (2009: +0.4%). Germany (+1.5%), Italy (+0.1%) and the Netherlands (+1.7%) contri buted most to growth, although many countries in the region experienced premium growth. However, premiums fell in the UK ( 1.2%) and Spain ( 1.5%). In the UK, strong premium growth in the motor business could not offset declining premium income in the commercial lines business, triggered by a further softening of rates and sluggish foreign risks business. In Spain, premiums declined due to weak economic conditions. Switzerland, Belgium and Denmark also registered marginal declines. The average combined ratio for direct business increased further to 100.4% in 2010 (2009: 98.3%). While the largest European markets unanimously suffered because of the current dismal performance of the motor business, some markets, like the UK and Italy, witnessed significant rate improvements, which should lead to future improvements in under writing results. With investment results remaining relatively low due to the prevailing low interest rate environment, the overall net operating results declined further to 8.5% of net premiums earned. For 2011, premium growth is expected to strengthen. While the economy in Southern Europe and Ireland continues to be weak, the recovery is stronger in the other European countries. Additionally, significant rate increases related to the unprofitable motor insurance business in several countries will also support premium growth, in particular in the largest motor markets such as the UK, Germany, France and Italy. However, overall profitability will remain below average as the commercial lines show no sign yet of rate increases, and investment incomes are expected to remain comparably low, despite the fact that interest rates are slightly rising. 16 Swiss Re, sigma No 2/2011

19 Japan and the newly industrialised Asian economies: record losses from the Tohoku Earthquake In 2010, life premiums dropped in Japan, but increased strongly in the other newly industrialised Asian economies. Strong economic growth will continue to support insurance demand. Non-life premiums rose in most markets. Major earthquake losses hurt profitability in Japan. Premiums in 2010 for Japan and the newly industrialised Asian economies World USD bn market share Life % Non-life % Real premium growth 6% 5% 4% 3% 2% 1% 0% 1% Life Non-life Growth rate 2010 Annual average growth rate Life insurance In 2010, life premium volume in Japan and the newly industrialised Asian economies increased by 2.4% to USD 609bn (2009: +1.9%). However, premiums written by Japan s life insurers are estimated to have stagnated in 2010 (2009: +2.2%). Modest growth was observed in individual traditional business, while sales of annuities remained depressed. Significant insurance losses⁷ are expected from the 11 March Tohoku Earthquake (and subsequent tsunami), which resulted in the death and disappearance of more than people⁸. Apart from death benefits, insurers are also liable for substantial claims from medical and accident insurance. The overall impact on Japanese life insurers, though, is expected to remain manageable. Outside of Japan, insurance premium growth in 2010 ranged from 3.8% in South Korea to 16% in Taiwan. In South Korea, sales of new endowment products drove premium growth. Positive economic growth has helped to underpin life insurance demand in most markets, despite ongoing volatility in equity markets. Overall, profitability is expected to remain stable given the persistently low interest rate environment. In Taiwan, despite positive premium growth, the appreciation of the local currency and the sovereign debt problem in Europe contributed to insurers relatively disappointing results. The outlook for the Japanese life insurance market remains uncertain due to the recent recession, although growth prospects should improve in the second half of Outside Japan, robust economic growth is driving demand for both traditional and investment-linked insurance products. The earthquake in Japan could also raise insurance awareness and increase demand for protection-type insurance policies throughout the region. Meanwhile, regulatory changes will continue to have an impact on the operations of life insurers. For instance, the Hong Kong regulator has proposed to set up a policyholders protection fund to improve consumer confidence about insurance. Non-life insurance Premium volume in the industrialised Asian countries increased by 4.2% to USD 183bn. Japan s non-life insurance premiums are estimated to have increased marginally by 0.6% in 2010 (2009: 0.9%), as further declines in property premiums offset gains in the motor and accident lines of business. Insurance losses were modest before the 11 March Tohoku Earthquake. The earthquake is expected to result in significant industry losses, though a precise estimate is still not available. While the government will eventually absorb most losses for household earthquake and nuclear insurance, private insurers will face losses, mainly from property and business interruption claims. In other industrialised Asian markets, non-life premiums continued to expand steadily, whereas South Korea registered strong growth of 15% over the year. Increasing demand for long-term products has driven premium growth in Korea, though profitability was hurt by the rising motor loss ratio. In other markets, growth in accident and health insurance, together with a recovery in external trade, has supported the business expansion of non-life insurers. Looking ahead, reconstruction will add significant momentum to Japan s economic growth, particularly towards the end of the current fiscal year. Many corporations will also have to review their insurance coverage in view of the latest combination of extreme events. Both factors will underpin firmer non-life insurance demand and prices in the near future. Outside Japan, insurance business will continue to benefit from robust economic growth and low interest rates. A proposal to re-introduce tariffs for nat cat policies in Taiwan could result in faster premium growth, whilst South Korea s recent implementation of the revised motor pricing scheme should help to rein in claims escalation. Accelerating inflation, however, could threaten insurance profitability in some markets. ⁷ The 2010 financial year ends March ⁸ National Police Agency of Japan Emergency Disaster Countermeasures Headquarters (as of 16 June 2011) Swiss Re, sigma No 2/