Economic parameters

Macroeconomic parameters have deteriorated even further in 2009, which has implications for insurance demand and for expected returns on investments.

Economy

There has been a dramatic slackening in economic growth worldwide. All industrial nations have entered into a recession whose overall magnitude and duration are not yet foreseeable. Consumer demand will be adversely impacted by rising unemployment, high levels of private debt in some countries and negligible real increases in wages. Owing to its dependency on exports, Germany is being hit by a collapse in demand from abroad, and the USA and UK are suffering because of their strong focus on the financial sector. The implications of state intervention and soaring national debt are still open, and emerging countries will show noticeably reduced growth at best. No recovery is in sight before the end of 2009. Since global demand is dropping, inflation in 2009 (subject to the inflationary impact of state intervention) is likely to be moderate, and oil prices should rise only slightly, if at all.

Capital markets

In view of the gloomy prospects for the economy, the environment for higherrisk investments in 2009 will continue to be difficult. The bonds of countries considered particularly solid are in demand because of their safe-haven characteristics, but do not really offer attractive investment opportunities, given their very low interest rates. Investors whose risk appetite is moderate therefore cannot expect to obtain high returns.

Insurance industry

The above situation also applies to the insurance industry. Though less hard hit than other industries in its core business, it will nevertheless be substantially affected by the economic downturn. In 2009, growth in the global insurance industry, if any, will be achieved in the emerging countries and then at a clearly reduced pace. Only in the medium to long term is the superior concept of private provision likely to lead to appreciably increased demand again. But the recession seems set to cause the international insurance industry’s growth rates to suffer at first. In an economic crisis, D&O, professional indemnity, and credit and bonding business are the lines of property-casualty reinsurance most likely to be affected by rising claims burdens due especially to the increasing number of insolvencies. Premium volume is expected to be lower in many other non-life insurance classes, but at the same time claims expenditure is also likely to decline. Similarly, new business in life insurance suffers from a prolonged recession because the funds available for old-age provision drop. If interest rates remain low, it will also become increasingly difficult for life insurers to pay the returns they have promised to their clients without taking a cut in profit.

As far as terms and conditions are concerned, the capacity effects described in the overview will stand strong insurers and reinsurers in good stead. In the renewals of reinsurance treaties at 1 January 2009, market terms and conditions were already hardening and even improved markedly in some segments. This trend is likely to continue. After all, sustained risk-adequate prices, terms and conditions are also in the interests of end clients, who attach more importance than ever before to reliable protection by strong insurers.

Risks

The risks have recently risen considerably. The economic prospects are subject to the imponderables described. Especially the liquidity and confidence crisis in the international financial markets could have further, as yet unforeseeable implications. The recession could spiral into a deflation and longterm depression. Other risks include geopolitical threats, especially in the Near and Middle East, the risk of major new terrorist attacks and protectionist trade policies.

The insurance industry must cope not only with macroeconomic uncertainties but also with political risks, including even stronger state influence on private health insurance or other disadvantageous measures in the field of social, economic and fiscal policy. Further risks may result from the expected tightening of supervisory regulations. Although the general conviction is that the worst deficiencies occurred in the banking industry, there is a danger that remedial measures designed for the banking sector will be applied to the insurance industry in an undifferentiated way. Conceivable in this context are excessive reporting regulations, exaggerated capital requirements and restrictions for individual types of business.

In the insurance markets, a recession-related slump in demand could trigger unexpectedly fierce price competition. For instance, financially weakened providers might pursue an aggressive pricing policy and thereby exceed their risk-bearing capacity, hoping just to be fortunate or to receive government help. The state umbrellas could thus stand in the way of the self-healing and rehabilitation of the markets that is so desirable from the competitive point of view. In this case, state intervention to combat the crisis would have an adverse impact on the structure of competition and the opportunities available to healthy companies. Providers with relatively strong finances will find it difficult to exploit their competitive advantage against this background. They will need to focus on profitability rather than volume and on the effectiveness of their risk-based management and control systems. Responsible buyers, as well as the state supervisory authorities, should consider the durability of providers’ financial strength and make their price tolerance conditional on the quality of the cover offered by the different companies.