Swiss Re has struck a cautiously upbeat tone in its latest Sigma study, revising its previously downbeat outlook for the insurance industry on expectations that the worst of the economic devastation of the pandemic is over.

But as with any projections, there are a number of caveats at play that are not within the control of insurers, whose fortunes are tied to how things pan out in the global economy.

A lot will hinge on the scale of the global recovery from the coronavirus recession, particularly in the US, China and other major economies, as well as the efforts to develop an effective COVID vaccine, says the Sigma study, Rebuilding better: global economic and insurance market outlook 2021/22.

For now, Swiss Re likes what it sees on the insurance front. Its latest projections call for a 1.1% increase in global non-life premium growth in real terms for this year and 3.6% next year and in 2022. In June, at the height of the pandemic outbreak, it had predicted stagnant premium growth for this year.

For advanced markets in Asia, which includes Australia, non-life premium growth is forecast at 0.6% for this year and around 2.7% for the next two years. In North America growth this year is seen at 1.4% this year and 2.7% next year.

Australia and other advanced markets have pulled through from the public health crisis better than expected despite months of business upheaval, according to the study. The industry’s quick deployment of digital tools to navigate strict lockdown measures and continued hardening of commercial rates have combined to cushion the business impact of the pandemic.

The Sigma study says hardening commercial rates have partly offset competitive pressures in personal lines.

“The global non-life insurance sector has demonstrated resilience to the impact of the pandemic, and we forecast a swift recovery in premium volumes next year,” Swiss Re says. “COVID-19 has impacted the insurance industry, although less so than we initially feared.

“Rate hardening in commercial lines of business has been a main factor supporting the resilience, and this momentum is set to continue through next year, underpinned by strong demand amidst rising risk awareness and rising claims.”

But the improved premium outlook will have little impact on insurers’ bottom line, with Swiss Re predicting the outlook for profitability remains challenging at this stage.

The reinsurance giant says the insurance sector’s return on equity (ROE), a keenly watched indicator by investors and analysts, will fall to 5% this year from 7.2% last year because of lower investment returns as central banks pursue aggressive near-zero interest rate monetary policies to stimulate economic activity.

For Australia and other advanced markets in Asia, the ROE for this year is tipped to decline to 5.3% this year from 9.3% last year.

COVID-related claims are the other factor pressuring profitability, Swiss Re says. Property and casualty insurers could be in line for some $US50-80 billion ($69-111 billion) in claims losses from the pandemic. This could worsen the combined ratio in commercial lines by 5-8 percentage points.

“Meanwhile, increasing competition in personal lines could pressure rates in business that benefitted from windfall gains during lockdown.”

Looking beyond the insurance sector, the Sigma study also provides an in-depth take on the state of global affairs, warning of potential repercussions for insurers should things go awry.

While Swiss Re projects the global economy will recover next year with a 4.7% expansion in real terms following a 4.1% contraction this year, it says the rebound will be at best “slow and uneven”.

“This year’s pandemic has caused the deepest recession of our lifetime and is exacerbating societal challenges,” Swiss Re says. “Even with recent news around a potential vaccine for COVID-19, still-ongoing containment measures remain a key headwind to economic growth.

“A global trade war and a credit crisis are also threats. Interest rates will be lower for longer, higher inflation is a medium-term risk.”

Swiss Re expects interest rates may fall further next year, and this could widen the profitability gap for non-life insurers by another 1-3 percentage points to 7-11%.

The Sigma study says the ongoing trade tussle between the US and China is not expected to subside even with post-election changes in US politics. There’s a 35% probability the two powers’ dispute over commerce and technology could escalate into a global trade war, imperilling the world’s fragile economic health.

And that’s a frightening thought if the two giants fail to dial down the temperature.

Click here to access the Sigma study.