State of the Market

Q1 2023: State of the Global Insurance Market

As pressures from the COVID-19 pandemic ease, new economic pressures are emerging, as are both climate change and geo-political risks. This report looks at the impact of these risk factors on the state of the insurance market in the first quarter of 2023.

Economic Outlook

Inflation surged around the world in 2022. According to the International Monetary Fund, inflation in the UK reached 9.1% in 2022. The World Bank says the global core inflation rate could be around 5% in 2023, assuming supply disruptions and labor-market pressures do not subside. This is nearly twice the five-year pre-pandemic inflation average. A global recession could occur in 2023 as a result.

Swiss Re expects the global GDP to grow by only 1.7% in real terms in 2023. In advanced markets, GDP growth is expected to be only 0.4%. For the insurance industry, high inflation is the top concern, but higher interest rates could help alleviate some of the pressure.

Lloyd’s of London says rising interest rates on fixed-income portfolios have forced a write-down of asset values, and this is expected to lead to higher yields and investment returns in the future. Lloyd’s has reported an investment loss of £3 billion, but this is expected to reverse as assets mature over the next two to three years. For 2022, Lloyd’s reported a full year loss of 0.86 billion before tax, compared to a profit of £2.3 billion for 2021.

Premium Growth and Underwriting Performance

According to Gallagher Re’s 2022 Lloyd’s of London Market Report, Lloyd’s saw improved profitability beginning in 2021 after four years of combined ratios above 100%. In 2021, gross written premiums increased by 11% to reach £39.2 billion. 2022 saw continued growth; Lloyd’s has reported that gross written premium increased by more than 19% in 2022 to reach £46 billion.

Lloyd’s of London says major claims, including losses stemming from the conflict in Ukraine and Hurricane Ian in the U.S., have impacted underwriting performance. Nevertheless, underwriting improved by 1.6 percentage points, which was more than expected, and the combined ratio for 2022 was 91.9%.
Globally, Swiss Re predicts 2.1% premium growth in real terms for 2023 and 2024. Total nominal premium volumes are expected to exceed $7 trillion. Higher interest rates, property and casualty market hardening, and increased life insurance demand are key factors.

Natural Disasters

Scientists warn that natural disasters may worsen due to climate change, but costly natural disasters are already a major factor in the insurance market.

The World Economic Forum says 10 climate-related disasters each caused more than $3 billion worth of damage in 2022. The events include a European drought that caused more than $20 billion in damages and Storm Eunice that caused more than $4.3 billion in damages in Europe and the UK.

Political Conflict

The Lloyd’s 2023 Market Oversight Plan notes that geo-political tensions increased in 2022. It cites Russia’s invasion of Ukraine and increased rhetoric from China regarding Taiwan.

The invasion of Ukraine has had far-reaching consequences. Microsoft says cyberattacks targeting critical infrastructure increased from 20% to 40% of all nation-state attacks. This increase was largely due to Russia’s attempts to damage Ukrainian infrastructure and target Ukraine’s allies.

The invasion has also impacted energy in Europe. According to the BBC, Nord Stream 1 used to supply European Union states with 35% of all the gas imported from Russia, but it was closed after leaks were discovered. The cause of the leaks has been a source of contention, with EU leaders saying the leaks were deliberate and Russia denying responsibility.

ESG and Climate Change

According to UCAR, the average global surface air temperature increased by 1.1 degrees Celsius between 1900 and 2020. The United Nations warns that climate change could threaten food production and increase the risk of catastrophic flooding.

In response to climate change risks, there has been a push for investments and business practices that promote environmental, social, and governance (ESG) responsibility.

The 27th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP27) took place in November 2022 in Sharm el-Sheikh. The United Nations says COP27 resulted in decisions designed to reaffirm a commitment to limiting the average global temperature increase to 1.5 degrees Celsius. The conference closed with an agreement to provide loss and damage funding to vulnerable countries impacted by climate disasters.

Individual organizations are also doing their part to address climate change. In its 2023 Market Oversight Plan, Lloyd’s says it will continue its sustainability agenda in 2023, including a commitment to net-zero underwriting.