P&C insurance riskier and more complex in next 20 years, says Swiss Re

Property and casualty (P&C) business is set to become riskier and more complex in the next 20 years, according to the latest sigma study from Swiss Re. It says there will be a fundamental shift in opportunity for insurers from lower-risk, high-volume motor insurance to catastrophe-exposed property lines and higher-risk liability lines.

The sigma study, More risk: the changing nature of P&C insurance opportunities to 2040, states that global P&C premiums are expected to more than double to $4.3trn in 2040 from $1.8trn in 2020. Emerging markets will lead the growth, with their share of global P&C premiums rising to 33% from 20% in 2020.

Swiss Re says property insurance is forecast to become the fastest-growing line of business, growing by 5.3% annually with global insurance premiums rising to $1.3trn in 2040 from $450bn in 2020.

Economic development will remain the key driver of rising property premiums, contributing 75%, or up to $616bn of new premiums, while climate-related risks are expected to result in a 22% increase in global property premiums, up to $183bn, during the next 20 years, as weather-related catastrophes will likely become both more intense and frequent, according to Swiss Re. The study suggests that climate risks could increase average weather-related property catastrophe losses in advanced markets by 30%-63%, while in China, the UK, France and Germany, the increase could be as much as 90%-120%. It says that in Europe and China, most additional losses will likely result from flooding events, while in the US and Japan, tropical cyclones will be the main drivers.

Jerome Haegeli, Swiss Re’s group chief economist, said: “Promoting the conditions for long-term sustainable growth is particularly important in the face of climate change, which poses the biggest long-term threat to the global economy. If we are to build a sustainable insurance system that allows society to manage and absorb future risks, we need to make risks and opportunities quantifiable. Our work is also vital for policymakers, with whom we share the aim of making economic growth insurable.”

Liability premiums are forecast to grow by 4.7% per year on average until 2040, to $583bn from $214bn in 2020, driven largely by social inflation, which is expected to drive up the frequency of large verdicts and settlements, especially in the US. Additional areas of long-term growth potential in liability come from climate-change effects, artificial intelligence, and social and legal changes, says Swiss Re.

“Liability claims have been rising faster than economic growth in most major countries recently, increasing claims costs for insurers,” the study states. “Covid-19 litigation, social inflation, opioid litigation and sexual harassment claims among others will shape the near-term future of liability insurance. Climate change litigation, cyber risk and the liability from emerging technologies such as artificial intelligence, hydrofracking and autonomous cars, may expand tort liability and liability claims in the period to 2040.”

It adds that the long-term growth in liability claims is influenced by economic factors such as medical expenses, wages, inflation and asset values; by societal and demographic trends (e.g. longer life spans); by developments within the legal system; and also by the scope of liability insurance cover.

Swiss Re flags some trends with the potential to expand the scope of liability exposures, including a new EU directive that will expand and standardise collective redress for consumers. Swiss Re says that US-style litigation and awards are unlikely, but it expects an upward trend in claims nonetheless.

It also points to climate change litigation, which it says has gained momentum. It notes that firms and states are at increasing risk of being found negligent in causing harmful climate change effects. And it adds that transition impacts have already started to expand professional liability/D&O exposure to claims.

“Climate-change litigation is likely to exacerbate the current episode of social inflation, which is already being amplified by the use of litigation funding and new psychology and data-based strategies in trial bar,” says Swiss Re.

Motor is expected to remain the largest of all P&C lines, with premiums forecast to almost double by 2040, from $766bn in 2020 to $1.4trn. But its share of the market is expected to shrink to 32% of sector premiums by 2040, from 42% in 2020, due to safety improvements from automation and smart technology, and a drop in associated claims.

But the study notes: “It will take more time for claims-reducing safety features to permeate existing fleets in emerging markets, where vehicles tend to be driven for longer. This will accentuate the premium shift to emerging markets. We forecast their share of global motor premiums rising to 46% in 2040 from 26% in 2020. Meanwhile, as shared-economy transport models gain traction, the share of commercial motor business globally will increase to close to 27% in 2040, from 23% in 2020.”

Gianfranco Lot, head global reinsurance at Swiss Re, said: “With the global portfolio shifting from lower-risk motor insurance to higher-risk lines, P&C insurance business will become more volatile. At the same time, risk modelling will become more complex, which will lead to higher capital requirements and an increased demand for reinsurance. In this fundamentally different risk environment, reinsurers will play a crucial role in keeping risks insurable.”

The study concludes with a call for action: “Insurance can facilitate the transformational changes taking place in the economy, society and in technology, but only with collective action by the private and public sectors. For instance, climate change is the main risk to the global economy. Insurance can provide compensation for damage to property resulting from extreme weather events, but an institutional framework to encourage investment in green infrastructure, and upgrading zoning and building standards, are equally important to ensure insurability of property risks. Likewise, with expanding liability regimes, unsustainable social inflation needs to be curbed through legislation and regulation. Further, the value of re/insurance needs to be protected against a trend of fragmentation via local capital and collateral requirements.”