Risks to the insurance sector arising from the macroeconomic environment
Manuel Aguilera General Manager - MAPFRE Economic Research
The Geneva Association’s 14th ART of CROs Conference Madrid, May 11, 2017.
Contents
The global economy in 2017: central scenario and Q1 general assessment1The insurance sector and the economy: transmission mechanisms and industry forecasts2New trends and potential risks for the insurance sector3
E C O N O M I C R E S E A R C H
• 2016 was a year marked by moderate, divergent and fragile global economic growth.
• 2016 was also the year in which governments, business community and academia became aware of the structural effects that low growth, low inflation and low interest rates (secular stagnation) can produce in terms of economic performance and financial stability.
• 2017 was intended be a year to generate a space of public policies in which fiscal policy might have a central (but not exclusive) role.
• The fiscal impulse in 2017 can be relevant not so much by its intensity but by its effect in a coordinated and complementary environment with other economic policies.
2017 CENTRAL SCENARIO
E C O N O M I C R E S E A R C H
• It is foreseeable that 2017-2018 will offer a better perspective of economic growth, but still with a trend of moderation, divergence and global fragility (on average it will approach 3,1%, and inflation will also accelerate to similar rates).
• However, there will be significant differences in the momentum of global activity and inflation, not only between emerging and developed markets, but also amongst developed economies (especially with respect to the performance of the US economy).
• Global monetary policy will remain heterogeneous, although a temporary rebound of long-term yields is expected.
• In general, expectations are biased downward (accentuate the negative factors), as there are latent risks and vulnerabilities that could develop over the next months.
2017 CENTRAL SCENARIO
E C O N O M I C R E S E A R C H
Economic activity
• During the Q4 of 2016, global activity continued to accelerate with quarterly growth rates close to 1%.
• In annual terms, global growth is expected close to 3.1% for 2017, with developed markets growing 1,9% while emerging markets would be growing 4,6%.
2017-Q1: GENERAL ASSESSMENT
Source: MAPFRE Economic Research
GDP growth, 2013-2018 (annual growth rates, real, %)
0
2
4
6
8
2013
2014
2015
2016
2017
2018
United States Eurozone Emerging markets China World
E C O N O M I C R E S E A R C H
Inflation
• Global inflation dynamics have hardly changed compared to what was anticipated at the beginning of this year.
• Expectations of global reflation have moderated.
• A global inflation close to 2% is expected throughout 2017, and close to 3% in average in 2017-2018.
2017-Q1: GENERAL ASSESSMENT
Source: MAPFRE Economic Research
Inflation, 2013-2018 (annual average, %)
-2
0
2
4
6
2013
2014
2015
2016
2017
2018
United States Eurozone Emerging markets China World
E C O N O M I C R E S E A R C H
Monetary policy
• Global monetary policy will remain quite heterogeneous, although in global terms a rebound in long-term returns is expected, which together with the more dynamic economic activity might stimulate the insurance sector.
2017-Q1: GENERAL ASSESSMENT
Expansionary monetary policy
(EMP)
Contractionary monetary policy
(CMP)
Quantitative Easing (QE)
Interest rates above natural rate
Interest rates below natural rate
EMPCMP
*Arrows show short-term interest rates trend.
E C O N O M I C R E S E A R C H2017-Q1: GENERAL ASSESSMENT
United States
• The Federal Reserve is expected to maintain the adjustment of its monetary policy in an orderly manner with gradual interest rate hikes until 2019, alternating with the normalisation of its balance sheet only from the end of 2018.
• Two additional increases might place, with interest rates between 1.5% and 1.75% at the end of the year.
Monetary policy
• Global monetary policy will remain quite heterogeneous, although in global terms a temporary rebound in long-term returns is expected, which together with the more dynamic economic activity might stimulate the insurance sector.
E C O N O M I C R E S E A R C H2017-Q1: GENERAL ASSESSMENT
Eurozone
• In the Eurozone monetary policy will remain unchanged in line with a more benign economic activity and inflation outlook.
• The debate on the monetary policy normalisation has already emerged with its possible sequencing: elimination of negative rates, gradual increase in interest rates and, finally, normalisation of the ECB’s balance sheet starting at the end of 2019.
Monetary policy
• Global monetary policy will remain quite heterogeneous, although in global terms a temporary rebound in long-term returns is expected, which together with the more dynamic economic activity might stimulate the insurance sector.
E C O N O M I C R E S E A R C H2017-Q1: GENERAL ASSESSMENT
Emerging markets
• In the main emerging markets monetary policy will remain selective and diverse.
• Turkey and Mexico maintain a contractionary monetary policy bias (in order to control exchange rates), while Brazil is showing an expansionary trend (in order to stimulate economic activity).
• In China, interest rates have been increased since November, preventing monetary conditions from being too lax.
Monetary policy
• Global monetary policy will remain quite heterogeneous, although in global terms a temporary rebound in long-term returns is expected, which together with the more dynamic economic activity might stimulate the insurance sector.
E C O N O M I C R E S E A R C H
*Arrows show the expected risk bias.
RISK SEVERITYRI
SK P
ROBA
BILI
TY
Emerging markets
vulnerabilities
European economic and governance
vulnerabilities
Materialisation of economic policies
of the Trump Administration &
assets price correction Sovereign-financial
crisis in China
BALANCE OF GLOBAL RISKS
• The central scenario is strongly biased downward (affected by the negative factors), as there are still risks and vulnerabilities that could develop (with different levels of probability and severity) over the next months.
Source: MAPFRE Economic Research
Contents
The global economy in 2017: central scenario and Q1 general assessment1The insurance sector and the economy: transmission mechanisms and industry forecasts2New trends and potential risks for the insurance sector3
E C O N O M I C R E S E A R C HTHE INSURANCE INDUSTRY AND THE ECONOMY
Source: MAPFRE Economic Research
Support to domestic and
international trade
TradeCr
edit
insu
ranc
e
Against catastrophic events
Economic continuity
Cat i
nsur
ance
Financial markets
Savings / investment
Life
(in
vest
men
t) in
sura
nce
Primary sector, Industry & Services
Support to real economy
Prop
erty
&
casu
alty
, cro
p in
sura
nce
Protection to society welfare
Personal income stability
Life
(risk
), he
alth
, ac
cide
nts,
hom
e &
aut
o in
sura
nce
INSURANCE INDUSTRY
• The insurance industry has close linkages with all areas of economic activity.
Support to domestic and
international trade
Trade
Cre
dit
insu
ranc
e
Against catastrophic events
Economic continuity
Cat i
nsur
ance
Financial markets
Savings / investment
Life
(in
vest
men
t) in
sura
nce
Primary sector, Industry & Services
Support to real economy
Prop
erty
&
casu
alty
, cro
p in
sura
nce
Protection to society welfare
Personal income stability
Life
(risk
), he
alth
, ac
cide
nts,
hom
e &
aut
o in
sura
nce
INSURANCE INDUSTRY
Support to domestic and
international trade
Trade
Cre
dit
insu
ranc
e
Against catastrophic events
Economic continuity
Cat i
nsur
ance
Financial markets
Savings / investment
Life
(in
vest
men
t) in
sura
nce
Primary sector, Industry & Services
Support to real economy
Prop
erty
&
casu
alty
, cro
p in
sura
nce
Protection to society welfare
Personal income stability
Life
(risk
), he
alth
, ac
cide
nts,
hom
e &
aut
o in
sura
nce
INSURANCE INDUSTRY
Support to domestic and
international trade
Trade
Cre
dit
insu
ranc
e
Against catastrophic events
Economic continuity
Cat i
nsur
ance
Financial markets
Savings / investment
Life
(in
vest
men
t) in
sura
nce
Primary sector, Industry & Services
Support to real economy
Prop
erty
&
casu
alty
, cro
p in
sura
nce
Protection to society welfare
Personal income stability
Life
(risk
), he
alth
, ac
cide
nts,
hom
e &
aut
o in
sura
nce
INSURANCE INDUSTRY
Support to domestic and
international trade
Trade
Cre
dit
insu
ranc
e
Against catastrophic events
Economic continuity
Cat i
nsur
ance
Financial markets
Savings / investment
Life
(in
vest
men
t) in
sura
nce
Primary sector, Industry & Services
Support to real economy
Prop
erty
&
casu
alty
, cro
p in
sura
nce
Protection to society welfare
Personal income stability
Life
(risk
), he
alth
, ac
cide
nts,
hom
e &
aut
o in
sura
nce
INSURANCE INDUSTRY
Support to domestic and
international trade
Trade
Cre
dit
insu
ranc
e
Against catastrophic events
Economic continuity
Cat i
nsur
ance
Financial markets
Savings / investment
Life
(in
vest
men
t) in
sura
nce
Primary sector, Industry & Services
Support to real economy
Prop
erty
&
casu
alty
, cro
p in
sura
nce
Protection to society welfare
Personal income stability
Life
(risk
), he
alth
, ac
cide
nts,
hom
e &
aut
o in
sura
nce
INSURANCE INDUSTRY
E C O N O M I C R E S E A R C HTRANSMISSION MECHANISMS FROM THE REAL ECONOMY TO THE INSURANCE INDUSTRY
• Likewise, the insurance industry general performance depends on several macroeconomic factors.
Economic activity
1Interest rates
2
Financial volatility
4
Exchange rate
3
TRANSMISSION MECHANISMS
SECTORAL EFFECTS ON:
Demand
ZFinancial income, Premium rates,
Life insurance business model
Asset valuation ALM
Costs structure Reinsurance!
!
!
Source: MAPFRE Economic Research
Economic activity
1
Interest rates
2
Financial volatility
4
Exchange rate
3
TRANSMISSION MECHANISMS
SECTORAL EFFECTS ON:
Demand
ZFinancial income, Premium rates,
Life insurance business model
Asset valuation ALM
Costs structure Reinsurance!
!
!
• One of the main features of the insurance sector is its pro-cyclical behaviour.
• Its growth rate is highly sensitive and synchronic to changes in the overall economic activity.
-10 %
-5 %
0 %
5 %
10 %
15 %
20 %
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
GDPInsurance premiums
Global GDP vs global insurance premiums growth, 2000-2016 (annual growth rates, nominal USD)
Source: MAPFRE Economic Research (IMF and Swiss Re data)
• Role of insurance in the economy. Insurance products compensate for and disperse risks arising from economic activity. As it expands, so does insurance demand.
• Main features of insurance business model. In order to avoid an adverse selection process, the technical rigor of the underwriting process increases during periods of crisis, and tends to relax during periods of economic expansion.
• Effect of risk-sensitive regulations. Capital charges based on risk level tends to increase in the lower part of the economic cycle, contracting the growth capacity of insurance undertakings.-10 %
-5 %
0 %
5 %
10 %
15 %
20 %
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
GDPInsurance premiums
Global GDP vs global insurance premiums growth, 2000-2016 (annual growth rates, nominal USD)
Source: MAPFRE Economic Research (IMF and Swiss Re data)
Developed markets: • High synchronisation of Non-Life insurance.
• High level of Life insurance penetration.
Emerging markets: • Amplification of the pro-cyclical effect due to
the size of the Insurance Protection Gap (insufficient insurance coverage).
• Low level of Life insurance penetration.
-10 %
-5 %
0 %
5 %
10 %
15 %
20 %
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
GDPInsurance premiums
Global GDP vs global insurance premiums growth, 2000-2016 (annual growth rates, nominal USD)
Source: MAPFRE Economic Research (IMF and Swiss Re data)
PEN
ETRA
TIO
N (P
REM
IUM
S / G
DP)
2 %
4 %
6 %
8 %
DEPTH INDEX (LIFE INSURANCE PREMIUMS / TOTAL PREMIUMS)
40 % 45 % 50 % 55 % 60 % 65 %
Source: MAPFRE Economic Research
Source: MAPFRE Economic Research
2016PE
NET
RATI
ON
(PRE
MIU
MS
/ GD
P)
2 %
4 %
6 %
8 %
DEPTH INDEX (LIFE INSURANCE PREMIUMS / TOTAL PREMIUMS)
40 % 45 % 50 % 55 % 60 % 65 %
Global Insurance Industry
1980-2007
2007-2016PE
NET
RATI
ON
(PRE
MIU
MS
/ GD
P)
2 %
4 %
6 %
8 %
DEPTH INDEX (LIFE INSURANCE PREMIUMS / TOTAL PREMIUMS)
40 % 45 % 50 % 55 % 60 % 65 %
Global Insurance Industry
Source: MAPFRE Economic Research
Economic activity
1
Interest rates
2
Financial volatility
4
Exchange rate
3
TRANSMISSION MECHANISMS
SECTORAL EFFECTS ON:
Demand
ZFinancial income, Premium rates,
Life insurance business model
Asset valuation ALM
Costs structure Reinsurance!
!
!
Range of rates throughout 2016
-0,6 %
0,0 %
0,6 %
1,2 %
1,8 %
Years
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
2016 Average March 2017
Eurozone: risk-free yield curve (%)
0,0 %
0,5 %
1,0 %
1,5 %
2,0 %
2,5 %
3,0 %
Years
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
United States: risk-free yield curve (%)
Source: MAPFRE Economic Research (with data from EIOPA)
Range of rates throughout 2016
2,0 %
3,0 %
4,0 %
5,0 %
Years
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
2016 Average March 2017
China: risk-free yield curve (%)
Source: MAPFRE Economic Research (with data from EIOPA)
Brazil: risk-free yield curve (%)
5,0 %
10,0 %
15,0 %
20,0 %
Years
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Economic activity
1
Interest rates
2
Financial volatility
4
Exchange rate
3
TRANSMISSION MECHANISMS
SECTORAL EFFECTS ON:
Demand
ZFinancial income, Premium rates,
Life insurance business model
Asset valuation ALM
Costs structure Reinsurance!
!
!
Economic activity
1
Interest rates
2
Financial volatility
4
Exchange rate
3
TRANSMISSION MECHANISMS
SECTORAL EFFECTS ON:
Demand
ZFinancial income, Premium rates,
Life insurance business model
Asset valuation ALM
Costs structure Reinsurance!
!
!
E C O N O M I C R E S E A R C HINSURANCE BUSINESS FORECAST
1. GDP growth expectations for 2017 are a key element in the outlook for the life and non-life insurance markets, strongly linked to the economic performance.
2. Overall growth outlook is favorable for the insurance industry, although the low level of growth forecasted for some developed economies would provide an equally weak scenario for the insurance sector in those markets.
3. The higher elasticity of demand for insurance in emerging economies, together with a relevant GDP growth, will imply a better performance compared to that of the developed economies.
4. In 2017, the insurance sector is expected to maintain its dynamics in developed and emerging markets, with the latter leading the growth of the global industry.
E C O N O M I C R E S E A R C H
-6 %
-4 %
-2 %
0 %
2 %
4 %
6 %
8 %
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
(e)
2017
(f)
2018
(f)Life Life (f) Non Life Non Life (f)
Developed markets: Life and Non Life insurance growth forecast (median growth of insurance premiums, %)
0 %
3 %
6 %
9 %
12 %
15 %
18 %
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
(e)
2017
(f)
2018
(f)
Emerging markets: Life and Non Life insurance growth forecast (median growth of insurance premiums, %)
INSURANCE PREMIUMS FORECAST
Source: MAPFRE Economic Research
Contents
The global economy in 2017: central scenario and Q1 general assessment1The insurance sector and the economy: transmission mechanisms and industry forecasts2New trends and potential risks for the insurance sector3
E C O N O M I C R E S E A R C H
1 Big Data
3 Expanding distribution channels!
9 Cyber risks
10 Regulatory convergence
!
2 New non-traditional participants
6 App-Based Management
5 Usage-Based Insurance!
4 Use of technology in the automobile business and the internet of things!!
7 Adapting to change in demographic patterns
Effects of climate change8!
• Most of the main macro-business trends observed in the insurance industry in 2016 will continue to deepen throughout 2017.
Source: MAPFRE Economic Research
NEW TRENDS & RISKS FOR THE INSURANCE SECTOR
E C O N O M I C R E S E A R C H
Big Data1!
Source: MAPFRE Economic Research
• Big Data for customer analysis and segmentation (creating individualised client profiles), as well as for service management.
NEW TRENDS & RISKS FOR THE INSURANCE SECTOR
• Technology risk • Legal risk • Reputational risk
E C O N O M I C R E S E A R C H
2
Source: MAPFRE Economic Research
New non-traditional participants
• New financial firms that offer insurance services at lower costs based on the intensive use of information technologies and collaborative economy schemes, reformulating the principle of mutualisation of risks (InsurTech).
NEW TRENDS & RISKS FOR THE INSURANCE SECTOR
• Strategic risk
E C O N O M I C R E S E A R C H
Expanding distribution channels3!
Source: MAPFRE Economic Research
• Insurance undertakings will continue to emphasise the expansion of their distribution channels as a way to be successful in a more competitive market, particularly the development of digital channels in which the process of customer segmentation will prevail.
NEW TRENDS & RISKS FOR THE INSURANCE SECTOR
• Commercial risk • Technology risk
E C O N O M I C R E S E A R C H
Use of technology in the automobile business and the internet of things4!!
Source: MAPFRE Economic Research
• Insurers will continue to adapt their operation and business models to the new reality of the automobile business (automated drivers aids, semi-autonomous driving) by identifying the reduction of certain risks and the emergence of others that will need adequate coverage.
• Likewise, insurance companies will continue to incorporate the so-called internet of things as part of their business model.
NEW TRENDS & RISKS FOR THE INSURANCE SECTOR
• Technology risk • Underwriting risk
E C O N O M I C R E S E A R C H
Usage-Based Insurance5!
Source: MAPFRE Economic Research
• The trend towards the Usage-Based Insurance will continue by designing and offering more competitive products in which the insurance premium will be linked to the use (PAYD, Pay-As-You-Drive) or driver behaviour (PHYD, Pay-How-You-Drive).
NEW TRENDS & RISKS FOR THE INSURANCE SECTOR
• Technology risk • Underwriting risk
E C O N O M I C R E S E A R C H
App-Based Management6
Source: MAPFRE Economic Research
• The use of technological applications (apps) to carry out the management of different business processes and the monitoring of the risk conditions of clients.
NEW TRENDS & RISKS FOR THE INSURANCE SECTOR
• Technology risk • Underwriting risk • Legal risk • Reputational risk
E C O N O M I C R E S E A R C H
Adapting to change in demographic patterns7
Source: MAPFRE Economic Research
• Primarily determined not only by the population ageing (that will affect the design of pension and life products), but also by variations in migration patterns that will affect customer segmentation and product design.
NEW TRENDS & RISKS FOR THE INSURANCE SECTOR
• Longevity risk • Underwriting risk
E C O N O M I C R E S E A R C H
Effects of climate change8!
Source: MAPFRE Economic Research
• A trend that has dominated the concerns in the field of non-life insurance with regard to the protection against risks of nature.
• Especially in the face of the effects of climate change associated with modifications in urbanisation patterns.
NEW TRENDS & RISKS FOR THE INSURANCE SECTOR
• Underwriting risk
E C O N O M I C R E S E A R C H
Cyber risks9
Source: MAPFRE Economic Research
• On one hand, there is a growing need for protection against cyber attacks.
• And, on the other, the uncertainty remains in terms of the degree of insurability of cyber risks.
• Are the traditional idiosyncratic compensation mechanisms suitable for this kind of risks?
NEW TRENDS & RISKS FOR THE INSURANCE SECTOR
• Underwriting risk
E C O N O M I C R E S E A R C H
Regulatory convergence10
Source: MAPFRE Economic Research
• Process of regulatory convergence towards prudential models based on risk (Solvency II-type).
• Implementation of regulatory measures linked to systemic risk and financial stability (at both global and domestic levels).
NEW TRENDS & RISKS FOR THE INSURANCE SECTOR
• Operational risk • Compliance risk • Legal risk
Source: MAPFRE Economic Research (with information from the IAIS)
2016 20172013 2014 2015
End consultation to 1st ICS-CD
End consultation to 2nd ICS-CD
ICS Adoption (version 2.0)
Start ICS Project
Second Field Test
Start consultation to 3rd ICS-CD
2018 2019
End consultation to 1st ICS-CD
First Field Test
Start consultation to 2nd ICS-CD
ICS (version 1.0)
End consultation to 3rd ICS-CD
2020
• IAIS project for an international capital standard (ICS).
• In 2017 regulatory convergence will continue (beyond the ICS) towards risk-based prudential models (Solvency II-type) seeking:
(i) To adopt solvency systems based on risk measurement and risk management schemes, and
(ii) To create a local regulatory environment that harmonises with the operation of the main global insurance groups.
Source: MAPFRE Economic Research (with information from EIOPA)
Mexico2
Brazil2
Japan3
Switzerland1
Bermuda1
Australia2
Canada2
USA2
1/ Full equivalence 2/ Provisional equivalence (10 years in order to complete
implementation process or additional adjustments) 3/ Provisional / temporary equivalence
• Markets subject to Solvency II-type regulatory standards would account in 2017 for almost 76% of worldwide insurance premiums.
Source: MAPFRE Economic Research (with information from EIOPA)
Mexico2
Brazil2
Japan3
Switzerland1
Bermuda1
Australia2
Canada2
USA2
1/ Full equivalence 2/ Provisional equivalence (10 years in order to complete
implementation process or additional adjustments) 3/ Provisional / temporary equivalence
E C O N O M I C R E S E A R C H
Economic and Sectoral Outlook (Jan, 2017)
Economic and Sectoral Outlook - Q1 (Apr, 2017)
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