Global insurance markets

To help insurance executives gain insights into various insurance sectors and notable overseas markets, we offer key insights into the trends, challenges and opportunities that are shaping these markets.
y y y y y
For a clear picture of where the industry is and, more important, where it is heading, see our individual sections on: Global insurance industry overview Asia-Pacific insurance outlook Europe insurance outlook US life insurance outlook US property/casualty insurance industry Specifically, Find out how to operate your business more effectively by gaining insight into the following topics: 1. 2. 3. 4. Responding to the changing regulatory environment Establishing capital and risk management solutions post-crisis Improving operational efficiencies to control cost Reinventing products and distribution to energize growth

Global insurance industry overview

Across the world, insurance markets are adapting to the aftermath of the economic crisis. Many multinational insurance companies that hunkered down to conserve capital and trim expenses are now ready to invest in global markets that are poised for significant growth. Insurers enter new domains
Expectations are pointing to insurers entering new domains, as well as expand their presence in current markets. While there are signs of stabilization, consumers and businesses continue to tighten their purse strings. For much of the European and US insurance markets, these conditions continue, with only slight improvement. In Europe, for example, 2011 will likely be another year of low GDP growth, low interest rates and moderate equity market performance. On the life insurance side in Europe, low interest rates reduce the probability of people saving or putting capital into investment products like life insurance and annuities. Insurers that seek greater flexibility in their distribution relationships may be able to counter the stagnant sales environment.

Consumers and businesses tighten their purse strings

Sluggish consumer and business spending similarly strains the US property/casualty and life insurance segments, causing revenues and earnings to fall in 2010. The decline in net premiums occurred at the same time that investment yields were torpid. Insurers are further pressured by a competitive insurance market, with pricing barely budging in 2010 and no expectations for significant movement in 2011. Insurer surplus in the US is at an all-time high, and this, too, is driving enhanced competition for business. As in Europe, US insurers that invest in more efficient distribution methodologies and more cost-effective operations can drive stronger performance at home and abroad.

Investment in foreign markets

Indeed, with capital and surplus overflowing for many if not most multinational insurers, there are tantalizing opportunities for prudent investment in other foreign markets, depending on the region. In Asia-Pacific, for instance, significant opportunities beckon. Domestic markets in many countries are growing fast now that a middle class has burgeoned. More people are buying homes, cars and other seeming luxuries beyond their grasp a few years ago. And more businesses have sprung up to provide these goods and services. While more mature markets in the region are saturated from an insurance penetration standpoint, emerging markets and those continuing to develop offer varying opportunities for growth, especially for early movers willing to invest now for long-term potential. Strategically, such insurers might consider investments that seize upon the evolving distribution strategies in the region, especially for life insurance sales. Customers are seeking to buy insurance products outside the established agency and independent financial advisor channels, which will require insurers already in certain markets to retool their existing distribution models. For insurers entering the markets, they might consider adopting more flexible sales approaches that leverage the Internet, mobile platforms and other evolving technologies.

Asia-Pacific insurance outlook

Industry highlights
y y y y
More people and businesses are equipped to buy insurance and the regulatory systems in many locales have become more sophisticated. While insurance penetration in more mature markets is hindered by relatively high saturation, fast-growing developing and emerging markets offer important growth prospects over the long-term. Insurers seeking opportunities will need to consider strategies that address the fast pace of local and global regulatory and accounting developments. Access to reliable capital sources to support investments in specific regions and developing distribution strategies that take into account consumer buying patterns and demographic trends are other avenues for growth.

Growth prospects in Asia-Pacific

Asia-Pacific presents significant opportunities for insurers seeking growth, as many markets in the region have enlarged due to an increasing number of consumers looking to purchase insurance. Additionally, the regulatory systems across much of the region have become more sophisticated.

Growth drivers vary on market-by-market basis

Some challenges, of course, remain. Since Asia-Pacific is a highly diverse super-region with respect to different countries' economic development and insurance penetration, the rate and drivers of growth vary on a market-bymarket basis. Mature markets, for example, are more saturated. Developing and emerging markets, on the other hand, offer greater growth opportunities for companies prepared to invest for the long haul. We anticipate further regional evolution, but not revolution, in Asia-Pacific markets in 2011. Each insurer's strategic prioritization and response to the opportunities presented may reap significant rewards. Early movers may especially benefit by their immediate actions, while the insurers who wait to discern the short-term mistakes of others may similarly attain valuable traction.

Poised for opportunity

Indefinitely postponing a response to the current market opportunities seems ill-advised, given the chief attraction of the Asia-Pacific market and its remarkable growth rate. This alone helps explain why many multinational insurers are either preparing plans for further investment in the region, or are in the thick of implementing them.

By 2015, approximately 39% of the world's economy is predicted to be in Asia-Pacific

Europe insurance outlook

Industry highlights
y y y y
Europe in 2011 offers a financially stronger insurance market than in 2010, given strengthening of the credit and equity markets and improvements in the insurance industry's capitalization, solvency and profitability. While GDP is expected to decrease slightly in 2011, inflation should remain steady at 1.5% to 1.6% levels that pose no immediate threat to growth. Litigation, fraud and catastrophe-type exposures also are increasing in the region. As insurers prepare for the implementation of Solvency II and Basel III, they must develop ways to maintain, if not increase capital. To seize growth in 2011, insurers will need to quickly address and adapt to the changing regulatory and accounting environments, enhance the flexibility of their distribution systems, develop new markets and products and improve management of capital.

European insurers challenged to prosper amid uncertainty

The European insurance industry entered 2011 financially stronger than it was at the beginning of 2010. As the credit and equity markets recover combined with reductions in claims frequency in 2009 and 2010, the industry's capitalization, solvency and profitability are improving. Efforts to maintain and increase capital will continue in 2011, as insurers prepare for the impending implementation of Solvency II and Basel III.

Macroeconomic conditions indicate that 2011 will likely be another year in Europe of low GDP growth, low interest rates and moderate equity market performance. Even if the economic recovery continues, insurers may find that the assets underpinning their balance sheets have decreased in value. Questions concerning the impact of the European sovereign debt crisis also remain, albeit the effect may vary for individual countries. Certainly, the macroeconomic conditions will challenge the skills and resources of insurers to generate superior investment returns and maintain balance sheet strength.

Macroeconomic conditions suggest sluggish economy

The sluggish economy and low interest rate environment challenges all segments of the European insurance industry to achieve superior growth. Non-life premiums across the region were poor in 2010, while profitability in both the nonlife and reinsurance sectors will continue to be challenged by the soft market, the need for continuing expense reductions, and the end of loss reserve releases supporting profitability. Business demand for traditional non-life products will remain especially listless in 2011 due to the slow business growth. At the same time, risks relating to continued advancements in technology, catastrophic weather events as well as fraud and litigation exposure are increasing. A key question is how catastrophic losses in 2010 might affect pricing this year.

Aging population creates opportunities

On the life side, premiums improved modestly in 2010. As Europe's population ages and grapples with demographic challenges to their social welfare systems, especially those parts related to retirement benefits, it creates opportunities for insurers to provide products and services in the retirement space. The downside is the low interest rate environment, which reduces profitability of guaranteed products. Continued high unemployment also makes it difficult financially for many individuals to purchase new products. A key question facing life insurers is whether the emerging capital requirements will hinder their ability to meet consumer needs.

US life insurance outlook: 2011

Industry highlights
y y
A slowly growing economy, persistently low interest rates and looming regulations that stand to be altered during the year challenge the development of competitive portfolio returns. To generate top-line growth and widen profit margins, insurers will need to consider expanding their menu of products, services and distribution channels, while simultaneously reducing costs and improving operational efficiency. Companies that enhance their capital management, respond to changing regulations first and optimize products and distribution methodologies will be positioned to achieve more profitable traction in 2011.

Driving growth with pared down costs

The US life and annuity insurance industry enters 2011 with a stronger balance sheet, reasonable earnings momentum and slightly rising direct premiums, albeit at the expense of a declining base. Going forward, the industry confronts a climate of broad regulatory and economic uncertainty in the coming year and beyond.

Facing regulatory and economic uncertainty

In this environment, insurers will need to create new products and services and leverage distribution channels to increase top-line growth, while paring costs and unprofitable risks to drive bottom line earnings. The latter requires simplifying the business and product portfolio, improving operational efficiency and squeezing earnings out of a stagnant revenue base, as the slowly growing economy makes it difficult to attract new customers and retain existing ones.

Challenges for life and annuity insurers

Low interest rate conditions compound these problems, challenging life and annuity insurers to generate competitive product returns. Companies that clearly understand these issues and react quickly and prudently in their strategic core businesses will gain a competitive advantage. Looming regulatory changes such as those posed by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) are still in the process of being interpreted and implemented not to mention possibly revised. These changes pose strategic and competitive challenges to life and annuity insurers.

Reposition yourself for future earnings

As insurers address these concerns, they must be cautious to preserve their financial strength. Nevertheless, there are opportunities in deploying rebuilt capital to reposition and grow their businesses and improve future earnings.

US property/casualty insurance industry

Industry highlights
y y y y
The key performance driver for insurers in today's environment is superior underwriting and a number of leading insurers are using advanced analytics to gain a competitive advantage. The industry is financially strong and has amassed significant policyholder surplus, which is at or near an all-time high. The industry maintains adequate loss reserves and enjoys access to relatively inexpensive capital. Reduced underwriting profits and investment income will eventually alter the status quo, but this is not anticipated in 2011. Consequently, the key performance drivers in the market remain superior underwriting and risk assessment. Companies that leverage risk modeling and analytical tools, anticipate regulatory developments, and develop insightful methods of managing their excess capital will be better positioned to achieve growth in 2011.

US property/casualty industry outlook

The property/casualty industry outlook in the US is one of continuing challenges for individual insurers. Many of the same factors that fostered the soft market conditions in recent years remain in play. Nonetheless, the industry is financially strong, thanks to an abundance of capital amassed in 2009 and 2010.

Three factors driving the market

Capital positions are at or near an all-time high and continue to drive price competition in the property/casualty insurance industry. Three other factors are conspiring to maintain the competitive market through at least 2011: A recovery in the value of the industry's assets Access to relatively inexpensive capital Adequate loss reserves to address claim costs

y y y

These generally positive factors are contrasted with the industry's ongoing underwriting and investment income pressures. The slow economic recovery, years of price competition and generally low investment returns have compressed the industry's profit margins and are expected to further squeeze individual carrier operating margins.