A decisive decade ahead - Allianz Global Insurance Report 2022; And: European food inflation (the consumer being on the losing end)

Time to take stock of how the insurance industry has fared over the last year with our Global Insurance report: 2021 was a good year for the insurance industry but what made the year remarkable is the composition of premium growth: More than two-thirds were generated in Western Europe and North America, with the US market alone accounting for half of the increase. Thus, 2021 represents an unusual end to the past decade in which global premium growth was much lower (+3.6% per year on average) and driven by Asia, which accounted for 40% of all additional premiums. Looking ahead: The upcoming upheavals will give birth to new risks, and the industry is called upon to offer solutions for these risks. This requires a level of creativity and collaboration with customers and governments that goes beyond previous efforts: a decisive decade ahead indeed – detailed insights in our report and more on the key take-aways also in our fresh episode of our podcast ‘Tomorrow’: The rise in agricultural food prices and the challenges European households are, consequently, faced with, are our second topic this week. Plus our weekly wrap-up on relevant economic events.

Weekly wrap-up?

The week was heavy on Eurozone data suggesting growth is holding up remarkably well in the near-term despite a plethora of headwinds while inflationary pressures continue to build. The current growth dynamics put pressure on the ECB to hike rates sooner rather than later:

• Market participants continue to seek shelter in “safer” assets. Unclear policy guidance, mixed economic releases and high levels of uncertainty has perpetuated the recent risk-off asset rotation.
• Equity markets remain positioned for a “hiking into a recession” scenario. Equity markets continue to follow the recent bearish trend, with defensive stocks outperforming cyclicals and value stocks outperforming growth stocks (US: -3.6% w/w and EUR -2.5% w/w).
• Corporate credit is range-trading and slightly immune to recent market developments. Despite higher equity volatility and structural equity market underperformance, investment grade corporate credit remains somewhat resilient to the volatile and pessimistically biased incoming news flow.?
• Russia’s potential government debt default has been the focus in Emerging Markets. Default might be triggered by the expired carve-out in the US sanctions that allowed US citizens to receive bond payments from Russia.

Allianz Global Insurance Report 2022: A decisive decade ahead

Strong economic tailwinds, rising risk awareness and record-high savings buoyed by booming markets made 2021 a good year for the insurance industry. Insurers worldwide collected almost EUR4.2trn in premiums, 5.1% more than the year before (life: +4.4%; P&C: +6.3%). But what made 2021 really remarkable is the composition of premium growth: More than two-thirds were generated in Western Europe and North America, with the US market alone accounting for half of the increase. Thus, 2021 represents an unusual end to the past decade in which global premium growth was much lower (+3.6% per year on average) and driven by Asia, which accounted for 40% of all additional premiums, more than half of them written in China. As a consequence, China’s global market share doubled to 12%. You will find our comprehensive analysis here.

• 2022 was expected to be another bumper year for the insurance industry, but the invasion of Ukraine has dashed those hopes. Premium income is likely to grow by roughly 1pp slower than originally assumed as the war takes its toll on economic activity and confidence, even as inflation supports the top line. Overall, we now expect global premium income to grow by +4.8% in 2022, with life and P&C developing almost in step (+4.9% and +4.6% respectively). This figure must be considered against the backdrop of a global inflation rate of 6.2% this year.
• Despite the great uncertainties today, we are not too pessimistic about the more distant future. After all, these uncertainties are precisely the breeding ground for rising risk awareness; they reinforce the impact of the two megatrends of climate and demographic change, which will continue to be the main drivers of demand for risk protection. Overall, we expect annual growth of +4.8% over the next 10 years (life: +4.9%; P&C: +4.6%). This corresponds to an increase in premium income by +67% or EUR2.8trn by 2032, of which just under EUR1.8trn will be generated by the life segment (+69%) and just over EUR1trn by the P&C segment (+63%).
• In the life business, demographic change is likely to be the decisive growth driver. This applies for both advanced and emerging markets: Unrelenting aging and social change combined with rising public debt and often inadequate social security systems speak loudly for the need to increase individual provisions. This development is likely to benefit from two crisis-related developments in the coming years: increased risk awareness in the wake of the Covid 19 crisis, and the inflation-triggered end of zero interest rates, which should make many savings and pension products more attractive again.
• In the P&C business, climate change is the main topic in two respects. First, extreme weather events will increase in the coming years, driving claims and premiums higher. On the other hand, climate-mitigation efforts will intensify, first and foremost the decarbonization of energy supply, even more important now amid the Ukraine war and the resulting quest for energy independence. This requires major investments from both the private and public sectors and creates a high need for risk protection as new risks will emerge with this radical transformation of our economy.
• Although the growth gaps between emerging and advanced markets will narrow – reflecting the moderate recovery of life markets in Western Europe and Japan as well as diminished growth prospects in China – the global insurance market will continue to shift in favor of the former. For example, China’s share will increase from 12% to 15%, while the rest of Asia (excluding Japan) is expected to reach a share of just under 17% (2021: 12.2%). Around 42% of new premiums will be written in Asia (excluding Japan), half of which is likely to come from China alone. As a result, anyone looking for growth in the 2020s will still have to turn to Asia.
• The upcoming upheavals will give birth to new risks, for instance risks related to data protection, new green technologies or AI and climate liability. So there will hardly be a lack of demand for protection and prevention. However, the industry is called upon to offer solutions for these risks so that they do not remain uninsurable or have to be assumed willy-nilly by the state. The question of insurability – and closely related: affordability – is likely to become increasingly urgent in the coming years, not least with regard to natural hazards. This requires a level of creativity and collaboration with customers and governments that goes beyond previous efforts. Thus, the insurance industry is facing radical transformation. To paraphrase Giuseppe Tomasi di Lampedusa: The industry has to change if it wants to stay relevant. For this, the industry must move beyond pricing and transferring risk to changing outcomes. It needs to actively reduce risk in the system by impact underwriting and investing, and thus leading the pivot to sustainability.

European food inflation: and the loser is the consumer

Food prices and food security concerns were high on the agenda of the G7 group of countries meeting on 13-14 May in Stuttgart (Germany). Please read the full report here.

• Agricultural food prices rose by +31% in 2021 and will increase by a further +23% in 2022 amid a general increase in input costs (fuel, electricity, fertilizers), years of lower agricultural yields translating into low stocks and, more recently, Russia’s invasion of Ukraine impacting not only the supply of food staples such as wheat or oil, but also having ripple effects on the prices of substitutes.
• The worst is yet to come for European households: Food retail prices are far from reflecting the surge in food commodity prices observed over the past 18 months. Eurozone food and beverage producers have already increased their prices by an average of +14% since the beginning of 2021, with the strongest price increases found among everyday life products, including oils and fats (+53%), flours (+28%) and pasta (+19%). In contrast, food retail prices have only adjusted by a modest +6%, meaning retailers have not yet passed on even half of the higher food producer prices onto food retail prices. But past episodes of high food inflation show that retail prices broadly adjust to producer prices with some lag. High inflation, together with a post-pandemic decline in food volume sales in stores, will add pressure to the profitability of European food retailers but we anticipate generally high pass-throughs to consumer prices.
• Using our central estimate of retailers passing the equivalent of 75% of the past increase in food producer prices onto consumers, we compute that food inflation would cost the average European consumer an extra EUR243 for the same basket of food products vs 2021, with estimates ranging between EUR200 to EUR250 in Europe’s four largest consumer markets. Coming on top of a more general increase in the cost of living (fuel, electricity, rents, away-from-home food, etc.), this surge in food prices is likely to revive debates on possible welfare payments to relieve the burden for the most vulnerable households.