The Dagong Global Credit Rating Group ("Dagong") issued the "2018 global insurance credit outlook" on January 29, predicting the trend of global insurance credit risks under the influence of stable recovery of global economy and tightened monetary policy expectation.
With the slow recovery of the global economy and withdrawal of the major developed economies from loose monetary policy, the global insurance underwriting demand and investment returns are expected to rise accordingly. Tighter financial regulations will reduce the liquidity risk of insurance companies and ensure prudent operation, mitigating the global insurance credit risk. However, under the influence of long-term ultra-low interest rate and low growth macro-environment, underwriting and investment have accumulated risks and have to be adjusted for risk control in the future; there are potential risks in global insurance industry.
In 2018, the global insurance industry has the following key trends:
I. In 2018, the recovery of the global economy and the expected tightening of monetary policy will improve the profitability of insurance industry. However, the accumulated credit risks still exist.
Global economy is growing slowly, industry demand increasing, positive expectations of monetary policy in major developed countries, and increase in investment returns will improve the profitability of the insurance industry in 2018. The expected growth rates are 3% and 4% for global life and non-life premiums respectively. The credit risk will be mitigated. The emerging market led by China, will continue to be the main drive for the growth of the non-life insurance industry. For life insurance, tighter financial regulations will continue to lower the liquidity, but the continuous increase of overall investment risk preference is still a potential risk factor in the insurance industry due to the continuous ultra-low interest rate in recent years. The credit quality tend to decrease.
II.The United States will continue interest rate hike. However, slow economic recovery and rising claims in the U.S. insurance industry cause severe pressure on underwriting capacity. Overall profitability will be challenged.
In 2018, the economic recovery in the US, the normalized monetary policy and the resultant rise of long-term government bond yields will stimulate insurance demand and improve investment returns of non-life insurance industry. However, due to competition in the industry, insurance rate increase is limited, and inflation pushes up compensation cost, restricting underwriting profit. And natural disasters also cause underwriting profit fluctuation, which is the biggest threat to the stability of overall profitability. Hence, in 2018, the overall profitability of the US non-life insurance industry will face downward pressure. The industry credit risk remains high.
III.Weak economic fundamentals and ultra-low interest rates have led to a rise of preference for high investment returns in Japan's life insurance industry, raising its portfolio risk and thus its credit risk.
In 2018, the Bank of Japan will maintain the loose monetary policy in order to continue stimulating the weak economy, which will promote life insurers in Japan to continue reducing their holdings of national debt and increasing the holding of foreign portfolio investment. Portfolio risks are thus heightened. In addition, as the inconsistency between Federal Reserve and the Bank of Japan monetary policy becomes glaring, and USD/JPN exchange rate is highly correlated to the US and Japan's long-term bond spreads, USD/JPN exchange rate is expected to continue to strengthen in the short term. Currency exposure of investment portfolio will become larger, which is not conducive to credit risk mitigation.
IV.Under the influence of long-term low interest rate environment and strict supervision, the profitability of European insurance industry continues to be under pressure, and the preference for life insurance investment continues to rise.
Due to ultra-low interest rate and tighter financial regulations, non-life insurance returns increase slowly, considering economic growth and decline of premium rate fall. But profitability of life insurance industry is still under pressure. To increase profits, the European insurance company will continue to raise the investment risk to increase investment returns. These will increase insurance industry future risks and decrease its credit quality.
V. Due to the tightening of regulation policies, the growth rate of insurance premiums in China is slowing down, challenging short-term liquidity. But the long-term credit risk is still under control.
In 2018, China’s economy will deleverage in a moderate way under the guidance of steady supply-side reform as well as moderate and neutral monetary policy. In addition, economic growth is expected to remain stable, and per capita disposable income is expected to increase, which leads to insurance demand premiums increase, With the tightening of supervision policy, life insurers might face liquidity risks in the short term, but they will develop steadily in the long run.
Dagong Global Credit Rating Group
29 /01/ 2018