Organic growth remained elusive for the insurance sector in 2011, particularly in developed markets, such as the United States and Europe, where economic uncertainty, soft pricing, weak demand and the costliest catastrophe year in history weighed
heavily on the industry. But the picture is more promising in Asia and Latin America—the economic hot spots in the world economy.
The U.S. economy grew at a 3% clip last year (the fastest rate since 2008), but the recovery was hampered by high unemployment and the congressional impasse over dealing with the budget deficit. Looking ahead, the road to recovery will be rocky, but we’re moving in the right direction—as long as we aren’t pulled into a second recession by the European debt crisis.
Brokerages scrambled last year to eke out some organic growth. The large brokerages grew a modest 2%-4% with some finding double-digit growth in Latin America. Organic growth for the smaller agencies was generally flat. Broker revenues were up compared to the previous year, thanks to growth in group benefits and commercial lines. But overall growth was driven by mergers and acquisitions, which picked up significantly in 2011.
KPMG found insurance executives pessimistic about our industry’s outlook. Our position is precarious. Underwriting losses continue to pile up, and reserves used to prop up balance sheets are dwindling. A pricing turn would help insurers dig out, but when that finally happens is anyone’s guess.
The Council’s last quarterly Commercial Property-Casualty Market Survey did show some price firming, but an abundance of capacity may suppress rates. Rather than across-the-broad price increases, expect pockets of increases—CAT-prone property, for example.
As the U.S. market stagnates, business will look abroad for growth. KPMG found that 60% of U.S. middle-market executives plan to expand globally over the next five years, creating new client demand for insurance overseas.
Europe’s debt crisis remains a worry for the global economy even after intervention by world central banks to ease credit. The EU’s bank problems haven’t gone away, and leaders will have to pull together. The euro and the Union may hang in the balance. If efforts fail, Europe could be pulled into a second recession.
Insurers and brokers struggle with soft pricing and low demand. Watch for more market tightening and a squeeze on both CAT-driven pricing and capacity, although capacity remains strong. Reserve releases, which have supported balance sheets, are running low. Solvency II will pressure insurers to build capital. London brokerage consolidation is likely to continue as brokers forage for growth.
Asia remains a bright spot. By 2015, the Asia-Pacific region will amount to 39% of the world’s economy, according to Ernst & Young. China’s share alone is projected to surpass all of Europe’s economy in five years and nearly catch up with the U.S. in the next decade. Excluding Japan, Asia accounts for about 70% of growth in global demand.
Demand for insurance will grow with the region’s economy. Consumers have more disposable income and are buying more insurance to protect their new assets. Business expansion will drive insurance demand to protect against growing risk exposures. Climbing interest rates will have a positive impact on insurers’ profitability in the region.
The drivers of insurance growth in the region vary. Mature markets are more saturated than emerging markets, but demand is still strong. From 1999 to 2009, the insurance growth rate was about 12% a year.
Brokers face obstacles in China and India. Foreign brokerages are still limited to large-scale commercial risk business in China unless they joint venture with a local brokerage. India limits foreign investment to 26%. Other up-and-coming markets include South Korea, Malaysia, Thailand, Indonesia, the Philippines and Vietnam.
Latin America has largely rebounded from any ill effects of the financial crisis and is building strength. Brazil leads the insurance market with 40% of premium volume. Mexico is second. Latin America generates more than $100 billion in annual premium and is home to more than 500 million people. As the economy expands, so does wealth. The growing middle class has more money to spend on insurable goods, such as cars and homes. To keep up with economic expansion, countries are investing in infrastructure projects and building highways, bridges, power plants, airports and other key structures needed to keep the economy competitive. Marsh and Willis grew organically in the region by double digits last year. Brokers looking for growth can tap into this booming market by leveraging their clients’ expansion into the region.