European insurers' premium growth outpaced expense growth

Achieving sustainable margin recovery appears increasingly difficult for European insurers, as insurance premium increases are necessary to avoid erosion after costs surged to 10.9% in 2023, up from 3.5% in 2022.

According to a Bloomberg Intelligence research, the bulk of expenses are effectively fixed and are being driven higher by inflation.

A key highlights

  • Rising Costs: European insurers experienced a significant increase in costs, which tripled to 10.9% of premiums in 2023, up from 3.5% in 2022. This rise is largely driven by inflation and fixed expenses.
  • Premium Growth: Despite the increase in costs, premium volume rose by 7.5% on average in 2023, following a 3.8% increase in 2022 after declines due to COVID-19.
  • Margin Pressure: Maintaining a sustainable margin recovery is increasingly challenging. Insurers need to raise premiums in real terms to prevent margin erosion due to rising costs.
  • Underwriting and Investment Income: Insurers rely on both underwriting and investment income for profitability. The industry struggles with costs rising faster than premiums, putting constant pressure on underwriting margins.
  • Cost Ratios: The average acquisition cost-to-net earned premium ratio for European life and general insurers was 14.7% in 2023, showing slight improvement from 14.8% in 2021.
European insurers' premium growth outpaced expense growth

Insurance premium volume rose by an average of 7.5% in 2023, following a 3.8% increase in 2022 after declines driven by COVID-19. The recent performance is mixed.

Average premium growth outpaced expense growth in 2018-2019, reversing 2017’s trend, but premium volume fell by 3.5% in 2020 compared to a 3.9% increase in costs.

The insurance industry historically has struggled with a fundamentally significant problem: costs rising faster than premiums. This puts constant pressure on underwriting margin

Kevin Ryan, BI Senior Industry Analyst – Insurance

The situation shifted in 2018 and continued into 2019. While comparing industry averages can be imprecise, the 2019 increase in costs (4.5%) and premiums (5%) indicates the sector was healthier than at the end of 2017.

Insurers derive profit from two primary sources: underwriting and investment income.

The pandemic impacted 2020, but 2021 experienced a recovery with net premiums exceeding total costs, a trend that persisted into 2022. However, in 2023, with the implementation of IFRS 17, costs have risen faster than premiums again.

A key factor to highlight is that total costs as a percentage of premiums in BI’s insurer universe climbed 10.9% in 2023 (3.5% in 2022), having edged down 0.3% in 2021.

The natural upward momentum here is hard to halt, therefore any progress should be considered as a positive.

The costs usually tend to be higher in general insurance than in life under IFRS, but this has reversed under IFRS 17.

European insurers' premium growth outpaced expense growth

As well as this, across general and life-insurance companies in analysis, the average total cost-to-net earned premium ratio was 29.3% in 2023, compared to 27.6% in 2022, and 27.8% in 2021.

In 2023, general insurance acquisition costs rose by 6%, compared to an average increase of 0.3% in 2022 among the insurance companies we monitor.

These costs are significant, averaging 17.1% of net earned premiums in 2023, down from 19.4% in 2022 and 19.3% in 2021. The general insurance sector is experiencing the most strain.

According to McKensey, nominal interest rates will remain elevated in the foreseeable future as central banks look to get inflation under control. This is in sharp contrast to what we have seen over the past two decades, which have largely consisted of quantitative easing and ultralow nominal rates.

In the near-term, life insurers may use these tailwinds to passively capture growth opportunities, especially as asset rotations on the investment side happen quicker than adjustments on the liability side, which results in higher spread.

Life insurers have faced several challenges delivering growth and returns. In the past two decades, economies grew faster than insurance premiums, indicating insurers haven’t been growing at the same rate as the economies in which they operate.

In the United States and Europe, nominal GDP grew at a CAGR of 4% over the past 20 years, but premium growth grew at a CAGR of 2%. In Asia (excluding Japan), economies grew at a CAGR of 10 percent while premiums grew just 3 percent.

In sample of 40 European life and general insurers, the average acquisition cost-to-net earned premium ratio was 14.7% in 2023, slightly down from 14.8% in 2021.

These ratios are unlikely to be directly comparable, due to different approaches to cost allocation and divergent business mixes but does flag that this is likely an area of focus for all insurers.

Yana Keller  by Yana Keller