Underwriting

EMEA Q3 regional trends

The picture for Europe, the Middle East and Africa is, naturally, a diverse one. Europe’s governments have generally sought to recover from the impacts of COVID-19, relying on urgent vaccination campaigns to end the strictest lockdown measures and allow the virus to become endemic. The huge levels of government spending required to weather the crisis have been followed by pledges of long-term recovery plans including spending on infrastructure and renewable energy. The EU, for example, approved its EUR 750 billion collective recovery plan in June 2021.

Similarly, the wealthier countries of the Middle East are seeking to return to growth, with soaring energy prices likely to provide a boost to the oil-producing countries of the GCC. For the countries of Europe, on the other hand, spiralling natural gas costs present major economic challenges that will be exacerbated by delays, shortages and cost increases across global supply chains.

Official health data for the countries of Africa, meanwhile, have typically shown substantially lower mortality from COVID-19, but vaccine supplies have also been much more limited in these countries. This, together with lower capacity for governments to fund major recovery programs, makes prospects for recovery uncertain.

There has been a reversal of the underwriting conditions seen a year ago. Risk pricing appears to have stabilised with some softening in the premium rate cycle as insurer focus has shifted from remediation to profitable growth whilst these favourable underwriting conditions prevail.

Any capacity constraints and insurer attitudes experienced last year have now eased considerably whilst underwriters still remain less flexible on accommodating business outside their core appetite.

Across this diverse region, the general picture is of economic recovery as many countries shake off the worst impacts of the COVID-19 pandemic, but prospects are clouded by a number of factors. In some countries, relatively low vaccination levels mean that fresh waves of the virus still pose a major threat and may be met by strict lockdowns. Meanwhile, countries in the region that have achieved higher levels of vaccination, or which have been relatively successful in containing the virus, are attempting to transition to an ‘endemic’ stage where enough of the population is immunised that relatively high levels of infection can be tolerated, striking a delicate balance between public health and economic objectives.

As with other regions of the world, returning to economic growth in the wake of the pandemic has also brought major challenges in the form of supply chain disruption, energy shortages and fuel price rises. These concerns weigh particularly heavy in China, dampening prospects for its vast manufacturing industry, but naturally, also extend throughout the region. The October 2021 IMF forecast suggests 6.5% growth across APAC, a 1% downward revision from the April 2021 forecast. The downward revision resulted from the rise of the Delta variant, varied government policy, differing levels of vaccine access and supply chain disruption.

Credit insurance capacity continues to increase across the region, with many sectors benefiting from improved credit limit appetite. Premium rates are beginning to soften for investment-grade risks and well-graded and good performing portfolios. There is a divergence in economic recovery across the advanced and emerging market economies in the region and this impacts both underwriter appetite, capacity and pricing.

Volatility remains with many factors that could impact the economic recovery, including geopolitical risk, supply chain disruption and supply-side inflationary risks.

Both Canada and the US have faced fourth waves of COVID-19 in the third quarter of 2021, while their governments raced to vaccinate their populations and avoid returning to economically damaging lockdowns. Although Canada has reached more of the population in its vaccination drive and has seen correspondingly lower death rates, however, the US has experienced a more consistent economic recovery and had returned to growth by the end of the second quarter.

Like other parts of the world, North America will see major infrastructure spending as part of efforts to boost the economic recovery, although in the US in particular the level of expenditure remains subject to heated debate. Other uncertainties for the economic outlook are global supply chain disruption in the wake of the pandemic, adding to the earlier impact of US-China trade tensions, and rapidly rising fuel costs, although as of the beginning of October these had impacted North America much less than Europe.

As for the insurance market, conditions continue to stabilise as combined ratios shift, capacity continues to flow in, and pandemic-related underwriting uncertainty subsides. A refocus from remediation toward growth continues. Despite the exits of QBE and Zurich, competition remains strong amongst the non-cancellable insurance markets. Underwriters are increasing capacity across the board as well as adding staff. Competitive pressures are slightly reduced with the traditional cancellable markets, however, still with improving conditions.

COVID infections and deaths have seen a downward trend in most countries and approximately 44% of the population completed their COVID vaccinations, many countries struggle to expand vaccine coverage. Some indicators warn about a possible wave in December as seen in other regions across the globe. Volatility and uncertainty remain in the region caused by the aftermath of the pandemic and the 2020 negative 8% GDP development as well as the outcomes of the elections across the region this year and presidential elections in 2022 in Brazil and Colombia.

As per S&P Global 4th Quarter Outlook: More contagious variants of COVID-19 that trigger strict lockdowns will likely remain a risk to our outlook for some time. However, there are several risks that are not pandemic specific. The recent increase in domestic inflation, if it continues to persist in 2022, could prompt more aggressive monetary tightening than we envision, taming demand more than we expect. Several factors could lead to this, for example, continued supply-side bottlenecks, weaker exchange rates, or the potential for electricity shortages in the case of Brazil. In the current environment of high joblessness, further bouts of social instability could directly disrupt activity and amplify policy uncertainty, with negative implications for investment.

Insurers are concerned with these developments and even though credit limit capacity is in excess of levels pre-pandemic, it is anticipated that appetite will decrease in the next few months. The removal of government incentives and support as well as the rise of inflation and interest rates will make it challenging for companies to access cost-efficient capital.