Why consumers cut back on insurance spending

INSURERS TO FACE STAGNANT GROWTH IN THE NEXT 5 YEARS

JAPAN

Japan’s life insurance industry is expected to grow at a compound annual growth rate (CAGR) of 2.6% from $274.9b in 2021 to $313.3b in 2026, in terms of direct written premiums (DWP), data and analytics firm GlobalData predicts.

However, the industry will see stagnant growth in the next five years due to sluggish sales of term life and savings products.

According to GlobalData, the Japanese life insurance industry registered 2.4% growth in 2021 after two consecutive years of decline in 2019 and 2020. Past 2021, however, the industry will only increase by a few percentage points, reaching only 3.1% by 2026.

Ashish Raj, Insurance Analyst at GlobalData, said that the industry growth is expected to remain sluggish in 2023 as the term and savings products are not sought-after life insurance products amongst the older Japanese population.

“A persistent low-interest rate environment since 2010 due to a stagnant economy has prompted insurers to reduce the sales of savings products offering guaranteed returns. Since the Bank of Japan is persisting with low-interest rates, a recovery in the sale of life products with guaranteed returns is expected to be minimal over the next few years,”Raj said.

Disruptions

Another challenge for life insurers is the reliance on agency or brokers’ distribution channels, which traditionally accounted for the majority share of life insurance sales. A less developed digital sales channel led to a decline in sales during the last couple of years, specifically after the disruption caused by the COVID-19 pandemic.

To avoid such disruptions in the future, the Japanese government established the Digital Agency in the second half of 2021. The agency will support life insurers in reducing their dependence on traditional sales.

With the cost of living on the upswing, insurance may be cut out of the household budget

Why consumers cut back on insurance spending

ASIA PACIFIC

Consumers are now flinching from a higher cost of living as a result of inflation in Asia Pacific and many are cutting back on spending with one in six saying they would cut back on insurance premiums first, a report by YouGov revealed.

Breaking it down to several key markets in APAC, Australia has the highest number with one out of five consumers saying they would cut back on policies or premiums. 16% of Hong Kong consumers have said they would ease up on insurance spending, an almost similar figure to 15% in India.

Consumers in Singapore and Indonesia are slightly less resistant to the cost of living increases with just one in eight consumers looking to cut back on insurance in the wake of higher costs (12%).

Commenting on Singapore’s numbers, Ervin Ha, APAC Head of Commercial at YouGov told Insurance Asia that with inflation in Singapore reaching a 14-year high it is expected for consumers to feel the effects of rising costs and plan for cutbacks to mitigate its impact.

“While some do plan to cut back on insurance policies and premiums, it appears to still be more cost resistant than other consumer categories such as dining out, travel, and clothing, where greater cutbacks are anticipated,” YouGov's Ha said.

He also identified that in Singapore, those who will likely cut back on insurance are those ages 55 and above. This runs parallel with the numbers in the Asia-Pacific region that shows older consumers will be most likely to ease up on insurance spending.

“This is consistent with earlier YouGov data which found that those above 55 are most likely to expect their financial situations to worsen over the next 12 months, which could be one explanation for why the group intend to cut back,” Ha explained.

A weight on insurers

However, despite only 14% of consumers planning to cut back on insurance first, a report by Swiss Re revealed that economic slowdown and the high-inflation environment will weigh on insurance markets as slowing growth typically leads to lower demand for insurance.

In a forecast, Swiss Re predicts a negative 0.2% growth in global insurance premiums, with a potential positive 1.9% growth in 2023. However, despite this development, this is still a below-trend performance.

With the current economic conditions, insurers will continue to carefully tread water as Swiss Re expects flat growth in total global premiums this year based on real inflation-adjusted terms.

“Nevertheless, in nominal we expect total premiums volumes will exceed the USD 7 trillion mark for the first time ever by the end of this year. We base our estimation of a rise in total premiums to $7.3t from $6.9tat the end of 2021 on strong market recovery from pandemic-induced lows, continued rate hardening in non-life, and stronger premium growth in emerging markets in particular,” Swiss Re said.

Outlook

Swiss Re describes 2022 to 2023 as a transition year for the insurance industry in the Asia-Pacific as it navigates the economic realities of high inflation and low growth.

Price pressures would also be felt in property, casualty and health insurance. For positive trends, rising interest rates will boost investment returns.

Those above 55 are most likely to expect their financial situations to worsen over the next 12 months