The size of the insurance industry

It is important to remember just howlarge the insurance sector is. According to Swiss Re,2 worldwide insurance premia in 2005 amounted to USD 3,426 billion, of which USD 1,452 billion were in non-life insurance.

Insured losses from natural catastrophes and man-made disasters alone reached a record USD 80 billion in 2005 (see Graph 1), mainly due to the very heavy losses from hurricanes in the U.S. and the Caribbean.

As the graph clearly shows, this figure varies from year to year, but there seems to be a clear upward trend, above and beyond the growth of world GDP, which some experts put at 5 per cent per annum in real terms.

If 2005 was heavily influenced by the hurricane season in North America, the previous year, 2004, pointed to another phenomenon. Owing to the Asian tsunami of December 2004, the difference in distribution between financial losses and human fatalities became especially apparent.

Graph 2, based on figures taken from 96 per cent of all the victims were in Asia, but only 24.9 per cent of the expected payouts are associated with the region; the U.S., on the other hand, had 2.4 per cent of the victims but over 2/3 of all the expected insurance payouts.

This could be taken as an indication that insurance is not always where it should be, or that it might be there but not in the quantities needed. The figures given above demonstrate very clearly that the insurance system is not very homogeneous around the world.

During the recent Monte Carlo Rendez-vous de Septembre of the world reinsurance industry, the large reinsurers estimated the world insurance premia for the year 2005 at almost USD 2,000 billion for the life insurance industry alone. In the developed countries, the average insurance density, that is, total insurance premium per head, is estimated at around USD 3,300.

This is a huge amount of money and underlines the importance that insurance plays. In developed economies the total insurance penetration, that is, the share of insurance premia to GDP, is generally greater than 5 per cent and often accounts for more than 1/10 of the whole economy: for example it accounted in the U.S. for 9.36 per cent in 2004, Japan 10.51 per cent, U.K. 12.60 per cent, Germany 6.97 per cent, France 9.52 per cent, or the Netherlands 10.10 per cent. Such important capital flows lead to huge assets, which the insurance industry controls.

The OECD estimates that the financial assets of insurers in the year 2004 amounted to 4,088 billion USD in the U.S., 2,321 billion USD in Japan, and 1,399 billion USD in the U.K., corresponding to 40.5 per cent, 60.3 per cent, and 97.1 per cent of GDP, respectively.

The enormous relevance of the insurance industry to the performance of these economies is evident. Experts at Swiss Re estimate that, overall, world insurance has grown at around 5 per cent per annum (real growth) since the 1950s.

With the exception of the leastdeveloped countries (and countries under special circumstances such as the collapse of the Soviet Union), insurance regularly outgrows the general economy as more insurance is demanded when the income and wealth of individuals improve and the interest in protecting assets increases. This underlines the increasing importance to national economies as they develop more wealth.

Location: Indonesia