3.1 PESTEL Analysis
3.1.2 Economical Factors
Economical forces play a major part in the activities of the general insurance companies. The three most important economical factors concerning the general insurance business are economical growth and trends, interest rates and inflation.
3.1.2.1 Economic Growth
The current economical situation in the Nordic countries is reasonably good compared to many other European countries.39 They are among those countries, which came out of the financial crisis without deficit, high unemployment, etc.
37 www.oecd.org/ctp/taxdatabase
38 European Commission: http://ec.europa.eu/taxation_customs/taxation/company_tax/common_tax_base/index_en.htm
39 http://epp.eurostat.ec.europa.eu
27 When looking at one countries’ economical situation, economic growth is a key factor. The most commonly used measure of economical growth is Gross Domestic Product (GDP).
Chart 1
Source data: Eurostat
Chart 2
Source data: Federation of Finnish Financial Services, SSB, Statistikbanken, The Swedish Insurance Federation
The first graph shows the development of GDP over the last nine years, while the second graph shows how premiums written have developed over the last eight years. As both the graphs are showing, the Nordic market has been an attractive place to do business, with a growth in GDP and premiums written.
100 % 110 % 120 % 130 % 140 % 150 % 160 % 170 %
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
GDP Development Index;2001
Euro area (16 countries) Denmark Finland Sweden Norway
100 % 110 % 120 % 130 % 140 % 150 % 160 % 170 % 180 %
2001 2002 2003 2004 2005 2006 2007 2008 2009
Total Gross Premium per Country - Index;2001=100
Norway Denmark Finland Sweden
28 A comparison of the two graphs shows that correlation is present between GDP and premiums written. Factors behind the economic growth are private and public consumption. They have both been high in recent years. Especially private consumption has contributed to the economic growth.
For the insurance companies, both private and public consumption means increased demand for insurance products and increased premiums written. Examples of such insurance products are car insurance, house insurance, travel insurance etc.
Due to the financial crisis, the Nordic countries experienced a negative growth in GDP in 2009. Norway managed the crisis best with a decline of 1.7% in GDP, while Finland experienced a decline in GDP of 8.2%.40 However, forecast for the two years ahead predicts that all the Nordic countries will experience a positive growth in GDP.
3.1.2.2 Economical Trends
Most of the trends we experience in the world economy today are a result of the recent financial crisis. Europe is struggling with a significant amount of national debt, the United States is experiencing record high budget deficit and the rebellions in North Africa are causing threateningly high oil prices.
These trends are important to consider, because they indirectly affects the Nordic insurance market. The European debt crisis and the budget deficit in the US are threatening the economical growth. In addition, increased oil prices can lead to inflation and higher interest rates, which again affects consumer consumption in a negative way. Less consumer consumption means fewer goods to insure and decreased profit for the insurance companies.
It is a vicious circle, where the insurance companies have no control.
Furthermore, the uncertainty that is characterizing the world economy today has a negative effect considering the insurance companies’ investments. Due to the imposed capital requirements, insurance companies have a great need to place this extra capital. When there are significant fluctuations in the market, the return varies as well.
3.1.2.3 Interest Rates
Interest rates have a great impact on the economy and are often used as a tool to control a country’s economical situation. The insurance companies’ profits are affected by the interest rate.
40 Eurostat. http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home
29 A low interest rate stimulates consumption and increases number of goods and assets that need insurance. A high interest rate on the other hand, weakens people’s purchasing power and causes fewer goods or assets to insure. In this way the total premium income will be affected by changes in the interest rate.
The interest rate does not only affect the Nordic insurance companies’ profit through changes in consumption. It may also affect the companies’ investment return and claims provisions.
Due to the capital requirements they are imposed, many insurance companies choose to invest their capital in bonds. A low interest rate will reduce the company’s investment return, while the company will benefit from increasing interest rates.
The interest rate has a similar affect on the claims. Insurance companies use discounting of claims-reserves, therefore declines in interest rate lead to increased claims provisions. The opposite is the case when interest rates are increasing.
As discussed above, the Nordic countries experienced economic growth and increased consumption in the years before the financial crisis. A contributory factor for this economic growth was the relatively low interest rate.
Today, the interest rate is unusual low in a historic perspective. This is because the governments are recovering from the financial crisis, and they try to stimulate the economy and ensure economic growth. In the following years, as the economy in the Nordic countries improves, one would expect increased interest rates.
3.1.2.4 Inflation
The targeted inflation rate is around 2% a year in the Nordic countries.41 Increased inflation could damage a country’s economic growth and competitiveness. It could influence insurance companies in a negative way as increased inflation weakens people’s purchasing power, which again may reduce the demand for insurance products. Inflation may also provoke higher wage demands from employees and increase companies’ costs.
41 The Norwegian Financial Institution & The European Central Bank
30 Chart 3
Source data: Eurostat
The graph above shows that, except around the financial crisis, the inflation rate has been quite normal in the Nordic countries over the past ten years.
When looking at the inflation rate within one country, it is always important to compare it with other countries’ inflation rate. Inflation is primarily damaging for a country when it exceeds other countries inflation rate over a longer period of time, as this will reduce the country’s competitiveness. For most of the years, the inflation rate in the Nordic countries has been below the Euro area’s inflation rate.
