Financial pain could be insurers’ gain
Swiss Re has forecast gloomy economic conditions will linger for another two years, but expects the ongoing financial crisis to provide a shot in the arm for premium rates.
The giant reinsurance company last week released a special report, Global insurance review 2008 and outlook 2009: Weathering the storm.
It says the financial crisis is the most severe since the Great Depression of the 1930s, and it expects volatility to continue well into 2010. The report provides a baseline forecast that sees a global recession extend until the middle of next year.
Under a more pessimistic scenario, Swiss Re says there is a 25% chance sustained negative growth will persist through 2010.
The report makes grim reading for most financial services providers, but Swiss Re expects both insurance and reinsurance rates to appreciate as a result of the turmoil.
General insurers are expected to follow a careful strategy incorporating conservative investments, increased demand for reinsurance and underwriting profitability. Swiss Re says insurers which follow that sort of fiscal rectitude will lead the industry out of the woods.
As well as rate increases among lines with heavy recent exposure – think commercial and private motor and personal lines – declining rates are also projected to slow among other classes of business.
Prices in non-life reinsurance are also expected to harden, “due partly to the fact less alternative capacity is available nowadays”.
Reinsurance premium volumes are expected to accelerate as the need for protection soars, given the lower capitalisation of primary insurers, who use reinsurance as a substitute for shareholder capital – a point the Swiss Re report notes with some understated satisfaction.
That development could represent something of a boon to the concentrated reinsurance market. Munich Re Group Board Member Ludger Arnoldussen echoed those sentiments last month in an interview with insuranceNEWS.com.au.
Of course, reinsurers and underwriters haven’t had it all their own way. By the end of this year, insurers around the world can expect to have dropped 10-15% in the levels of their surpluses compared with just 12 months ago.
Reinsurers have also endured a difficult financial year. Operating results have declined by more than half while the industry’s combined ratio sits at a marginally profitable 97%.
Despite the pain, Swiss Re says insurers are in relatively good health compared to their peers in the financial sector. General insurance premiums face a limited effect by economic downturns, with only a few lines of business sharing direct links to economic activity.
In addition, general insurance activities are pre-funded by premiums so unlike other financial services providers insurers do not face the risk associated with a run on funds.
Insurers can thank underwriting as the unwavering performer against a backdrop of declining investment income, the Swiss Report says.
“The insurance industry continues to function well in all countries,” it said. “Only a few insurers have needed support by governments and usually not because of the insurance part of their business but due to the financial services division.”
International insurers AIG and Fortis can’t have been far from the author’s mind. The report highlights the US as the main exception to a global industry that maintains a combined ratio comfortably within the profitability yardstick of 100%.
“Unless markets deteriorate substantially further, we would not expect to see many, if any, insurance companies fail,” the report continued.
But it may be two years before the good times roll again.
“While prospects for 2009 are not very encouraging, 2010 may well be one of the better years,” the report states. “Underwriting performance should be very good and, if capital markets bounce back, it may well be an excellent year.”
The giant reinsurance company last week released a special report, Global insurance review 2008 and outlook 2009: Weathering the storm.
It says the financial crisis is the most severe since the Great Depression of the 1930s, and it expects volatility to continue well into 2010. The report provides a baseline forecast that sees a global recession extend until the middle of next year.
Under a more pessimistic scenario, Swiss Re says there is a 25% chance sustained negative growth will persist through 2010.
The report makes grim reading for most financial services providers, but Swiss Re expects both insurance and reinsurance rates to appreciate as a result of the turmoil.
General insurers are expected to follow a careful strategy incorporating conservative investments, increased demand for reinsurance and underwriting profitability. Swiss Re says insurers which follow that sort of fiscal rectitude will lead the industry out of the woods.
As well as rate increases among lines with heavy recent exposure – think commercial and private motor and personal lines – declining rates are also projected to slow among other classes of business.
Prices in non-life reinsurance are also expected to harden, “due partly to the fact less alternative capacity is available nowadays”.
Reinsurance premium volumes are expected to accelerate as the need for protection soars, given the lower capitalisation of primary insurers, who use reinsurance as a substitute for shareholder capital – a point the Swiss Re report notes with some understated satisfaction.
That development could represent something of a boon to the concentrated reinsurance market. Munich Re Group Board Member Ludger Arnoldussen echoed those sentiments last month in an interview with insuranceNEWS.com.au.
Of course, reinsurers and underwriters haven’t had it all their own way. By the end of this year, insurers around the world can expect to have dropped 10-15% in the levels of their surpluses compared with just 12 months ago.
Reinsurers have also endured a difficult financial year. Operating results have declined by more than half while the industry’s combined ratio sits at a marginally profitable 97%.
Despite the pain, Swiss Re says insurers are in relatively good health compared to their peers in the financial sector. General insurance premiums face a limited effect by economic downturns, with only a few lines of business sharing direct links to economic activity.
In addition, general insurance activities are pre-funded by premiums so unlike other financial services providers insurers do not face the risk associated with a run on funds.
Insurers can thank underwriting as the unwavering performer against a backdrop of declining investment income, the Swiss Report says.
“The insurance industry continues to function well in all countries,” it said. “Only a few insurers have needed support by governments and usually not because of the insurance part of their business but due to the financial services division.”
International insurers AIG and Fortis can’t have been far from the author’s mind. The report highlights the US as the main exception to a global industry that maintains a combined ratio comfortably within the profitability yardstick of 100%.
“Unless markets deteriorate substantially further, we would not expect to see many, if any, insurance companies fail,” the report continued.
But it may be two years before the good times roll again.
“While prospects for 2009 are not very encouraging, 2010 may well be one of the better years,” the report states. “Underwriting performance should be very good and, if capital markets bounce back, it may well be an excellent year.”