The continuing low interest rate environment will force the insurance market to harden over the next year, Swiss Re Chief Economist Thomas Hess has told insuranceNEWS.com.au.

Mr Hess, who was in Australia last week for client presentations, says the persistent low global interest rates are “basically a disaster for insurers” creating a profitability challenge as investment returns cannot be relied upon to bolster underwriting results.

He says that while the balance sheets of insurers still look relatively strong, companies tend to under-reserve during periods of low investment returns and a “fair bit” of under-reserving will soon begin to become evident through adverse loss developments.

While a natural lag exists between the beginning of a low interest rate environment and the impact showing up in profit and loss (P&L) accounts due to the timeframes of interest-based investments, Mr Hess expects that over the next year “the P&Ls of insurers will not look too good, especially for those that have chased business in the past few years”.

As a result, companies will be forced to push up rates and the insurance market will harden.

“It will lead to a global turn in the insurance cycle,” Mr Hess said.

While the Australian market will feel the impact of any global hardening, Mr Hess describes both the economic and insurance situation in Australia as looking “brighter” than in many other parts of the world.

He says the cat losses of 2010 and 2011 have now been digested and “not too much” capacity has been withdrawn from the Australian market.