The insurance market needs more underwriting discipline to offset the effects of low interest rates, according to Swiss Re Chief Economist Kurt Karl.

He says this applies to all business lines, but particularly to casualty.

Dr Karl told insuranceNEWS.com.au that although there has been some hardening in the property market, particularly for natural catastrophe cover after last year’s disasters, he sees only a slow turn in rates for casualty.

And he accepts that any desire to toughen up on underwriting is being countered by competition.

“It is a fiercely competitive market right across the board, through the life industry and property and casualty, particularly on commercial insurance,” he said, noting that businesses are under pressure because of weak economic activity and are pushing back against price increases.

Swiss Re forecasts higher interest rates towards the end of this year will bring some relief for insurers’ earnings.

Dr Karl expects rates in the US and Europe will begin to rise in the fourth quarter, with the increases continuing into next year.

But he says interest rates will stay comparatively low for the next few years while economic growth picks up.

Underwriting discipline is starting to improve in parts of life insurance, where a bigger proportion of profit is made from investment yields.

“If you cannot make it on the investment yield, you have to be firm on the underwriting side.”

He says although rates are not moving for traditional life insurance, there is a huge restructuring taking place in savings-related products.

Some life companies are carrying heavy losses on annuity products that guarantee annual returns, because the returns were calculated prior to the financial crisis in 2009, when investment yields were higher.

Dr Karl says there is now more caution in structuring products and fewer rate guarantees are being given.

Although merger and acquisition activity is weak in the insurance industry, he says the large amount of regulatory change globally is forcing companies to restructure to meet higher capital requirements, with banks selling insurance assets and insurers quitting non-core operations.

Some European companies are likely to sell assets to meet higher capital requirements under Solvency II.

Dr Karl says the reinsurance market remains well-capitalised and ready to write risk in Australia and New Zealand, where rates have risen substantially after last year’s disasters.

Swiss Re reported a 3% rise in July treaty renewals, mostly from Australia, New Zealand and the Americas.