Swiss Re Says Profitability Requires Improved Underwriting Results

Major reinsurer Swiss Re released findings from its latest sigma study, “Profitability of the Non-Life Insurance Industry: It’s Back to Basics Time,” which showed that the slumping non-life insurance market must improve premium rates and underwriting results in order to increase profitability.

The study analyzed factors affecting non-life market profitability in the Group of Seven (G7) nations-Canada, France, Germany, Italy, Japan, the UK, and the US-comparing investment and underwriting results between countries and across business lines. By making such comparisons, Swiss Re sought to:

• Identify the main drivers of profitability;
• Determine how the long-term profitability of non-life insurers compares to benchmarks;
• Determine the importance of investing to profitability, capacity, and volatility;
• Identify patterns of the insurance cycle between countries and across business lines; and
• Determine the degree to which underwriting results must improve to achieve widespread profitability.

Analysis of various factors found that non-life insurers are in transition between severe soft and hard markets after years of falling interest rates and robust stock markets increased capacity and created strong investment returns. As a result, competition heated up, premium rates fell and underwriting results declined in all major markets. Commercial lines and reinsurance premium rates started to rise in 2000, and have gained momentum in 2001. Prices in the personal lines have lagged slightly but are now increasing as well.

The study determined that underwriting results must improve by 7 to 14 percentage points of net premiums in order to restore average profitability. In addition, catastrophic claims costs and equity investment losses will cause non-life insurers’ capital base to contract, which should prompt them to increase rates in the next few years.

It also concluded that investment performance has become increasingly important to profitability in conjunction with the trend toward increasing asset leverage (the ratio of investment assets to net premiums) related to structural increases in loss reserves; now, loss reserves are growing faster than premiums, and liability lines of business have become more important.