‘Substantial’ Rate Hikes Expected As Re/Insurers’ Results Take a Hit: Swiss Re

December 4, 2017

Non-life re/insurers’ full-year underwriting results are likely to be severely affected by the second half of the year’s three hurricanes and earthquakes in Mexico–which will lead to rate hardening for non-life insurers and reinsurers, according to a report published by Swiss Re.

These natural disasters could cost the industry an estimated US$95 billion and lead to a combined ratio in the U.S. property and casualty insurance sector of 109 percent in 2017, up from 101 percent in 2016, said the Swiss Re Institute’s report, “Global insurance review 2017, and outlook 2018/19.”

This figure will be even higher for global reinsurance.

Assuming no further large catastrophe events, the combined ratio for the reinsurance sector on average is estimated to be around 115 percent in 2017, up from 92 percent in 2016, Swiss Re said.

Rate Hikes Expected in Loss-Affected Sectors

As a result of these large losses, rate hardening is expected in both non-life insurance and reinsurance.

“Price rises in loss-affected segments are already happening and could be substantial,” said Kurt Karl, Swiss Re’s group chief economist.

“The ultimate volume of losses is not yet known, but appears to be large enough to cause price increases beyond the affected sectors,” he said.

“This is also happening because prices have fallen so low over the past few years,” Karl added.

In reinsurance, the catastrophes “have drained capacity from both the traditional and alternative capital sectors,” said the report, noting that rates “in loss-affected accounts could rise significantly.”

Profits Down in 2017

Soft underwriting conditions, low investment yields and catastrophe losses have all acted to reduce global non-life insurance industry profitability, the report said. Return on equity (ROE) was down to 3 percent from 6 percent in 2016.

While profitability in non-life insurance “is expected to strengthen in 2018 and 2019 as underwriting conditions turn more favorable, the improvement will be modest with industry ROE at around 7 percent to 8 percent,” it added.

Further, insurers’ investment income will continue to be weak “given the ultra-low interest rate environment over recent years.” The report said that although interest rates are gradually rising, investment income will grow only slowly.

In non-life reinsurance, global premiums are estimated to have grown by 3 percent in 2017 in real terms, “based on rapidly increasing cessions from emerging markets,” Swiss Re continued.

“In 2018 and 2019, premium growth in emerging markets is expected to remain steady, driven by stronger sales of primary insurance in all regions. In the advanced markets, premium growth will reflect a moderate hardening of rates and stronger primary market growth,” the report said.

Growth Expected in 2018

Swiss Re noted that the global economy is in a cyclical upswing, so moderate growth is forecast for 2018 and 2019.

“This should further support growth in the insurance markets, with global non-life premiums forecast to rise by at least 3 percent, and life premiums by about 4 percent in real terms annually in 2018 and 2019,” the report added.

“A number of risks could derail this relatively benign growth outlook. For example, protectionist trends pose an increasing threat to global economic growth,” Swiss Re said. “Also, there are worries that unwinding of quantitative easing programs by central banks could spark a negative financial market reaction. In addition, elevated corporate debt levels in China, despite measures taken, remain a concern.”

Emerging Markets

The emerging markets, particularly in Asia, will continue to be the main driver of premium volume gains with premiums forecast to rise by 6 percent to 7 percent in real terms annually in the next two years, little changed from 2017.

Non-life business will continue to benefit from urbanization, as well as rising home and car ownership, the report said. “Concerns about environmental protection, food safety and underinsurance in property are also expected to start to filter through to sturdier demand for associated liability and property covers,” the report indicated.

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