Swiss Re Sigma Study Analyzes 2001 Losses, Equity Decreases

Swiss Re’s latest Sigma report, No.4/2002, offers an analysis of the non-life insurance industry, and how it is adjusting to “two major shocks – the catastrophic losses of 2001 and the ongoing stock market meltdown.”

The report discusses the reactions in the major non-life insurance markets, and stresses that “the need for improved underwriting results continues in a market environment of shrinking insurance capacity and diminished investment prospects.” It expects the price rises to continue over the next few years.

The report, entitled “Global non-life insurance in a time of capacity shortage,” found global increases in p/c rates. It characterized the “severe bear market since 2000 and record losses in 2001” as reinforcing “the cyclical upturn of the non-life insurance market.” The study indicated that “price increases are necessary for insurers to shore up their balance sheets, given weak investment returns and the heavy losses in 2001.”

It also indicated that while the events of Sept. 11 had perhaps accelerated the move to a harder market, the trend was already in place, having really begun in “late 2000, early 2001.” Swiss Re expects the hard market to “last longer than in previous cycles, given the global shortage of quality capital and increased risk exposures.”

The authors of the report calculated that global equity funds had decreased since their historical peak in early 2000 by around $180 billion, or close to 25 percent. The former soft market conditions and the decline in the equity markets have combined to reduce the p/c industry’s capacity,” particularly in commercial lines and reinsurance.”

The report went on to note that “Solvency ratios started to decline in 2000 in most major markets.” Even though new capital of around $30 billion came into the market, it “was not able to fill the gap left by lost capacity.” Worldwide non-life capital funds decreased by about $90 billion in 2001, mostly due to valuation losses in equity portfolios.

It warned that “Similar or larger losses have to be expected for 2002 if the current state of stock markets continues.” Most of the world’s share value indexes are in fact lower now than they were after Sept. 11. The market, particularly in the U.S., continues to be plagued by financial scandals, which Swiss Re concluded “are keeping investors away from the financial markets.”

This could lead to an over correction as stock markets go through “a period of overshooting on the downside before reverting to normal growth, which is 3-4% over risk-free returns, compared to 7-10% during the 1990s.” It concluded that as a result “investment returns for the insurance industry may remain low for a long period of time.”

The report may be downloaded at the company’s Web site