Insurers Expect Lower Returns in Face of Low Interest Rates, Heightened Competition

July 14, 2016

Approximately three-fourths of insurers surveyed have lowered their target return-on-equity expectations to 10 percent or lower, a reflection of highly competitive market conditions remaining and the slow-growth economy, according to a new A.M. Best survey.

According to the A.M. Best Spring 2016 Insurance Industry Survey, the prolonged low interest rates remain a prevalent issue, as 37.6 percent of insurers cited them as the biggest industry threat, followed by increased regulations (26.2 percent), competition (19.3 percent) and antiquated business models (12.4 percent).

Only 2 percent of respondents felt that the outcome of the presidential race would be a main threat to the industry.

In terms of competitive pressures, the health and life/annuity segments responded that they feel the most pressure from regulatory drivers, while the majority of property/casualty insurers reported facing pressure from product development, new entrants and external forces such as Amazon and Google.

The survey also asked insurers about other issues including cyber risk and reinsurance trends.

On cyber risk, about 30 percent of survey participants indicated that they had been a target of data breach or cyber-attack. Within the last five years, half of the insurers in the survey have invested more than $1 million in upgrading systems, both hardware and software. However, nearly as many insurers (42.9 percent), spend less than $100,000 to prevent such attacks. Just 10.4 percent reported making investments of more than $1 million to prevent cyber attacks and data breaches.

Fundamental shifts in the reinsurance industry remain apparent in the survey findings. Over the past 24 months, 43.9 percent of respondents have restructured their reinsurance program. Of these companies, 71.4 percent said they were able to get better protection for either less or the same cost. In addition, 52.7 percent of survey respondents said they had added and/or removed reinsurers from their panel in that 24-month timeframe.

Source: A.M. Best Spring 2016 Insurance Industry Survey

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