Global Insurance and reinsurance will continue their recoveries in 2010, predicts Swiss Re-
Challenges ahead for insurance include regulatory changes, low asset returns and climate change
Reinsurance showed resilience throughout the crisis
Non-life reinsurance remained robust throughout the crisis. Capital has almost returned to end-2007 levels. Overall, slightly improved top-line growth is expected in 2010 compared with 2009. Profits will improve or remain stable on average: better investment returns compared with 2008 will compensate for slightly lower underwriting results. As primary life insurers continue to recapitalise in 2010, life reinsurance is still projected to show robust growth. Profits in life reinsurance are also expected to improve, primarily due to better investment results.
Emerging markets: Growth, resilience and improving regulations
“The emerging markets, though by no means decoupled from the financial storm, weathered its effects fairly well, with the exception of Eastern Europe,” said Clarence Wong, Swiss Re’s chief economist in Asia. Insurance lines in emerging markets are expected to grow much more robustly than in the developed economies. “The regulatory response to the crisis in emerging markets has been very encouraging. Authorities are continuing to liberalise regulation and move towards a risk-based capital regime,” he added.
Continued trend towards increasing natural catastrophe losses
Worldwide average insured natural catastrophe losses between 1970 and 1989 were USD 5.1 billion per annum; these losses went up to USD 27.1billion per annum between 1990 and 2009. Matt Weber said: “As a result, we see increasing demand for natural catastrophe cover. Strong public-private partnerships will be essential in tackling the substantially increasing risk posed by natural catastrophes.
Low asset returns in 2010: (re)insurers forced to focus on underwriting profitability
While the corporate bond market and equity markets are expected to continue improving in 2010, insurers’ investment income will continue to suffer from the low interest rate environment. Insurance and reinsurance companies mostly invest in high-quality fixed income assets and yields, particularly on government bonds. Rates on these assets are very low by historical standards. Unlike banks, insurance companies do not tend to have very high leverage ratios. But even P&C insurers have asset leverage and this magnifies the impact of declines in investment yields on return on equity (ROE). For example, P&C insurers in the US had asset leverage – assets as a percent of equity – of 278% in 2008. To maintain the same ROE after a 1% point drop in investment yields requires about a 3% point improvement in the combined ratio.
Thomas Hess concluded: “The implication is clear: low investment yields will force (re)insurers to focus on underwriting profitability. This will give companies with a strong combined ratio history a competitive advantage.”
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(Source: Swiss Re Release)
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