9 Reinsurance Risk Trends
Published September 10, 2012 11:46 AM
|
Updated September 10, 2012 2:44 PM
1 Min Read
Andrzej Pobiedziński
Global slowdown
The debt crisis in the Eurozone continues to constrain top-line growth, particularly in developed markets. This has compelled reinsurers into a risk-off investment mode, seeking higher-grade investments, which reduces credit risks but also renders balance sheets more sensitive to interest rate movements.
Max Baumann/Getty Images/iStockphoto
Portfolio yields decrease
Another result of the ongoing economic crisis, particularly in Europe, has (re)insurers investing in higher-grade options such as Swiss, U.S., German, Japanese and British government bonds. These low yielding assets, which now dominate sector portfolios, are perceived as less risky but offer lower investment returns. In this environment of declining investment income, together with lower growth expectations in certain lines, underwriting results will be even more central to carriers earnings profiles.
Muted opportunities
As business volumes and discretionary spending moderate, demand for insurance cover may be muted in commercial and personal lines. Also, for new businesses that do purchase insurance, weaker economic growth could make it more challenging for insurers to generate profit from rate increases.
Increased interest rate sensitivity
Reinsurers also are making themselves more susceptible to interest rate fluctuations with portfolios offering lower yields to maturity. Thus, carriers with conservative investment allocations and low equity gearing are relatively unhedged against inflation and interest rate risk.
Unknown risks
As reinsurers continue to seek new markets, this expansion also represent unknown risk territory. Of the significant catastrophes in 2011, resulting in global insured losses in excess of USD 110 billion, only the Tohoku earthquake in Japan can be considered a peak risk.
Global catastrophe activity
Between 2009 and 2011, Asia experienced the highest insured natural catastrophe losses by region (35 percent); the United States, which has historically accounted for more than three-quarters of global losses, accounted for just 33 percent. The lack of catastrophe modeling solutions in emerging markets has raised concerns that reinsurers do not currently possess an adequate understanding of the scale and nature of losses that can occur in these territories. in contrast to 2011, global catastrophe activity has been relatively light so far in 2012.
Remaining 2012 hurricane season
While so far 2012 has provided respite from hard-hitting catastrophe losses, the outcome of the 2012 North Atlantic hurricane season will play a key role in determining the direction of the reinsurance sector through 2013 renewals.
kostyantyn Ratnikov/Getty Images/Hemera
Deteriorating reserves
Although it is expected, accident years from 2011 will show reserve deterioration; offsets from 2010 and prior years will likely result in the industry first seeing deteriorating reserves in 2014 or beyond. For some carriers that write specific lines like workers compensation, net reserve deterioration has already begun.
Chris Lamphear/Getty Images/Hemera
Reserve redundancies running low
Guy Carpenters analysis of the reserving cycle, which studies booked ultimate losses by accident year, shows reserve releases slowing in the near term. It is expected that the U.S. P&C industry will continue to release reserves, but 2012 reserve releases will be less than the 2011 releases.