Current economic momentum is not enough to compensate for the phase of low profitability currently being experienced across most global non-life insurance markets, according to the latest sigma report from Swiss Re.
The report found that insurers in major western markets and Japan need to improve underwriting margins by around 5 to 9 percentage points in order to deliver sustainable return on equity (RoE) of 10% in the future.
Swiss Re acknowledged that supportive macroeconomic developments will benefit future profitability to some extent through higher interest rates and investment returns, but maintained that economic momentum alone will not be sufficient to close current profitability gaps.
The report also found that tighter labour markets are expected to push up wage and claims inflation, meaning premium rates will need to increase more than claims trends to achieve sustainable improvement in profitability.
RoE in the global non-life insurance sector slipped further to 6% last year, from 7% in 2016 and the roughly 9% achieved annually between 2013 and 2015.
In the past, during periods of higher interest rates, stronger investment returns were offset by larger underwriting losses, but in the current underwriting cycle underwriting results have deteriorated without the benefit of compensating rising yields, Swiss Re said.
“Under the current stronger economic conditions, we expect interest rates in mature markets to continue to rise moderately, which should support insurers’ earnings through higher investment returns”, explained Jérôme Jean Haegeli, Group Chief Economist at Swiss Re.
However, “macroeconomic developments alone are unlikely to generate sustained improvement in non-life sector profitability,” he added. “The trend of declining investment yields has bottomed but at the same time, the increase in long-term interest rates that we foresee is not substantial.”
Swiss Re noted that although underwriting conditions remain soft in 2018, they seem to be passing through an inflection point due to the large hurricane losses in 2017 that prepared the sector for a price correction.
“The catastrophe losses in 2017 sparked a modest change in market dynamics”, said Edouard Schmid, Swiss Re Group Chief Underwriting Officer. “However, it remains to be seen how strong and sustainable the market firming is. Rate increases for accounts and commercial lines of business not affected by the catastrophe losses, for instance, have been below initial expectations.”
Swiss Re added that it believes the cyclical pattern of underwriting cycles will continue given how strongly integrated it is globally and across lines of business, but said that it believes the average duration of the cycle has lengthened from six years to nine years.
The report concluded that investments in technology may enable insurers to alleviate earnings pressure through efficiency gains, reduced claims costs, and access to new risk pools, although it noted that these benefits are often initially obscured by investment costs and as gains are passed on to consumers through competition.
In the long term, the report held that investments in data and advanced analytics will improve efficiency, underwriting, and the insurability of increasingly complex risks through improved affordability, access or better ability to underwrite new and hard-to-quantify risks.