The impact of lower investment returns on European players is proving far more manageable for large cap composite insurers than it is for the reinsurers, according to Deutsche Bank.
In the lower for longer interest rate environment, investment returns have come under pressure and naturally, explains Deutsche Bank, property and casualty (P&C) lines are some of the most exposed to lower bond yields.
Generally, the view is that lower investment returns for P&C insurers and reinsurers are in the end offset by increased policy pricing and subsequent improved underwriting margins, but this isn’t always the case.
High competition and elevated levels of catastrophe losses in the P&C industry has, in recent times, hindered the ability to improve underwriting margins. However, and as highlighted by Deutsche Bank, there’s currently some positive rate momentum in the U.S. commercial space, suggesting that some companies will be able to bolster underwriting margins to mitigate the impact of lower investment returns.
In its analysis, Deutsche Bank explores how underwriting margins have trended/are trending as investment returns trend lower, and the effect this has on operating margins. Interestingly, the analysis shows that composite insurers are managing this far better than reinsurance companies.
“One thing that is clear is how well the large cap composite insurers (Allianz, AXA, Generali, Zurich) screen relative to the reinsurers. For all four of the composites, we forecast operating margins to at least remain stable, if not slightly improving relative to historic trends – a function of ongoing portfolio rebalancing, pricing discipline and process automation/digitalisation initiatives – all of which we expect to be sustainable for some time.
“In contrast, our operating margin forecasts for the reinsurers sit towards the lower end of the historic trends with ongoing investment margin pressure more than offsetting modest anticipated underwriting margin expansion,” says Deutsche Bank.
After consecutive loss years and a very challenging time for reinsurers, rates gained some positive momentum at the start of the year and are expected to improve through the 2020 renewals seasons. However, Deutsche Bank warns that as a result of the continued abundant supply of capital in the P&C sector, price increases are lower than that what they might have been historically, which implies longer payback periods.
With interest rates not expected to move anytime soon it’s likely that both insurers and reinsurers will have to endure lower investment returns going forward, and, continue to look for ways to mitigate the impacts and ultimately improve underwriting margins in what remains a very competitive and challenging landscape.
