A recent report by JP Morgan suggests (re)insurers increased investment returns will not slow down the raising prices.
Non-life insurance companies with short-duration portfolios could see material increases to return on equity (ROEs) assuming that underwriting margins hold at current levels.
In the late 1990s and early 2000s, insurers sustained underwriting losses, but these were more than offset by investment returns. This form of underwriting was typically in predictable lines of business such as auto insurance but was also seen in lines with a longer tail.
However, the report states that this theory no longer holds, and expects the pricing increase to continue for the foreseeable future.
Whilst ROEs should materially improve with higher yields, the report does not think this will influence a positive pricing story in commercial lines or reinsurance.
Pricing tends to react to loss trends rather than yields, and many companies have floating ROE targets that, in theory, adjust for the material increase in the risk-free rate.
Additionally, prices did not increase when interest rates began to decline following the Great Financial Crisis.
The report names its most preferred institutions to play positive pricing momentum as Munich Re, Zurich, Beazley, Lancashire, and Hannover Re.
“Now is the time to seize opportunities in markets that are continuing to harden,” said Munich Re CEO, Joachim Wenning, when talking about the reinsurance pricing opportunity that lies ahead.
