After years of eroding rates from excess capacities and low major-loss expenditure, Munich Re says low interest rates, exacerbated by the coronavirus pandemic, are impacting the profitability of reinsurers.
As a result, insurance covers are likely to become more expensive, particularly for long-term risks in third-party liability and other lines.
Munich Re notes how the gradual erosion of rates and a softening of terms and conditions have been straining the profitability of reinsurers for years.
Interest rates have dropped to record lows once again in 2020 and, against the backdrop of the coronavirus crisis, it’s increasingly likely this environment will continue to affect low-risk investments for the foreseeable future.
The global reinsurer notes how these circumstances mean that sustained profits, in long-tail business and elsewhere, will only be possible if prices match the assumed risks.
“Interest rates will remain low for quite some time. In turn, income for insurers must come from risk assumption itself, and that includes long-tail business,” Doris Höpke, Member of the Board of Management responsible for Europe and Latin America.
“Relying on interest income, or hoping that statistically likely losses will not occur, is an unsuitable basis for the long-term assumption of major risks.
“We want to support our clients reliably and in the long run with our financial capacity and our knowledge of risks. We devote considerable attention at Munich Re to sound underwriting as well as appropriate prices, terms, and conditions.”
Munich Re adds that the scale of the COVID-19 pandemic serves as a stark reminder to always properly assess and manage low-probability risks that bear tremendous loss potential.
This is especially true of risks that are exposed to an underlying deterioration – as is the case with certain natural disasters made worse by climate change.
Recent experiences following the lockdown of public life and the business world in many countries have been a wake-up call to the potential for systemic risks to result in losses that subsequently trigger many different repercussions.
Yet it is by definition impossible to insure risks that lead to losses everywhere at the same time, thus violating the fundamental criterion of insurability.
