The ongoing low interest rate environment in investment markets is expected to heap additional pressure on the insurance and reinsurance industry in years to come, according to Munich Re’s CEO.
Interest rates have been considered depressed for a number of years now and it seems this may be better considered a new normal, as there is worse still to come according to Joachim Wenning.
Speaking to German newspaper Welt this weekend, the Munich Re chief explained that the low interest rate environment is set to continue and this has significant ramifications for the insurance and reinsurance business model.
As re/insurers collect premiums from the risk business they underwrite, these accumulate and can be put to work in the investment markets, providing an additional profit lever.
But Wenning warns that this lever may not be as effective in years to come, as he says the persistence of low interest rates is becoming an increasing burden.
Wenning said that earnings per unit of premium underwritten are falling as a result, a trend that he says will worsen over the coming years.
In particular Wenning highlights the fact that when older, higher yielding assets have matured they are not being replaced, meaning that as low interest rates persist the negative effect on Munich Re and others in re/insurance is likely to intensify.
Wenning suggested that the cost of re/insurance may have to rise to offset the declining revenue coming from the investment side of the business.
“From a technical point of view, contributions should rise to offset this effect,” Wenning explained to Welt in his interview. “How the market will reacts is not yet clear.”
He also noted that because re/insurers tend to have strict investment rules, regarding the levels of risk they can take on in their investment portfolios, it has harder to steer their strategy to avoid the lower yielding assets.
Investments are a key part of the strategy for major insurance and reinsurance firms and given the low interest rate environment is expected to persist and as a result higher yielding assets roll out of the market, we can expect to see an increasing focus on creating new assets to invest in.
Life and longevity focused insurers, with their long-dated books of liabilities, have already become expert at this, investing in development projects which can produce longer-term, higher yielding assets for their investment portfolios.
That’s harder for companies which also have shorter-tailed books of underwriting as well, given they need a mix of assets, in terms of maturities and liquidity.
But the warning from Munich Re’s CEO suggests we will see a continued evolution of the investment strategy for major re/insurers over the coming years, as they continue to adapt to the new normal of lower interest rates.
