DAILY NEWS Jan 24, 2013 11:13 AM - 0 comments

Low interest rates put upward pressure on p&c insurance premiums: S&P

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Low interest rates have increased the risk for insurance companies worldwide but have produced some benefits for property and casualty firms, according to a recent report from ratings agency Standard & Poor’s Financial Services LLC. 

"For P/C insurers, although investment returns are depleted, low interest rates have had some benefits because of the resulting focus on making an underwriting profit," S&P noted in a report titled Global Insurance Key Risks and Credit Trends Dominated by Low Interest Rates and Regulation Issues and released Monday. "The sector can no longer rely on investment income to meaningfully support overall returns and we observe a positive trajectory in premium rates around the world, which we believe to be related."

On the other hand, S&P says life insurance firms, whose policyholders want guaranteed investment returns, are taking on greater credit and equity risk.

New York-based S&P also reported that regulatory risk "continues to emerge" in the insurance sector, though it suggests Canada's regulations are more sophisticated than others.

"Canada, Australia and Switzerland already have sophisticated risk-based regimes in place that Standard & Poor's views favourably," S&P stated in an analysis of Solvency II. "These are less likely to require major overhauls in the near future, although Australia is introducing enhanced prudential capital standards in 2013 that introduce a capital standard broadly in line with Solvency II."

Solvency II is a set of proposed capital requirements and risk management standards for European insurers. A plenary vote on the Omnibus II directive is scheduled in European Parliament next June. 

The Canadian government's Office of the Superintendent of Financial Institutions (OSFI) said two years ago it would wait before deciding which elements, if any, of Solvency II will apply in Canada. In addition to regulating banks and trust firms, federally-regulated pension plans, fraternal benefit societies, P&C and life insurance companies, OSFI’s mandates include evaluating system-wide risks.

In December, OSFI announced a proposed guideline for Own Risk and Solvency Assessments (ORSA) for federally-regulated P&C and life insurance firms. Comments are due April 12.

 "The current solvency regime in Europe is not fit for purpose and dates back to the 1970s," according to the S&P report, which did not comment specifically on OSFI’s proposed ORSA guidelines. S&P did predict in the report that Solvency II is unlikely to be implemented before 2016.

"Despite the anticipated further delays and compromises, we continue to view Solvency II as critical to address the deficiencies of Solvency I."

S&P also suggests economic indicators for the developed markets are getting worse, with Europe entering a recession and U.S. GDP growth predicted at 1.8% for 2013.

"For P/C insurers, lower economic activity has somewhat reduced claims recently,” according to the report. “However, this may be offset in the medium term through the greater propensity of policyholders to claim during economic downturns (including fraudulent claims) and ultimately through claims' inflation.”

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