Better business models required for a positive 2006 (December 15, 2005)

The primary non-life sector is expected to attain positive results in 2006 with primary premiums growing above inflation and specifically, significant increases arising in classes impacted by 2005’s hurricane season, Swiss Re reported at its recent annual review and outlook for the insurance industry.
In order to maintain positive results in light of strong competitive pressure and increasing regulation, Swiss Re suggests that the primary insurance industry will need to improve its business model to meet the upcoming challenges.
Executive board member and head of client markets Michel M. Lis noted that the considerable and growing demand for catastrophic cover will continue to be met as long as the insurance industry observes the valuable lessons resulting from these disastrous hurricanes.
“The data clearly shows that we are in a period of heightened hurricane activity, in terms of both frequency and severity of events,” Lis said. “Insurers and modelers must now learn the lessons of 2005 and produce new models for risk pricing and assessing capital requirements, which more accurately reflect the true magnitude of risk being underwritten.”
In his review of 2005, Swiss Re’s chief economist Thomas Hess outlined that the industry had delivered satisfactory results with non-life combined ratios below 100% outside the US, which has been hit by the very expensive hurricanes.
According to Swiss Re the need for reserve strengthening has significantly reduced which means that the results seen in 2005 will likely continue in 2006/2007. Hess however cautioned that results must remain rooted in underwriting profitability, as investment returns will remain low.
With short-term profitability likely, mainly because the cycle will be prolonged due to Katrina’s impact, the primary industry faces the dual challenge of shareholders and regulators demanding transparent profitable results, while competition and claims costs are rising.
“To succeed insurers need to improve efficiency and underwriting quality and make better use of reinsurance, risk securitisation and hybrid capital,” Hess said. “There is a strong demand for new products responding to social trends and the needs of insurers to achieve an acceptable return for the risks assumed.”
Fittest insurers will succeed as competitive challenges emerge according to Stephan L. Christiansen, director of research, Conning Research and Consulting.
“Most companies are able to achieve decent profits in current market conditions, however, some are pulling away from the pack and are better placed to deal with increasing competition,” Christiansen said. “Being identified as one of them should be the task of the smart insurance executive.”