Economic uncertainty and disasters in non-peak zones among top risks for reinsurers: Guy Carpenter

The debt crisis in Europe, interest rate sensitivity and the shifting nature of catastrophe losses are among the top risks to the reinsurance industry’s profitability, according to risk and reinsurance specialist Guy Carpenter and Company LLC.

In its mid-year market report, Overcoming Key Risks on the Road to Profitable Growth, released during the reinsurance industry’s 2012 Rendez-vous conference in Monte Carlo, the company also cites reserving risk as the top risks for the industry.

“With the sector exposed to a debt crisis, emerging catastrophe risks and a deteriorating reserving cycle, it should come as no surprise that valuations for property and casualty reinsurers stand at or near 20-year lows,” David Flandro, global head of business intelligence at Guy Carpenter said in a statement.

The debt crisis in Europe has led reinsurers to seek higher-grade investments, which reduces credit risks but also creates more sensitivity to interest rate movements, according to the company. Lower-yielding securities have also reduced investment returns, placing additional pressure on underwriting results.

Losses in non-peak zones, or “cold spots,” will have a major impact on property catastrophe lines, Guy Carpenter argues, especially as reinsurers move into developing markets with inadequately modeled or unmodeled territory.

Between 2009 and 2011, 35% of insured natural catastrophe losses were in Asia, while 33% were in the United States. Australia and New Zealand saw an increase in insured losses during that time period, accounting for 19% of the total. Understanding the risks in previously non-peak areas is critical for reinsurers’ success, the company notes.

Guy Carpenter’s analysis also suggests that reinsurers won’t be able to rely on reserve releases to mitigate losses for much longer, as the sector could begin to see deteriorating reserves as early as 2014 financials.

The company’s full mid-year market report can be found on its website.