Low interest rates create pressure for increase in premium

Historically low interest rates at global central banks over the past six months are exerting downward pressure on the non-life insurance sector’s investment returns and driving the need to increase technical premiums, BestWire reported.
“Twelve months ago, balance sheets were strong, investment returns stable and economic growth robust,” Jiten Voralia, vice president of products at Swiss Re told BestWire.
“Now amidst an unravelling global financial crisis, many economists suggest that things are likely to get worse before they get better.”
Non-life insurers tend to invest more than 70% of assets on government and corporate bonds and less than 20% on equities, Voralia told BestWire.
“The impact of interest rate fluctuations on technical premiums is greater for insurance classes with longer intervals between the receipt of premium and payment of claim,” BestWire said. “Therefore, Voralia said long-tail casualty classes are affected to a greater extent than short-tail property classes.”
In the short term, technical premiums are expected to increase, BestWire reported. “Otherwise insurers’ profit margin will be hit by lower investment returns, severe catastrophe costs and eroding reserves.”