September 15, 2009 by Canadian Underwriter
Internal research by PartnerRe suggests a reinsurer would have to increase its rates by 4.3% (for short-term, property, non-proportional business) and 8.9% (for long-tail, motor, non-proportional business) just to account for lower interest rates and no other factors.
PartnerRe presented its findings at its ‘2009 Technical Seminar: Auto Casualty,’ held on Sept. 14 at the National Club in Toronto.
Grace Lin, PartnerRe’s chief pricing actuary in Canada, presented a report of her findings, which took into account a number of operating assumptions based on the company’s data.
In a slide presented to the seminar, Lin presented her assumptions based on two long-tail and two short-term classes of business.
In one example of short-term business — a reinsurer’s property, non-proportional class of business — the PartnerRe study assumes a claim duration of 1.47 years from the time a claim is first opened to the time the finally is ultimately closed.
For this class of business, the study presumes a 4.16% interest rate at the time of 2008 renewals, dipping down to 1.26% at the time of July 2009 renewals. The chart shows a bar graph with a risk free rate sliding from 4.5% to 1.5%.
Based on such a drop in the interest rate, a reinsurer would have to increase its rate by 4.3% just to maintain its current return on equity (ROE), Lin said.
In a second example, this time a long-tail, motor, non-proportional business, the information displayed assumed a claims duration of 8.65 years from the time the claim was opened to the time the file was closed.
For this class of business, the interest rate was assumed to be 4.09% at the time of 2008 renewal season, dropping down to 3.2% by the time of July 2009 renewal season. The bar graph shows a decline in the risk free rate from 4.5% to 3.5%.
Based on this kind of dip in the interest rate, a reinsurer would have to increase its rate in the long-tail, motor, non-proportional business by 8.7% just to maintain its current return on equity (ROE), Lin said.