Swiss Re economists envision hardening P&C market in 2012

Swiss Re sees continued global economic expansion in 2011, but warns a risk remains a global economic recovery will be derailed by renewed financial market turmoil.
This could potentially result in a hardening property and casualty insurance market in 2012, Swiss Re economists predict.
The analysis by Swiss Re economists is posted online and was made in connection with the Swiss Re Economic Forum 2010.
“The outlook for emerging market economic growth remains favourable in 2011, with rising consumer sentiment, supportive government policies and improving labour market conditions all set to boost domestic demand in the near team,” Swiss Re observes. “Over the next decade, the global economy is expected to expand on average by 3.8% annually.”
But several factors instrumental to the economic recovery – including low interest rates and regulatory activity that is causing insurers to focus on bolstering their capital positions  – may in fact create conditions leading up to a hardened market in 2012, Swiss Re economists warn.
“A confluence of forces – mark-to-market accounting, risk-free discounting, and heightened capital, regulatory and ratings standards – is pressuring investors to allocate more to lower-risk, lower-return assets,” Swiss Re says in an online posting. “Focus on disciplined underwriting has not been fully able to compensate the decline in investment income that results from lower interest rates.
“Regulatory standards that require insurers to invest more in such assets could ultimately lead to higher premiums for policyholders.”
“Current rates are not sustainable even when interest rates start to correct,” says Thomas Hess, Swiss Re’s chief economist. “A correction in premium rates is overdue but we may have to wait until 2012 for that to materialize.”