Swiss Re predicts fragile recovery for (re)insurers in 2010

Swiss Re economists predict insurance and reinsurance will continue to recover in 2010, based on the assumption of a “U-shaped” recovery.
But the increasingly positive results may be tempered by increasing losses due to natural catastrophes and low asset returns, Swiss Re warned.
“The global economy grew in the second half of 2009, but the recovery is fragile,” said Thomas Hess, Swiss Re’s chief economist.
“The crisis was proof of the resilience of the global insurance industry,” he said. “Insurance and reinsurance functioned routinely throughout the crisis, even at the peak of these extremely severe financial situation.”
Since March 2009, balance sheets of non-life insurers have recovered substantially, Hess said. By November 2009, capital was almost at levels achieved in late 2007.
Worldwide average insured natural catastrophe losses between 1970 and 1989 were US$5.1 billion per annum. These losses went up to US$27.1 billion per year between 1990 and 2009.
While the corporate bond market and equity markets are expected to continue improving in 2010, (re)insurers’ investment income will continue to suffer from the low interest rate environment, forcing them to focus on underwriting profitability, Swiss Re said.
Traditionally (re)insurers invest mostly in high-quality, fixed-income assets and yields — rates on these tend to be very low.
Unlike banks, insurers do not tend towards very high leverage ratios, but even property an casualty insurers have asset leverage and this magnifies the impact of declines in investment yields on return on equity, Swiss Re said.
“For example, property and casualty insurers in the U.S. had asset leverage — assets as a per cent of equity — of 278% in 2008,” a release said.
“To maintain the same ROE after a 1% drop in investment yields requires about a 3% point improvement in the combined ratio.”