Canadian Underwriter

Why Swiss Re says insurance profitability will remain ‘under pressure’

July 5, 2019   by Greg Meckbach

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Expect the low-interest-rate environment to continue for at least two more years, Swiss Re warned Thursday.

“Insurers will continue to operate in a low-interest-rate environment for the next two years at least, meaning that industry profitability will remain under pressure,” Swiss Re predicted in World Insurance: The Great Pivot East Continues, a sigma report released July 4.

Swiss Re said it expects the United States Federal Reserve to make a “precautionary cut” in interest rates. The Bank of Canada is scheduled to make its next interest rate announcement July 10.

Low interest rates are “not helping” the property and casualty insurance industry in Canada, Insurance Bureau of Canada CEO Don Forgeron said Apr. 2 during a media scrum following Swiss Re’s Canadian Annual Outlook Breakfast. This is because insurance companies cannot offset underwriting losses with earnings from interest-bearing investments to the same extent that they could 20 to 30 years ago.

The Bank of Canada announced in late May that it will maintain its target overnight rate at 1.75%. This is less than half the 2007 rate of 4%. Overnight rates were 13% in 1990 and 21% in 1981.

South of the border, many economists believe the Federal Reserve could decide at its next meeting on July 30-31 to cut its key policy rate, something it has not done since 2008, the Associated Press reported last week.

The Bank of England is likely to keep interest rates constant this year and throughout 2020, Swiss Re said in its sigma report. This is due to in part to uncertainty over how the British economy will perform as Britain leaves the European Union.

In that report, Swiss Re also released several key statistics on the insurance industry worldwide.

Non-life premiums were estimated at US$2.373 trillion in 2018, with US$775 billion of that in auto. The total non-life figure included including workers compensation, medical and accident and sickness written by life insurers.

Auto premiums could drop significantly as automation technologies reduce collision rates, Swiss Re suggested.

In Canada, the real premium growth in 2018 adjusted for inflation was 4.3%. It was 2.6% in the United States and 0.5% in Britain.

“We forecast that premiums in advanced markets will grow by around 1.8%, with most regions following their respective long-term trends. Emerging market premiums will grow by around 7%, about the same as in 2018, but below the long-term average of 7.7%,” said Swiss Re.

About US$1.7 trillion was paid out in claims worldwide in non-life lines in 2018, said Swiss Re. About 5% of that, or US$81 billion, was from natural catastrophe claims.

Of the US$2.373 trillion in non-life premiums in 2018, about a third each came from auto and accident and health. Property, marine and liability got 17%, 11% and 8% of premiums respectively. Agriculture, credit and engineering lines got about 1% each, with US$34 billion, US$25 billion and US423 billion respectively.