This reinsurer says rates need to go up

Underwriting margins will need to improve by at least six to nine points in major western markets to deliver sustainable returns, according to the latest sigma report from global reinsurer Swiss Re.

The report Profitability in non-life insurance: mind the gap, released Sept. 8, assessed the existing earnings gap in the non-life insurance (P&C) sector. It found most major non-life markets worldwide are in a phase of below-average profitability. Insurers in major western markets need to improve underwriting profit as a percentage of premiums by six to nine percentage points to deliver a desired return on equity (ROE) of 10% in the future, Swiss Re said.

How does Canada compare to other global markets? According to the report, between 2008 and 2017, Canada’s 10-year average (in percentage of net premiums) was:

• 67% – loss ratio
• 3% – underwriting result
• 1% – profit margin (pre-tax)
• 5% – ROE (investment yield: in percentage of average invested assets at market values; ROE in percentage of average capital funds).

Canada was on the high end of ROE between 2008 and 2017; the average ROE of markets analyzed was between 2.6-13.2%. Japan was at the bottom (2.6%), with Australia at the top with 13.2% ROE. Other markets included the United States, United Kingdom, Germany, France, Italy and China.

In Canada, Australia, Japan and the U.S., prices in personal lines have “hardened moderately” for a few years, but are still trending down in other markets. “It remains to be seen how strong and sustainable the firming market is,” Swiss Re said. “Insurers need to improve their underwriting performance more if current ROE shortfalls are to be redressed.”

The reinsurer said while current economic momentum will benefit future profitability through higher interest rates and investment returns, it won’t be enough to close the gaps. “At the same time, tighter labour markets are expected to push up wage and claims inflation. Thus, premium rates need to increase more than claims trends to achieve sustainable improvement in profitability.”

Swiss Re attributes the decline in profitability of recent years to the soft underwriting cycle, weak investment performance and the high level of capital funds. The global non-life insurance sector is currently at a weak phase of its profitability cycle, declining to 6% last year from 7% in 2016, “well below the roughly 9& achieved annually between 2013 and 2015,” the reinsurer said. Last year’s result was driven by three main factors:

• Soft underwriting conditions – following a modest improvement in commercial insurance prices in 2012, rates fell for 18 consecutive quarters, with the global market index in 2017 at just 89% of its 2012 value
• Low investment yields – Investment returns for non-life insurers remain under pressure. Average yields have stalled due to the ongoing low interest rate environment. The contribution of investment returns to profitability last year remain at the post-crisis low level of 9-10% of net premiums earned
• Large natural catastrophe losses in the United States.