The European Union insurance watchdog has sounded the alarm of increasing risks – but do those same warnings apply to insurers and reinsurers here?
“Rate in North America, because of the focus on underwriting discipline, has been positive in the last few years,” said Jason Porter, a credit analyst with Standard and Poors Insurance Ratings. “There is a little bit of a mixed story this year on property lines we’re seeing: particularly those that are catastrophe-exposed, we’re seeing rate decreases. Some of the longer-tail casualty lines are still seeing rate increases; so it is a mixed bag, generally between negative five and positive five per cent, depending on which line of business you’re looking at on the commercial side.”
For North American commercial lines insurers, no alarm bells are being sounded insofar as increased risk, said Porter.
“The insurance companies here are generally very well capitalized, with a lot of capital to deploy, but not a large amount of economic growth to deploy into, so they’ve been repurchasing a lot of shares, and focusing on underwriting discipline,” he said. “The investment yields are low, so there is a limited ability to rely on investment income for earnings.”
The two levers affecting risk are capital management and the tightening of underwriting practices to produce better underwriting profits, Porter told Insurance Business.
“That’s been a big part of the story. The other part of that is there is an expectancy within the industry that reserve releases will slow down,” said Porter. “We – among others – have been predicting a very sharp slowdown in reserve releases, and we continue to be surprised that they do keep coming, and part of the reason is some of the lower inflation and loss cost trends have helped keep reserve releases coming – but in general, there is a building pressure that many of the good casualty years from early last decade, the redundancy embedded potentially in those reserves – and even in some more recent reserves – is dwindling, and reserve releases will actually slow down.”
European insurance and reinsurance companies are facing increasing risks from a long period of low interest rates, a weak economic outlook and a deterioration in sovereign credit quality are creating a climate of increased risks for Europe’s insurance and reinsurance companies, the EU's industry watchdog has said.
At the same time, premiums are only likely to rise next year in the non-life sector, the European Insurance and Occupational Pensions Authority (EIOPA) said in its twice-yearly financial stability report.
“The overall profitability of insurance companies is still relatively favorable, but results remain pressurized,” states the EIOPA. “Overall, downside risks have increased.” (continued.)
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Insurers and reinsurers have been under pressure to keep premium rates low in the face of rising competition in their respective markets. However, low interest rates have restricted their ability to boost returns through investing those premiums.
Stress tests unveiled by EIOPA earlier this month showed 14 percent of Europe's 5,000 insurance companies would fall short of a key threshold if the EU's Solvency II rules, due to take effect in January 2016, had already been in force, according to Reuters.
The rules are aimed at improving the safety of products for consumers, and will require a complete overhaul of insurers' risk-management systems.
