IAIS report sees well-functioning and stable insurance sector in difficult environment

The insurance sector has remained well-functioning and stable but operates in an increasingly difficult macroeconomic and financial environment, according to a report by the International Association of Insurance Supervisors (IAIS).

In its 2016 Global Insurance Market Report, the IAIS says that during the current year, the (re)insurance sector has remained well-functioning and stable, as evidenced by high capital levels, positive profitability, and a persistent inflow of additional capital.

However, the sector operates in an increasingly difficult macroeconomic and financial environment characterised by weak global demand, low inflation rates, very low interest rates, and bursts of financial market volatility. The report says this environment is challenging long-established business models of various insurance companies, but mainly life insurers.

The IAIS report points out that non-life (re)insurance continues to be subject to soft market conditions, and premiums charged by non-life (re)insurers in the commercial lines, property and catastrophe markets remain under pressure, partly due to increasing competition, which is especially strong in the reinsurance market.

It says that reinsurers are facing competitive pressures and changing demand from cedants while investment yields remain low and the possibilities of reserve releases diminish.

Global non-life premium growth was slower in 2016 than in the year before, with premium growth in advanced economies decelerating to 1.7% from 2.5% due to weaker economic growth and a softer pricing environment in commercial insurance. The report states that in emerging markets, premium growth was 5.3% in 2016, up slightly from 2015, but slower than the 8% annual average growth between 2000 and 2014. Growth in emerging markets is mostly driven by motor insurance, which represents close to 60% of the total non-life market in these markets.

According to the report, the two most important factors to cause financial impairments for both life and non-life insurers have been deficient loss provisioning and inadequate pricing. Between 1969 and 2014, 45% of impairments have been caused by deficient loss reserves whilst rapid growth, which is probably highly correlated with deficient loss reserves, has caused 12% of all impairments.

The current soft market conditions are also partly due to the absence of major natural catastrophe losses. Insured natural catastrophe losses remained below historic average levels between 2013 and 2015.

To safeguard the stability of the financial system and economies in the future, the report concludes that, from a macroprudential supervisory perspective, “it is essential to ensure that insurers are responding adequately to the accumulation of risks and structural changes that are a source of potential vulnerability. Another important challenge is to strengthen the ability of insurers to respond to risks in areas where they are increasing their risk-taking.”

It continues: “Given the importance of large insurance companies to the financial system and the economies in which they operate, it is important they maintain a solid financial base and strengthen business management frameworks to manage the accumulation of risks, as well as being prepared to respond in an orderly manner in times of stress.”