IAIS warns supervisors to watch insurer reserves

The International Association of Insurance Supervisors (IAIS) has published its latest Global Insurance Market Report. The 2015 edition of the report examines the global (re)insurance sector from a supervisory perspective, focusing on the recent performance of the sector as well as key risks faced by it. The report said that during the current year, the global (re)insurance sector has proven to remain functioning and stable in the midst of an often challenging economic and financial environment. It noted the high capital levels held by (re)insurers, the overall stable profitability shown by the sector and an inflow of additional capital. Insurance premiums charged by non-life insurers and reinsurers in the commercial lines, property and catastrophe markets have come under pressure, partly reflecting increasing competition, said the IAIS, noting that competition is especially strong in the reinsurance market, in part due to an increasing supply of capital from institutional investors, such as pension funds or hedge funds, to support alternative reinsurance capacity.hideThe report highlighted the fact that the insurance industry has experienced a surge of mergers and acquisitions, and said that according to estimates by market participants, more than 10% of the global reinsurance industry is currently involved in major mergers activity. "The global insurance industry is affected by global economic factors such as weak economic growth, low inflation rates, volatile financial markets and near-zero interest rates," said the report. "Against this background, premium growth was robust recently; underwriting profitability in non-life insurance is stable, being supported by benign claims trends that enable insurers to release loss reserves. For life insurers, low premium growth and low interest rates in particular form a challenging business environment. At the same time, the entire insurance sector experienced declining investment yields." Robust premium growth The report pointed out that the insurance industry has grown at a robust pace in 2015, after an impressive recovery in the year before. Premium growth slowed down slightly in 2015, in both the advanced economies and in the emerging markets. It said that non-life insurance premiums were up 2.5% on an inflation-adjusted basis, after a 2.8% increase in 2014, although it explained that non-life insurance premium growth in emerging markets slowed down notably, reflecting weaker economic growth. In 2014, total direct premium growth was higher than GDP for the first time in five years, being driven mainly by health insurance and life insurance. "Insurance premium growth will probably continue to be driven mainly by emerging markets and developing economies," said the IAIS. "Although they are likely to face diminishing growth in the coming years, affecting demand for life and non-life insurance products, overall economic growth is still expected to remain well above growth rates in the advanced economies of the US, Japan or Europe." The report explained that premium rates in US commercial lines declined in 2015, while prices in other markets are also under pressure. In Europe, Asia and Latin America, prices in commercial insurance are softening, driven partly by the currently strong capital position in the non-life (re)insurance industry, which leads both to a decline in reinsurance demand since more risks can be retained and, combined with increased competition, to pressure on primary insurers' profit margins, said the IAIS. Insufficient reserving A related factor has been the benign development of claims on casualty business, resulting in major reserve releases. "Reserve releases have contributed to higher profitability and allowed companies to give in on prices in competitive markets. There is a risk that at some point reserving may prove insufficient. Redundant reserves from the hard-market years are gradually being eroded, while the reserves adequacy of recent 'softer market' years is unclear, given that underwriting is based on lower expected claims," the report said. It went on: "These developments suggest that supervisors should closely monitor the adequacy of non-life insurers' reserving activities. In the past, the two most important factors to cause financial impairments for both life and non-life insurers have been deficient loss provisioning and inadequate pricing. Inadequate prices, either as result of poor actuarial work or in the wake of aggressive pricing in order to compete for market share, materialise often in deficient reserving."

IAIS warns supervisors to watch insurer reserves

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