Policyholders and insurers being made to pay for economic crisis experts warn

Speaking to Commercial Risk Europe at the conference Thomas Hess, Chief Economist and Head of Economic Research & Consulting at Swiss Re, warned that the current general economic environment remains ‘very shaky’. This is creating many risks for insurers and has resulted in an extremely challenging investment environment, he said. Interest rates are likely to remain low for the foreseeable future, he continued, as governments try to keep down the costs of the bailouts in Greece and other European countries as well as the high level of debt held by many countries across the world. The low rates mean that insurers and other investors face more meagre returns on their capital.hideAccording to Swiss Re figures, each 1% drop in interest rates costs the insurance industry $220bn per year. “When you think of this low interest rate environment all of the savers behind insurance—policy holders, investors and insurers themselves—are now charged with low interest rates and are basically being made to pay for the mess, which was created through the banking and credit crisis,” said Mr Hess. Speaking at the conference held in Oslo, Norway on Tuesday and Wednesday Jean-Jacques Henchoz, Member of the Group Management Board Division Head Client Markets EMEA at Swiss Re spelled out the problem clearly. “Much of the brunt of the crisis has been borne by insurers and pension funds though a sustained low interest rate environment, which is a great concern to our industry. It has the effect of transferring wealth from savers to borrowers,” he explained. Whilst forced to accept this situation, insurers must not ignore the prevailing winds and must adapt accordingly. In order to combat lower investment returns non-life insurers will have to ensure that they increase the profitable of their core business activity—insurance. This means they will need to decrease their expenses, claims and, of course, raise premiums, experts agreed. “In the end the policy holders pay,” said Mr Hess. “Insurers may pay in-between, but in the end this increases the cost and availability of insurance." In his keynote speech, entitled ‘Challenges for the insurance business model—Potential consequences of the post crisis impacts for the insurance business model’, the economist said he does not expect the low interest environment to ‘kill insurers’. But, it will likely mean they do not have enough flesh on their bones to live comfortably or generate enough profitability to be attractive to their shareholders, he added. Whilst there are serious concerns about the long-term viability of traditional guaranteed life insurance products, the experts and attendees at the conference agreed that non-life insurers have the means to fix the problem with core business performance. Its business model remains valid. But, buyers may be forced to accept increased premiums across the board. Mr Hess believes non-life insurers need to raise premium in a line such as motor by about 3%. General commercial insurance needs to see increases above that, he added. “I think it is necessary for the industry to do this to keep attractive to shareholders. How much each increase should be is very much dependent on the line of business, with less capital intensive lines needing less price increases,” he said.” In particular the long tail business needs to be adjusted quite a bit. For example US liability business is underpriced, much commercial business is underpriced.” But with capitalisation of the market still strong there are still a lot of insurers chasing for business, said Mr Hess. With no immediate pressure for price rises, as yet insurers have not acted as one to raise prices, he noted. But it will be very interesting to see how the reinsurance market reacts to this situation at its annual meeting in Monte Carlo in October, he added. Particularly worrying for non-life insurers is the fact that real interest rates are down as well as nominal interest rates. Real interest rates are the result of the comparison between interest rates and inflation. Whilst there is some relief currently from lower inflation, which keeps claims costs down, this is not enough to compensate the industry and insurers’ profits are under pressure. Insurers should be careful when it comes to the strategic questions of who pays for the financial mess, reiterated Mr Hess, and they must make their case to policyholders as well as politicians. “We need more communication with politicians to make sure they understand our issues. I think we also need more communication with the public and buyers of insurance because, as I said, in the end the policyholder pays.”

Policyholders and insurers being made to pay for economic crisis experts warn

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