0 1 2 3 4
YEARLY
0 1 2 3 4 5
2006 2007 2008 2009 2010
0 1 2 3 4 5
2006 2007 2008 2009 2010 2006 2007 2008 2009
US INTEREST RATES, GOVERNMENT SECURITIES, TREASURY BILLS US INTEREST RATES, GOVERNMENT SECURITIES, GOVERNMENT BONDS
2010
To give an idea of just how serious the situation is, some of the world’s
biggest reinsurers say that the effect on them has been more serious than the devastating catastrophes in the first quarter of the year.
“Record low interest rates, not earthquakes or other natural catastrophes,
have been the most significant structural shock to the industry in recent years,” said Brian Gray, chief underwriting officer at Swiss Re, during the company’s press conference at the Monte Carlo Rendez-Vous. “If not compensated by significantly lower combined ratios, earnings capacity of the industry will erode over time.”
For many years, insurers and reinsurers have been able to make a healthy
return on their investments. This allowed them to offer more competitive pricing to their clients. This must now end, argues Kevin Kelley, chief executive officer of insurer Ironshore.
0 1 2 3 4 5
“This is going to impact on our long-tail liability business the most,” 2006 2007 2008 2009 2010
Kelley says. “Historically, most insurance companies were able to get eight to 10 points of return or more on equity off invested assets, depending upon the interest rate environment. This new environment, where the 10-year US bond is below two, has impacted on the potential returns for liability business.”
There is a feeling within the industry that a solution must be found
to replace those returns if companies are to remain profitable. The industry must return its focus to increased profits from its underwriting activities, argues William Berkley, chief executive and chairman of WR Berkley.
“People are talking about the inevitability of investment income going down and therefore just how essential underwriting profits are going to
32 | INTELLIGENT INSURER | November 2011
be,” he says. “The riskiness of doing business now requires better returns, and even adequate returns are harder to come by with investment returns on high-quality securities down so low.”
Berkley believes that since interest rates are unlikely to increase in
the immediate future, companies will have to adjust their underwriting behaviour. He warns that the future will not be bright for those who cut their prices carelessly.
“We live in an ever riskier world and this will make it harder and
harder for us to make profits, with declining investment yields making underwriting profits more essential,” he says. “Therefore, disciplined underwriting and the capacity to increase prices to allow margins have become even more essential than they were just a few years ago.
“This means that the ability realistically to appreciate the way the
world is has become more and more critical, because the foundation for operating an insurance company has always been investment income and that foundation is certainly under lots of pressure with declining yields and higher risk. Underwriting profits, which have always been a very important thing for a quality insurance company, are becoming even more important.
“I think the winning companies understand that and are facing up to it.
But there are some companies which are desperate and those are the ones which are aggressively cutting prices.
“The fact is that the companies which have disciplined underwriting are
the high-quality companies and they will survive. The companies that are aggressively cutting prices are the ones that won’t survive,” says Berkley.
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