Insurers Are in a Squeeze as Shaky Investment Options Pressure Underwriting and Pricing Decisions

Even as Europe’s top insurance trade group issued a report showing strong market recovery in 2009, the world’s biggest reinsurer warned that insurers worldwide are exposed to dangerous conditions on the investment front.

In its annual report on Europe’s insurance market, the CEA said total gross premiums in Europe rose 2.9% to 1.06 trillion euros [at constant exchange rates] in 2009. Life insurance premiums, which account for 61% of all premiums in Europe, totaled 647 billion euros last year, up 4.7% from 2008 at constant exchange rates. In the nonlife market, premiums fell 1.9% to 409 billion euros, the first time in a decade that growth was negative, according to the CEA.

According to the CEA, European insurers’ total investment in the global economy rose more than 8% to 6.8 trillion euros in 2009, following a rebound in capital markets that began in March 2009. Such investments fell 7.5% in 2008, at constant exchange rates.

But the good news on the investment front isn’t assured.

Swiss Re, in its latest sigma study, cautioned that “a low yield environment coupled with tighter regulatory standards” can stress insurers’ investment returns, leading to lower profits and higher prices for buyers.

“The financial crisis has created a new, challenging environment for insurance investment managers,” said Swiss Re. “In its aftermath, government bond yields have reached historically low levels that may persist until the global economy truly recovers.”

Add to this changes in regulatory standards such as mark-to-market accounting and higher risk charges on some asset classes, and insurers could be forced to invest more in low-risk, low-return assets, said Swiss Re.

According to Swiss Re, insurers worldwide held nearly $23 trillion (17 trillion euros) of assets. Together with mutual funds and pension funds, insurers are “by far” the world’s biggest investors, the reinsurer said.

Life insurers alone held $19 trillion in assets, and the four largest insurance markets — the United States, Japan, the United Kingdom and France — held more than $14 trillion, or 60% of the world’s insurance assets.

David Laster, a co-author of the sigma study, said insurers tend to invest conservatively. “Both life and nonlife insurers hold most of their assets in government and highly rated corporate bonds,” he said in a statement. Nonlife insurers tend to hold more cash and equities, while life insurers hold more loans and fixed-income instruments.

Swiss Re warned that stricter accounting and regulatory standards may prevent insurers from diversifying their portfolios, leading them to invest more of their assets in government securities, even though these assets are producing “extremely low” yields and “sovereign bonds are no longer fail-safe investments,” according to the study.

The financial crisis has changed the strategies of insurers on investments. Swiss Re said insurers tend to assume now that crises will occur on a regular basis. Some insurers with low equity allocations are raising their risk profiles by investing more in equities.

Emerging markets are increasingly becoming a destination for investment funds, because they promise more robust growth. Also, inflation risk is pushing insurers to invest in commodities, real estate and inflation-indexed bonds.

Insurers are also turning to third-party asset managers for help in managing their asset portfolios.

Overall, it appears the investment front will continue to pressure insurers in terms of underwriting risk decisions and pricing, leading to a further squeeze on sales as buyers also pull back their spending.

(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)