In addition to the record breaking loss activity so far in 2011, the current macroeconomic environment continues to be challenging for the reinsurance industry. Subdued economic growth and low interest rates have seen investment returns remain at low levels through 2011. Coupled with poor underwriting results, the reinsurance sector’s non-technical income could be under pressure for some time to come if the current expansionary monetary polices in the United States and elsewhere remain in place.
In recent years, several reinsurers have offset accident year losses with the release of prior-year reserves on the back of favorable results for accident years 2003-2007. However, following deteriorating accident-year results and rising inflationary trends in subsequent years, many now question their sustainability. Indeed, there have been instances of companies reporting adverse reserve development for recent accident years, raising concerns over reserve adequacy and prompting some reserve additions. We continue to question how much longer reserves can be expected to bolster earnings.
There is also concern over the sovereign debt crisis in Europe. Yields on “safe” government bonds are at or near thirty-year lows, while spreads on peripheral sovereign European securities have reached or approached Euro-era highs. Recent events in the Eurozone have fueled fears over the threat of debt contagion. In an effort to stop the contagion spreading to other European economies, a new bailout plan for Greece was agreed upon in July, with private sector investors asked to accept a 21 percent loss, or ‘haircut,’ on certain Greek debt positions. Such potential impairments to Greek bonds are expected to be manageable for most reinsurers, given their limited exposure. However, should the crisis spread to larger economies, such as those of Spain and Italy, the impact on the industry would take on a new significance.