Low Interest Rates

While a concentration of assets in short-duration, high quality bonds has protected many (re)insurers from volatile asset markets, it has also lowered yields on investment portfolios. Due to concerns around slow growth and a double-dip recession, interest rates remain low. Indeed, interest rates in the United States, United Kingdom and the Eurozone are at or near post-war lows (see Figure 1). US policymakers announced in August that they will hold interest rates near zero through at least mid-2013 as long as the unemployment rate stays high and the outlook for inflation is “subdued.” With declining returns on fixed income portfolios, the (re)insurance industry can no longer rely on investment income to offset underwriting losses.

Continue reading…

Standard & Poor’s has downgraded the U.S. sovereign debt rating to AA+ from AAA. Implications for (re)insurers worldwide are mixed. Although there are broad economic implications, markets appear to have anticipated at least some of these, which could forestall rash or catastrophic outcomes. The long-term effects, however, could be profound.

Continue reading…

Mark Shumway, Vice President
Contact

A sagging economy has pushed non-life insurer earnings lower in Japan. After-tax net income for the seven largest companies dropped 67.1 percent for the first half of fiscal year 2008 (April 1, 2008 to September 30, 2008) relative to the same period in 2007-after adjustments for contingency reserve movements.

Continue reading…

Despite these major changes in financial markets, asset allocation did not change substantially in the aggregate. Declines in nearly every other asset category offset partially the JPY1.3 trillion (USD13.5 billion) decline in the carrying value of domestic shares, which dropped 3 percent to 24 percent of cash and invested assets. Fixed income investments increased from 34 percent to 39 percent.

To download this chart, right-click on the image, and select “Save Picture As”. If you have any trouble, please e-mail us.

Subscribe to GC Capital Ideas e-mail alerts >>

Sean Mooney, Chief Economist
Contact

Despite the ambiguity pervading financial and reinsurance markets, it is clear that systemic risk has increased. Unprecedented chaos in financial markets left investors more risk-averse than they were at the end of the summer. They are demanding greater returns on the capital they put at risk. A closer look at the economic conditions underlying the marketplace, however, suggests that an increase of 1 percent to 3 percent is warranted for catastrophe covers, which should result in a minor impact at the January 1, 2009 renewal. Other factors, including the impact of the global recession on premiums and claims, the collapse in equity values, a rising distrust of modeled results arising out of Hurricane Ike, increased demand by cedents seeking to preserve their diminished capital, and diminished supply of reinsurance capacity, are likely to have a much greater impact on rates.

Continue reading…

John Major, Senior Vice President, Instrat
Contact

How do you put a price on risk management? In the early days of finance theory (1950’s), the value of risk management was questioned—unless, of course, it was costless. The nuances of a more complex business environment have rendered this position untenable, but we still struggle to quantify the benefits of risk management, especially in the (re)insurance industry. Thus, the fundamental activity of risk-bearers has not been measurable, leaving a cloud of ambiguity in the middle of every carrier’s operation.

This changes now.

Continue reading…

David Piebe, Chairman of Global Client Development
Contact

(Re)insurers have come to expect that alternative sources of capital will always be available. Private equity funds, hedge funds, and other alternative investment vehicles have contributed copious capacity to risk-bearers since the turn of the millennium, and especially following the 2005 storm season. The well, however, may be at risk of running dry.

Continue reading…

David Priebe, Chairman of Global Client Development
Contact

Earlier this year, the (re)insurance industry celebrated an abundance of capital. Buybacks and dividends were common, as carriers struggled to find productive uses for their extra cash. Only a few months later, we are in the midst of a financial catastrophe that is wreaking havoc on balance sheets and constraining carrier access to capital. And, the situation could worsen. A major catastrophe event could place substantial demands on (re)insurer capital in a climate where replenishment would be both time-consuming and costly.

Continue reading…

Peter Zaffino, President & CEO
Contact

While hurricanes spun through the Gulf of Mexico last month, a larger catastrophe ripped through New York, London, Shanghai, and every other major financial center in the world. Tropical Storm Credit Crisis (which started as Tropical Depression Subprime) intensified quickly and became a Financial Catastrophe that destroyed vast amounts of shareholder wealth.

Continue reading…

Nick Frankland, CEO of European Operations
Contact

The (re)insurance market is fraught with uncertainty. As the next renewal looms large, buyers and sellers are attempting to find common ground for risk-transfer pricing, particularly in the wake of a high-frequency hurricane season and a severe financial catastrophe with implications for both sides of carrier balance sheets. While it is too early to tell if reinsurance rates are turning, it is clear that continued substantial declines are unlikely.

Continue reading…