Chief financial officers with leading North American property/casualty insurers rank interest rates as their top concern, above catastrophes and pricing.

Eighty-one percent list interest rates as their biggest economic and market environment concern, with natural catastrophes (44 percent) and inadequate rate levels (34 percent) next, according to the latest North American Property & Casualty CFO survey by Towers Watson.

Almost half (46 percent) indicate they are responding to today’s economic and market environment challenges by realigning their investment portfolio, while 37 percent said they are expanding into new products or markets.

Most participants (93 percent) said investment returns are the leading external challenge to achieving growth, profit and risk objectives, with economic growth (51 percent) and competitive environment (49 percent) following. Forty-five percent indicate they are not well prepared to respond to these challenges.

CFOs named human capital (36 percent), data availability (31 percent), regulatory restrictions (25 percent) and technology limitations (25 percent) as the leading internal challenges they’re facing.

Technology was identified as the greatest expense and cost management challenge (54 percent), followed by regulatory compliance (33 percent), operations (31 percent) and overhead (28 percent).

“The turn of the cycle frees up insurers. They should use the opportunity to focus on issues, such as developing cost-efficient technology solutions, that can make them more competitive in the long run and offer them some cushion when the cycle starts to soften again,” said Bruce Fell, a managing director in Towers Watson’s Risk Consulting and Software business.

Hard Market

The CFOs believe both property and casualty insurance markets are in the midst of hardening and that these markets will remain that way for the next one to two years. According to Towers Watson, three-quarters (75 percent) of CFOs characterize the property market as hardening, hard or at the top of the cycle, a nearly 30-percentage-point increase compared to results from this survey two years ago.

Almost two-thirds (65 percent) indicate they see the casualty market as hardening, hard or at the top of the cycle, a 52-percentage-point increase compared to the previous survey. Only 15 percent said the property market is softening, while 10 percent said the casualty market is softening.

A narrow majority of CFOs who consider both the property and casualty markets to be hardening also believe these markets will remain that way for the next one to two years (51 percent for property, 52 percent for casualty). Those who see hardening in the casualty market think it will last longer than in the property market.

“Insurers’ perceptions of the market have changed considerably, from a glimmer of hope for a turn in the insurance cycle, to the solidifying of firmer rates we’re experiencing today,” said Bruce Fell, a managing director in Towers Watson’s Risk Consulting and Software business.

“The impact of the softer market the past several years, combined with low interest rates, has hurt insurers’ profitability,” said Fell. “The state of today’s market should give insurers some breathing room and an opportunity to increase their bottom line.”

Almost all CFOs surveyed (98 percent) believe reserve redundancies still exist, and 81 percent said they expect these redundancies to continue for at least a year. Less than half (42 percent) think those redundancies will last one to two years, and one-quarter (25 percent) indicated they expect them to last two to three years.

“We believe the current hard market is very different from the hard markets of the past. Rather than being a reaction to poor pricing and severely deficient reserves — which cut deep into the industry’s financials and take years to reverse — the current market is characterized by pricing reflective of low investment yields and a tendency towards rational use of capital, and exists in spite of the reserve redundancies suggested by the results of our survey,” said Fell.

“Better investment yields coupled with the perception of relatively healthy financials may eventually lead to eroding pricing discipline. Further, the recent influx of alternative capital into the catastrophe reinsurance market could place downward pressure on reinsurance rates.”

CFOs’ views on key triggers shaping today’s market vary, though many consider financial performance essential. CFOs who see a hardening property market cite pricing, profitability and rate levels as principal drivers; those who see a soft property market list capital-related drivers, such as current capital base, and capital entering and exiting the industry. CFOs with both softening and hardening casualty perspectives cite financial performance and rate levels as the main triggers.

Twenty-three CFOs from P/C insurance companies participated in Towers Watson’s fifth CFO survey. The participants represent a variety of business types, distribution models, sizes and ownership structures, and local and regional carriers, along with national carriers and multinationals, according to Towers Watson.