Global property/casualty insurance markets are underperforming and have a way to go before producing sustainable returns, Swiss Re said in its latest sigma report.

“Most markets remain in a phase of below-average profitability,” Swiss Re concluded in its report, blaming “the soft underwriting cycle, weak investment performance and the high level of capital funds.”

The reinsurer warns that major western non-life markets must improve underwriting margins by between six and nine percentage points to reach the level of sustainable returns. Japan needs a five-point improvement, and Australia and China need at least a one-point gain to give investors “acceptable returns” that they seek, Swiss Re said.

According to the report, the presumed target for return on equity runs from 10 percent in mature western markets to 15 percent for China. The range reflects variant interest rates and past performance, Swiss Re said.

Overall return on equity for the sector hit 6 percent in 2017, down from 7 percent the previous year and lower than the average 9 percent return the industry hit between 2013 and 2015, Swiss Re said.

Many Things Keep Challenging P/C Profitability

As the Swiss Re report explains, soft underwriting conditions continue to hammer the P/C sector. While rates in commercial insurance pricing improved somewhat in 2016, they proceeded to fall for 18 consecutive quarters. That trend left the market index in 2017 at just 89 percent of its 2012 value, according to the report.

Lower investment yields have also dampened profitability, with average yields stalling because of perpetually low interest rates, Swiss Re said. Investment returns contributed to profitability in 2017 at the level of 9 percent to 10 percent of net premiums earned, a low hit after the financial crisis of a decade ago.

Natural catastrophe losses in the U.S. have also harmed profitability in much of the industry, Swiss Re said.

Even in 2018, Swiss Re explains that underwriting conditions remain soft, particularly on the commercial insurance site. But Swiss Re sees potential for this to change, because 2017’s large hurricane losses “set the stage for a price correction, along with big catastrophe losses stemming from wildfires, thunderstorms and major rain events. As a result, the global market saw $144 million in insured losses from natural catastrophes and large man-made disasters, according to the report.

“The cat losses were severe enough to spark a modest change in market dynamics, but it remains to be seen how strong and sustainable the firming market will be,” Swiss Re said.

The full Swiss Re sigma report is: “Profitability in non-life insurance: mind the gap.”

Source: Swiss Re