P&C profitability bolstered by underwriting discipline

A modest rise in inflation and firm economic growth will bolster the Federal Reserves interest rates resulting in a rise in federal funds, according to information from Swiss Reinsurance economists. Specifically, if the economy does remain strong and inflation continues on its rise, the yield on the 10-year Treasury note is projected to rise to 4.6% – 5.1% by the end of 2005 and almost 5.5% by the end of 2006.

Rising interest rates are further expected to reduce investment returns, and therefore, in order to remain profitable, insurers must maintain a strong underwriting discipline. “The Fed is moving at a measured pace,” Kurt Karl, Swiss Re’s chief economist in North American, says, “we expect a 25 basis point hike after six of the next eight Federal Open Market Committee meetings.”

In addition, Swiss Re economists predict that industry growth will continue to be spurred by consumption and business investment. However, rising interest rates and higher oil prices are further anticipated to constrain potential for profit. Kurt adds that high oil prices maintain the greatest risk to industry profit outlook, as the chance of a mild recession will be looming if prices reach $80 per barrel.

The property and casualty market will experience a substantial improvement in underwriting and this will fuel further earnings growth in 2005, according to Swiss Re’s senior economist for the property and casualty sector Thomas Holzheu.

The insurance industry’s current favorable position is a direct result of its expansion, to 2.3%, and growing financial strength experienced during 2004, according to Swiss Re’s latest sigma study – “World insurance in 2004” growing premiums and stronger balance sheets. Tight terms and conditions and disciplined underwriting – sustained since 2002 – allowed non-life insurers to post positive underwriting results, despite the record high catastrophe losses in 2004, according to data collected by Swiss Re. While 2004’s conservative investment strategy and modest financial market performance saw only average investment outcome, combined technical and financial profits pushed the operating return on sales to double-digit levels.

Data indicated that “non-life insurers reaped the benefits of focusing on underwriting discipline,” which Thomas Hess, head of economic research and consulting for Swiss Re says will put the industry in good shape to leverage growth opportunities in 2005. Although premiums in non-life insurance did decelerate after two years of strong growth, they did not stop short but rather continued to grow at a slower pace increasing to approximately US $1.4 billion. Pricing developments are responsible for deterring premium growth.