Insurer profits, premiums rise alongside costs
Higher interest rates are translating into higher returns on insurer investments, according to the Swiss Re Institute.
In conjunction with higher operating costs and increased claim costs, insurers are seeing some benefits from this tough economic environment, according to the Swiss Re Institute.
Researchers reported recently that higher interest rates are translating into higher returns on insurer investments. What’s more, the uptick in premiums due to higher costs also is translate into increased profitability. “The benefit of higher interest rates on insurers’ investment results far outweighs the associated higher cost of capital,” Swiss Re Institute said in its early September report titled, “Raising the bar: Non-life insurance in a higher-risk, higher-return world.”
Here are some other takeaways from the report:
- 2023 is expected to be a transitional year with higher insurer profits globally.
- Insurers will continue adjusting prices to keep pace with higher costs and increased risk.
- Natural disasters, inflation and higher replacement values have driven up the demand for insurance products in recent years.
- In the U.S., P&C insurance industry capital has grown by 5% annually on average for the past 10 years. During the same time, the natural catastrophe protection need has grown at about 7% per year on average.
- Both primary insurance and reinsurance sectors are contributing to closing the protection gaps.
- Globally, the value of unprotected risk exposure has risen steadily in the past 5 years. Swiss Re estimates the global protection gaps for natural catastrophes, crop, mortality and health insurance at $1.8 trillion in premium equivalent terms for 2022.
“Higher interest rates transform the economics of insurance and put insurers on a more financially sustainable long-term path,” the report says. “In 2023, we expect improving profitability for most non-life businesses, as underwriting measures adjust to claims trends and higher portfolio yields boost net investment income.”
Inflection point
Swiss Re Institute researchers reiterated the idea that 2023 is a transitional year, with a tough 2022 in the rearview and a more promising year ahead, in another recent report, “U.S. Property & Casualty outlook: Premiums in a race to catch up with claims costs.”
“Strong and accelerating rate increases in personal lines, an ongoing hard market in commercial property and high reinvestment yields were offset by the costliest second quarter for natural catastrophes since 2011, persistent inflation, and slowing favorable reserve development,” this report says.
The Institute concluded that it anticipates lower investment returns in 2023 due to catastrophe costs, but this year is still expected to be an improvement over 2022.
Also worth noting from this report:
- Property loss costs surge: In the first half of 2023, homeowners and commercial property claims costs increased by 36% and 30% respectively year over year.
- The worst appears to be over for personal auto. The line’s 112% combined ratio in 2022 was the highest since at least 1975 and the loss ratio is still elevated in 2023, suggesting a way to go before it turns a profit again. However, in Q2 2023, growth in direct premiums earned kept pace with loss costs.
- Personal lines look to be the growth engine of 2023. Swiss Re forecasts the average investment yield at 3.5% in 2023 and 3.7% in 2024.
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