NU Online News Service, July 6, 3:10 p.m. EDT

Premium growth is expected to continue throughout 2011 as the global economy recovers; however, the industry may be challenged by reserve adequacy issues, stricter regulations and rising combined ratios, according to a new report.

In its latest sigma study, “World Insurance in 2010,” Swiss Re says the global insurance industry returned to positive growth in 2010 after two years of falling premium volume. For non-life insurance, global premiums climbed 2.1 percent in 2010, with emerging Asia and newly industrialized countries in the region driving the growth.

“On the back of a very solid economic performance, non-life premiums in emerging Asia sharply increased by 22 percent, boosted by a 28 percent premium increase in China,” the report says. Korea saw 15 percent growth in premiums, while Singapore saw 8.1 percent growth.

Premium growth was also strong in the Middle East, Central Asia and Latin America.

In Europe and the U.S., however, Swiss Re says growth was sluggish, reflecting the ongoing soft-market pricing.

Despite a return to premium growth, though, overall profitability remained low, with an after-tax return on equity of 6 percent due to soft pricing and low interest rates.

Swiss Re says, “Underwriting results deteriorated further in 2010. The average combined ratio of the eight leading markets rose to 103, compared to 101 in 2009, but was 95 as recently as 2006. The actual underwriting profitability, however, was likely to be even worse, as 2010 results from the U.S. and large European insurers suggest that the 2010 underwriting results were supported by reserve releases of about four percentage points.”

Underwriting results fell the most in the U.S., and were negative in large European markets due to poor motor results, Swiss Re says. There have been signs of rising rates in some European regions and lines, which will positively influence 2011 performance, the report adds.

Overall, by the end of 2010, Swiss Re says P&C capital and solvency set a new record, with the average solvency of the eight leading markets climbing to 118 percent. This exceeds the previous 2007 peak of 115 percent.

Swiss Re also says it expects premium growth to remain strong in emerging markets and to improve in developed markets throughout 2011.

However, the report notes that challenges are ahead for the industry. Rising interest rates could lead to mark-to-market losses on bond portfolios, reserve adequacy is weakening due to the prolonged soft market, and 2011 first-half catastrophe losses have been high.

Additionally, Swiss Re says excessive regulation of insurance could slow growth. “While modern regulatory regimes—such as Solvency II, which takes a risk-based and economic view—would support insurance growth, policymakers may be tempted to adopt overly stringent capital requirements and other measures to make the industry 100 percent crisis-proof,” according to the report.

Swiss Re notes that such strategies could impact the profitability of insurers and unintentionally harm policyholders and the economy. For example, the report notes that excessive capital charges could be undesirable from a macroeconomic perspective, as less risk capital would be available to finance growth.