Swiss Re: Sees Risk Appetites Unchanged

Reinsurers' risk appetites have not changed despite enormous insurance industry losses in 2005, but they are reevaluating the risks, a Swiss Re executive said.

That assessment came in a discussion of the midyear reinsurance marketplace and future economic outlook during a telephone conference produced by Swiss Re.

"There is not a fundamental change in the risk appetite [of reinsurers], but a change in what the risk looks like," said Thomas Holzheu, senior economist with Swiss Re Economic Research & Consulting.

He said the industry learned some hard lessons from last year's hurricane disasters and was using the experience in this year's underwriting.

The industry, which was on course to see close to 19 percent return on equity in 2005, suffered losses that cut that ROE to 11.6 percent, Mr. Holzheu noted.

While that ROE figure was noteworthy for the insurance industry, the historic losses of $58 billion--the largest industry losses since the San Francisco earthquake of 1906--have proven to be a sobering experience, he said.

The fact that there were no major defaults, either among insurers or reinsurers, said Mr. Holzheu, proved the industry's resiliency, with distribution of risk on a worldwide basis.

Insurers, he said, are incorporating the lessons from last year into their latest underwriting models. The industry is also factoring increased hurricane activity into its risk assessments, he advised.

Mr. Holzheu said that, under pressure from rating agencies, underwriters are increasing their capitalization as the rating agencies look more closely at the total book of risk insurers underwrite.

The result of all this is higher prices on premiums and tighter terms and conditions for catastrophe risks. However, he said, other risk outside of catastrophe should see softening.

Mr. Holzheu predicted there will be an overall industry increase of 3 percent premium growth for this year.

Insurers have withdrawn capacity in the catastrophe-prone areas, he said.

However, he added that increased concentrations of risk over the past 11 years in catastrophe-prone areas still demand solutions.

Mr. Holzheu said insurers are filling this need and increasing capacity through securitization arrangements, where the investment market is putting up capital in the form of insurance bonds.

Kurt Karl, chief economist for Swiss Re Economic Research & Consulting, in his evaluation of the U.S. economy, said there is a 25 percent chance of a recession hitting the U.S. through 2007.

The biggest risk to the economy is a sharp spike in oil prices, but a slow upswing in oil to $100 a barrel can be absorbed over time, in his estimation. However, a dramatic increase to that level could spell serious disruptions to the economy, he said.

Slower but solid growth portends some more increases in the federal interest rate to 5.5 percent, he said. The Federal Reserve is not expected to go beyond that figure without damage to economy, Mr. Karl observed.

For the insurance industry, all of this means increased interest earnings on Treasury Notes, which it invests in heavily, and the returns point to increased investment income for insurers, ultimately helping their bottom line.