Asset-driven losses and market volatility are increasing pressure on insurance carriers' earnings, with profitability increasingly dependent on technical earnings rather than investment gains, according to a new study.
The report came from New York-based reinsurance brokerage Guy Carpenter & Company, LLC, which warned that a severe catastrophe could destroy insurer and reinsurer capital and earnings bases.
The Guy Carpenter briefing on the relationship between insurance carrier investment gains and profitability is titled "Bag Profits Early: Investment Gains Under Pressure."
"With net income declining steeply from the first half of 2007 to the first half of 2008, asset-driven losses have been on the rise," said Chris Klein, Guy Carpenter global head of business intelligence.
According to Mr. Klein, insurers' earnings are increasingly at risk. According to the Guy Carpenter analysis, while there have not been any mega-catastrophes, disasters across several continents have impacted insurers' and reinsurers' profits and taken together with the effects of the subprime mortgage market collapse, equity values have been pushed lower.
The brokerage's study of seven prominent risk-bearers found investment gains are down profoundly across the (re)insurance industry. For the first half of 2008, the group showed an aggregate investment loss of $566.2 million, compared to an aggregate gain of $98 million for the first half of 2007.
The study warned that even as investment gains have become less reliable, catastrophe losses have increased, particularly in the United States, where the second quarter of 2008 represented the second costliest second quarter of the past decade–offset in part by reserve releases.
The briefing concluded that in order to maximize profitability over the coming months, insurers may need to reconsider their risk management strategies, as investment gains are unlikely to provide the buffer on which some have relied over the past few years.
"A large catastrophe loss this year could erode earnings and capital bases," added Mr. Klein. "Carriers may want to consider protecting underwriting earnings booked year to date by seeking reinsurance cover in the form of a 'stop-loss,' or other instruments such as ILWs [industry loss warrantees], enabling them to lock in underwriting profits against potential future catastrophe losses. In addition, the judicious selection of risks, which can be enhanced by increased risk transfer, can help mitigate the effects of capital market volatility."
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