Property and casualty insurers are in a better position to deal with declining interest rates than their life insurance counter-parts because yearly renewal rates can be adjusted to compensate for their decline in earnings, a recent report from Swiss Re says.
The report, "Facing the Interest Rate Challenge" reviews the history of interest rates over the past 30 years and reviews why life insurers are at a disadvantage, losing money on life products with fixed rates and unable to adjust to declines unless programs are replaced with new products.
On the other hand, P&C insurers can use renewal periods to re-price their products, making it a less "thorny" road for carriers.
"In the current low-interest environment, raising prices would allow the non-life insurance industry to restore profitability," says Astrid Frey, co-author of the report, in a statement. "Non-life insurers would face bigger problems if inflation were to spike unexpectedly. Such inflation spikes are often—but not always—related to increasing interest rates."
P&C insurers invest their premiums in both short-term and long-term investment products, depending on the claims nature of the product.
Property line premiums are usually invested in Treasury bills due to the expected short-term payment of claims. Premiums for other business with expected longer-term claims history will be placed in longer-term investments.
One consequence of this is that short-term investments are "less sensitive" to interest-rate changes. On the other hand, long-tail casualty business is more dependent on investment income to produce a profitable result.
While rate adjustments can maintain profitability, Swiss Re says, "In practice, non-life insurers tend to be unable to fully adjust premium rates immediately when interest rates fall due to competitive pressures and market share considerations."
Insurers may also not increase rates when they see an interest-rate drop as a short-term event. Instead, they will absorb the loss in order to retain customers and avoid the costs of losing customers to competitive rate pressures.
A prolonged period of interest-rate decline is not viewed as positive for P&C insurers profitability, the report says.
Conversely, the report notes, when interest rates do increase and improve investment earnings, competition between carriers can then pressure rate reductions.
"Those insurers who fail to adjust their prices run the risk of losing market share," the report says. "Nevertheless, evidence shows that rising interest rates are associated with periods of improving profitability."
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.