Business

Editor: Bruce Meng
10 Dec 2008 04:55:01 GMT

LONDON, Dec 9 – Financial market turbulence is buffeting insurers and reinsurers but they are well placed to weather the recession, with potential to rebound strongly as the global economy recovers, Swiss Re said on Tuesday.

But predicting market uncertainty would continue into 2010, the world’s second-largest reinsurer said an industry that has suffered heavy losses on bond and share investments this year must concentrate on preserving capital.

Share buy-back programmes, used heavily by insurance companies in recent years, may be postponed, while asset risks will be reduced or hedged further and dividends may be cut. Companies are also likely to exit non-core business lines.

Speaking to Reuters, Swiss Re’s Chief Economist Thomas Hess forecast losses to insurers and reinsurers from the credit crisis would total about $300 billion, or roughly 15 percent of shareholder capital at year-end 2007.

Of that, about $100 billion has already shown up in balance sheets, he said.

But, "given this crisis (like) we have not seen since the 1930s, it’s surprising how well the insurance industry works … this is business as normal," Hess said.

The International Monetary Fund estimates that losses from the credit crisis will total $1.4 trillion, the lion’s share of which will be taken by banks.

Swiss Re said insurers’ overall investment portfolio at end-2007 was about $18 trillion, only slightly smaller than those of global pension funds ($22 trillion) and mutual funds ($19 trillion). Of that, about $2.2 trillion was capital held to cushion fluctuations in claims and asset prices.

Hess told a press briefing that solvency ratios across the property and casualty sector were 20 percent higher than in 2002, when stock markets last fell significantly, partly because companies have since reduced their exposure to equities.

He stressed the low systemic risk in insurance, where payouts are triggered by hazardous events rather than policyholders’ decision to withdraw.

Insurers are also rarely forced sellers, meaning they can hold assets that have fallen in value pending a recovery rather than take "fire sale" prices, Hess noted.

Swiss Re said the financial crisis is affecting both the liability and asset sides of insurers’ balance sheets, although the impact varies by business line and by company.

Life insurers have been hit relatively hard due to the falling value of invested assets and a slowdown in sales, while lower asset leverage and stable demand for cover have meant non-life insurance has been less affected.

Both sectors remain sound for reinsurers due to a continued focus on underwriting profitability.

REINSURANCE PRICES RISING

Reinsurance prices are expected to harden in 2009, Swiss Re said, reflecting an increasing demand for protection from capital-constrained insurers and the contraction of alternative capacity once provided by hedge funds and private equity.

"With renewals just beginning, we see the drop came to an end and now the question is how far prices will go up. It’s hard to predict but the trend is clearly up," said Hess, adding the outlook for pricing had "totally changed" following U.S. bank Lehman Brothers’ bankruptcy filing in September.

Hess said the credit crisis supported the holistic risk management approach of the European Union’s Solvency II regulatory frameowrk, due to come into force in about 2012, but that tweaks to the plan were still needed.

These include a focus on sound liquidity management, while concerns that marking to market, the use of credit ratings, and capital requirements may amplify cyclicality in times of stress should also be addressed. But he said discussions on Solvency II had already had a positive outcome, by prompting insurers to reduce their equity exposures.

Swiss Re economists predicted a severe recession until mid 2009 in industrialised economies including the United States and Europe, with a less severe slowdown in emerging markets.