01 June 2012

CRE: Solvency II will not drive up prices but hard market is on doorstep, say experts

In particular, long-tail and commoditised business is currently underpriced, speakers told delegates at the event organised by Commercial Risk Europe in association with the Malta Financial Services Authority. Despite years of soft markets, high catastrophe claims last year and poor investment returns, insurers remain well capitalised and will likely continue to remain so under Solvency II, said the experts.

But for that capital to be deployed in the European market, insurers need to ensure that they are writing risks at a price that will provide a return in excess of cost of capital, they added. This is currently not the case for certain lines of business, the speakers argued, with low investment income and dwindling reserve releases failing to pick up the slack. The good news for buyers of corporate insurance for now is that the market looks set to cope with Solvency II without the feared jump in prices as a result of excessive capital demands.

Robert Schimek, the recently appointed President and CEO of EMEA, Chartis, said that of the capital requirements faced by insurance companies—economic, regulatory and those laid down by the rating agencies—the constraints of rating agency capital requirements are actually the toughest and of course already exist. “Therefore Solvency II in and of itself is not going to cost me a higher rate for capital, nor is it going to cause me to hold on to more capital necessarily because the tougher binding constraint has generally been from the rating agencies”, explained Mr Schimek.

But the analyst warned that the cost of insurance will rise soon in the European primary market because there will be a recognition that present pricing is simply too low. “We have seen rises in some classes already but that will be a pricing recognition and nothing to do with the regulation”, Christopher Hitchings, leading equity analyst and Senior Vice President, Research at Keefe, Bruyette & Woods said.

“The primary insurance industry has been engaged in a traditional cyclical downturn that is very, very near to its trough. US corporates are already starting to pay more for their cover; Europeans are likely to be doing so in the near future. This is likely to impact all classes but I stress to you that long tail business is clearly going to be most impacted by the low interest rate environment”, warned the equity analyst.

But the analyst reassured buyers however that the reinsurance and specialty insurance markets are in good shape, have little need to raise prices, and have the capacity to write more business.

Chartis’ Mr Schimek agreed that prices for certain lines of business must increase in order for insurers to make an adequate return on capital, with investment returns set to be negligible for the foreseeable future.

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