Global market slump to lift insurance fees

Marion Dakers
INSURANCE companies could be forced to raise premiums to make up for lower investment returns, a report by Swiss Re said yesterday.

Tighter regulatory standards such as Solvency II and uncertainty in the equities market have pushed insurance firms to invest their takings in safer but less lucrative products such as bonds, said the authors of the study. Bond yields could remain at current historic lows “until the global economy truly recovers”.

In the long term, insurance firms will make up the profit shortfall caused by modest returns with higher customer fees, the report said.

“Higher insurance prices would adversely impact policyholders, as some consumers and businesses would scale back coverage, or forego it entirely,” warned Raymond Yeung, senior economist at Swiss Re and co-author of the report.

Solvency II, a European regime for insurers that comes into force at the end of 2012, will set a benchmark for capital holdings and force companies to undertake a risk-based measure of its assets. Swiss Re warns that firms could rely on sovereign bonds instead of testing the boundaries of the new framework.

Insurance companies remain among the biggest investors in the world, with firms holding nearly $23 trillion (£14.5 trillion) of assets at the end of 2009.

Firms have begun a switch to emerging markets, commodities, inflation-indexed bonds and property in place of equities, said the report. However, around $5.9 trillion, or just under a quarter, of total assets owned by insurance firms are still in the United States.

Life and non-life insurers tend to differ in their investment choices, co-author David Laster said: “Non-life companies hold proportionally more cash and equities, while life companies hold more loans and fixed income instruments and less cash.”