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Inside magazine issue 12 | Part 03 - From a corporate perspective<br />
What are the main factors for the<br />
current low margins in the insurance<br />
business?<br />
The insurance market in 2015 shows stable<br />
but low profitability, which, in fact, conceals<br />
a major disparity between life and non-life<br />
insurance business, as reflected in the last<br />
stock market performance:<br />
The persistency of the low yield<br />
environment, which is close to its lowest<br />
levels, has a negative impact on the<br />
profitability of the insurance market,<br />
mainly life insurance business. At the same<br />
time, non-life insurance and reinsurance<br />
undertakings delivered a positive return,<br />
due to the fact that short-term business is<br />
less sensitive — but not invulnerable — to<br />
the economic environment and due to the<br />
lower levels of claims that would normally<br />
arise from catastrophic events. 1<br />
Figure 3: Market Returns<br />
1M 3M 6M 12M 3Y<br />
Life 3.7% -6.8% -10.9% 0.4% 59.9%<br />
Non-Life 10.5% 8.7% 15.8% 33.0% 60.1%<br />
Composite 6.7% 0.0% -1.5% 12.2% 65.8%<br />
Reinsurance 12.3% 8.0% 13,1% 37.6% 67.2%<br />
DJ STOXX INSURANCE 7.9% 1.3% 1.6% 18.9% 74.2%<br />
Source: EIOPA Financial Stability Report December 2015<br />
Figure 4: European Central Bank: euro area yield curve<br />
Yield in %<br />
3.0<br />
The low interest rate environment<br />
increases pressure on profitability<br />
The prolonged low interest rate phase<br />
further increases the risk of reinvestment<br />
for the (re)insurance business, as maturing<br />
assets are reinvested either in low-return<br />
assets, pushing down profitability margins<br />
further, or in non-core (presumably riskier)<br />
assets.<br />
2.5<br />
2.0<br />
1.5<br />
1.0<br />
0.5<br />
31.12.2012<br />
30.12.2015<br />
01.03.2016<br />
The graph on the right (figure 4) shows<br />
how the spot rate for AAA bonds in the<br />
euro area has decreased between 2012<br />
and today: In life insurance business, due<br />
to the mismatch in duration between the<br />
technical provisions and the asset portfolio,<br />
the effect of the current low interest<br />
rate environment has had a negative<br />
impact on the expected profitability<br />
margin. This is even more pronounced<br />
for savings portfolios in Europe, where<br />
insurance undertakings still have longterm<br />
guaranteed rates up to 4 percent<br />
or 5 percent, without the possibility of<br />
changing the contract terms. This situation<br />
makes it very tempting for life insurance<br />
undertakings to consider M&A as one of<br />
the best ways to diversify the risk or get rid<br />
of unprofitable blocks of fixed-rate savings<br />
and annuity business, even if such deals<br />
could be very expensive.<br />
0.0<br />
-0.5<br />
-1.0<br />
0 5 7Y 10<br />
15<br />
20<br />
25<br />
30<br />
Residual maturity in year<br />
In life insurance business, due to the<br />
mismatch in duration between the<br />
technical provisions and the asset<br />
portfolio, the effect of the current<br />
low interest rate environment<br />
has had a negative impact on the<br />
expected profitability margin.<br />
1. http://www.wsj.com/articles/ace-agrees-to-buy-rival-insurer-chubb-1435748869<br />
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