Re/insurers are likely to see their investment yields declining for another two years and must rely on better underwriting to sustain their profits, according to Kurt Karl, chief economist at Swiss Re.
"Stronger economic activity will improve insurance premium growth, particularly in the emerging markets," said Karl. "But profitability will still be challenging because of the low investment yields."
Below-average catastrophe losses and reserve releases have kept non-life insurers healthy in recent years, but "since both cannot continue indefinitely, underwriting standards will need to improve," said Swiss Re in its Global insurance review 2014 and outlook 2015/16 report.
After a short-lived recovery in 2013, yields on government bonds - a mainstay of insurers' portfolios - began to slip again this year, dashing hopes of an improvement in investment returns. "Fixed income securities ... offer low yields and are exposed to many risks. Other asset classes may offer better returns, but at the cost of elevated volatility," the report notes.
Interest rates in the US and the UK are expected to rise next year, but the European Central Bank is showing no signs of hiking its rates while the eurozone economies are still struggling.
"Though rates will be rising, insurers and reinsurers face declining investment yields on their bond portfolios for a couple more years yet, as higher yielding bonds mature and are replaced with the current lower yielding ones. Corporate bond spreads are expected to tighten a little after widening recently, and equity markets are expected to continue to rise, but only moderately," Swiss Re said.
In 2014, investment returns for non-life insurers will be around 9% of net premiums earned, down from 9.4% in 2013, and well below the 13.5% annual average of 1999–2007, according to Swiss Re.
The situation is even tougher for life insurers because of the longer duration of their liabilities. Life firms have been shifting their portfolio mix toward higher-risk, less liquid assets such as infrastructure, private equity and joint ventures, but running yields are nonetheless expected to decline over the next few years, Swiss Re said.