Continued low interest rates and changing regulation present key risks for global insurers, according to a report released Tuesday by Standard & Poor's Corp.
Insurers are facing an “accumulation of risks,” said S&P in “Global Insurance Key Risks and Credit Trends Dominated by Low Interest Rates and Regulation Issues.” Continued low interest rates adversely affect insurers' credit quality and challenges business models, according to S&P. Changes in regulation create uncertainty, but could prove to be either positive or negative for insurers as they play out, S&P said.
S&P noted that the low-interest-rate environment has led property/casualty and life insurers to reprice products. But for property/casualty insurers, low interest rates could present some benefits because of the resulting focus on making an underwriting profit, it said.
“Global reinsurers enjoy the most stable credit quality,” said S&P, which views reinsurers as having the least risky investment portfolios. The report noted that reinsurers also benefited from “benign claims activity” during the first three quarters of last year, adding that “even after Superstorm Sandy, most reinsurers look to stay substantially in profit for the full year.”
The nature of future regulation on insurers remains uncertain, said S&P. That uncertainty is “adversely affecting many insurers' cost of capital, strategic choices and, as a result, is weighing on ratings.”
S&P said that “unfortunately for insurers,” many policymakers don't understand the dynamics of the insurance industry, and thus their “reflex response is often to impose similar measures” on insurers and banks.
The report also notes that the consequences of being designated a globally systemic insurer by the International Association of Insurance Supervisors are unclear for insurers. On the positive side, an insurer with such a designation might expect “to receive extraordinary government support under stress.” But such a designation also could increase an insurer's cost of capital relative to its peers, said S&P.