P/C Currency Complications

And that could be just the beginning, with a factor other than insured losses weighing on reinsurers and insurers alike: the euro. According to Holborn’s report “The 2012 Reinsurance Market: Changing Tides,” the need to write down sovereign European debt has already had an impact on capital levels at insurers.

Earlier use of flexible capital instruments had allowed insurers to bring in more capital from investors and had cushioned them from much of what has occurred in the eurozone. However, said Holborn, with some European regulators suggesting that all government bonds be carried at less than par value, “[t]his would sharply reduce the capital levels and share prices of insurers and banks in the peripheral countries, and to a lesser extent in the stronger economies of France, Switzerland and Germany. The likely restructuring of the EU and the eurozone may cause large swings in capital levels for certain reinsurers during 2012 and is a further source of uncertainty.”

Holborn isn’t the only company concerned about the effects of the eurozone crisis on the insurance industry. London reinsurance broker Willis Re also said in its 2012 report “1st View: Change is in the Wind” that the loss of capital surplus, which had contributed to strong competition in the industry, would see that competition and its attendant low prices come to an end as premiums rise.

With reinsurance at a premium as companies impose quotas on regions or types of business, insurers will be more dependent on stricter underwriting and other instruments, such as catastrophe bonds. However, cat bonds themselves are seeing losses, according to Holborn; hedge funds are moving away from insurance bonds in favor of potentially higher returns on European bonds with higher interest spreads, and new cat bond commitments in 2011, says the company, were lower than in 2007. The two concerns for your clients in 2012 are both cost and availability of coverage—both property/casualty and business interruption.