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Underwriting margins in focus as low interest rates persist: Fitch

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Australian general insurers, like their peers in the Asia Pacific region, will be looking to strengthen their underwriting earnings to make up for dwindling investment returns caused by the persistent low-interest rate environment, according to Fitch Ratings.

In a new report, the ratings agency outlined the implications for Asia Pacific insurers from what it says are “lower-for-longer” rates.

It says non-life insurers with short-tail classes, such as motor, are likely to be the least affected while the impact on non-life insurers and reinsurers with long-tail business will hinge on their ability to reprice over time, subject to competitive pressure.

With earnings under pressure from a weaker investment outlook, underwriting profits will become more important across all lines.

Insurers will focus on lowering loss ratios through price increases and cutting expense ratios by streamlining operations.

However, the extent of premium hikes will be subject to affordability constraints as the region’s economies have yet to return to their pre-pandemic state.

Associate Director Insurance Kanishka de Silva says in Australia rates continue to harden at varying degrees across the different lines.

“For some classes it will be more gradual as affordability is a key consideration,” he told insuranceNEWS.com.au.

“What you are looking at is whether rates are sufficient to meet the claims inflation so that will be what they are aiming for but I guess insurers will be mindful of competitive pressures as well so maintaining unit count would also be a consideration.”

The report says non-life insurers with long-tail businesses are likely to strengthen reserves as investment income will be insufficient to fund future claim payments.

“Insurers typically invest in long-dated bonds to back long-tail insurance liabilities,” the report says. “However, inappropriate reserve releases to boost short-term performance amid falling investment income remains a risk.

“Ensuring premiums are sufficient to meet future claims is key to maintaining profitability.”

Click here for the report.