JLT Re Advises Casualty Insurers to Hedge against Growing Pressures At PCI
24 October 2016
- Political uncertainty in North America creates more pressure on casualty insurers
- Structured reinsurance allows insurance companies to ‘keep the powder dry’ until times improve without having to shed their low return on equity portfolio.
At the Property Casualty Insurers Association of America (PCI) Annual Meeting in Dallas this week, JLT Re is advising casualty insurers to hedge against the growing number of pressures they face.
Gregg Holtmeier, Head of Casualty, JLT Re in North America, said: “The political and economic uncertainty that dominates the operating environment makes forecasting key financial and macroeconomic trends a challenge, especially for a line of business that requires pricing based on long-term assumptions. This is particularly true for interest rates and inflation, which are key drivers for casualty lines of business.”
Ed Hochberg, CEO North America, JLT Re, said: “Casualty insurers are facing many issues at the moment and while some think there will be ‘lower for longer’ interest rates which is a key issue for insurers, political uncertainty creates some doubt on the ‘lower for longer’ theory. The outcome of the US presidential elections could have an impact on rates. This would create a two-pronged effect of reducing the value of the bond portfolio and having a longer exposure to those same declining assets.”
The current environment may also encourage insurers to take riskier bets, on both the asset and liability side. Uncertainty over reserve development is another factor that could help to push casualty and liability rates, as discussed in JLT Re’s recent Viewpoint Report – ‘Enough in Reserve?’
Gregg Holtmeier concludes, “The good news is that uncertainty around reserve adequacy, together with interest rate and inflation risk, can be hedged by the strategic use of reinsurance. For example, structured reinsurance transactions can relieve long-term capital requirements for casualty lines in a low-return underwriting environment. With new investments generating less than a 2% yield, the opportunity cost is very little, if any at all.
“Working layer excess of loss reinsurance also provides a useful hedge. In a rising interest rate environment, medical inflation in excess workers’ compensation layers has historically been pushed significantly higher than underlying interest trends. Evaluating these layers based on overlaying medical inflation trends would be prudent.”
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Tel: (+44) 20 7558 3387/ (+44) 7920 586 032 Email: Isabella.Gaster@JLTRe.com
NOTES TO EDITORS:
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Head of Communications & Marketing, JLT Re