Monday 18 December 2017

Insurers under pressure as returns hit 25-year low

FBD chief says 'no place to hide' for poor underwriting

FBD chief Fiona Muldoon has warned the insurer must show discipline in face of low interest rates
FBD chief Fiona Muldoon has warned the insurer must show discipline in face of low interest rates
John Mulligan

John Mulligan

Investment returns for insurance firms are at their lowest level in at least 25 years, according to FBD boss Fiona Muldoon.

She said the brutally low rates mean strict assessment criteria have to be applied in selecting clients and setting premiums.

Releasing first-half results last Friday, stock market-listed FBD revealed that its annualised total investment return is currently just 0.7pc. The figure has slumped from 1.9pc a year ago.

CEO Ms Muldoon - a former Central Bank executive - said the return, in a normal market, would typically be between 3pc and 4pc.

In common with other insurers, FBD invests policy money that is held to cover claims in order to generate a return. But the investments must be low-risk to ensure money is available to meet claims.

At the end of June, FBD had just over €1bn in underwriting investment assets, compared to a similar amount a year earlier.

The figure at the end of June included €494m in corporate bonds, €242m in government bonds, €220m in deposits and cash, €22m in equities, €24m in unit trusts, and €16m in investment property.

"I'm in insurance 25 years, and in those years I have never seen returns as low for this long," Ms Muldoon told the Irish Independent.

"That's 10 years after the sub-prime crisis and the credit crisis. It's directly flowing from monetary policy in the central banks."

Mrs Muldoon said that in a normalised market, a typical return on corporate and government bonds might be between 3pc and 4pc, possibly rising to between 5pc and 6pc.

She said there's "precious little" insurance firms can do to tackle the low returns environment.

"In a low interest rate environment, where an insurance company's risk is on the liability side, you must have very low risk investments," she said.

"You can't afford to suddenly lose money in the investment markets at the time that you most need it to pay your claims. So we don't propose to go to a more high-risk investment portfolio. The return is unlikely to improve until the European Central Bank monetary easing ends, and interest rates start to rise again."

Ms Muldoon said the low interest rate environment is also contributing to the "kind of situation we have [where premiums have risen]".

"There is no place for our underwriting decisions to hide," she said. "If we make poor underwriting decisions, they show up immediately because there's no investment income to cover underwriting losses.

"From FBD's perspective, we need to show discipline in our underwriting in order to make sure that we're stable and that we're sustainable," she added. "The low interest rates are part of why it is a difficult environment for all insurance companies and customers."

Irish Independent

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