Posted on Jul 18, 2012 by Sergio Ulloa
Low interest rates "an enormous stress"
The current European economic climate, created by efforts to try to stimulate economic growth and rescue an ailing banking sector, is placing the insurance industry under "enormous stress". This according to Nikolaus von Bomhard, Chief Executive of Munich Re, one of the world's largest investors with a portfolio of more than €200 billion (US$245 bn).
While the low interest rates in Europe are a boon for consumers and those looking for cheap credit, large investors are feeling the pinch as their ability to make money on large capital investments is being severely hampered.
The value of money over time is especially critical to insurers, since they receive most of their money up front, in the form of policy payments, and then are liable for servicing those policies later. In an environment where the interest rates are extremely low, it is very hard to remain profitable when many annuity and life insurance products guarantee returns significantly higher than the current interest rate.
The interest rate on 10 year German bonds is currently around the 1.24% mark, well below the 1.6% classified as "extreme" and "unsustainable" by Joerg Schneider, CFO at Munich Re, during an interview in May. The rate hit a record low of just 1.21% in June 2012.
von Bomhard also expressed his view that banks should be allowed to go bust and creditors be made to carry a share of the losses. This might be unavoidable, should economist Nouriel Roubini's recent prediction prove true and the European debt crisis spirals out of control.
Fortunately, there is some good news to offset the the increased pressure resulting from low interest rates.
Global losses due to natural catastrophes have been moderate for the first six months of the year.
2012 is off to a good start as far as insuring natural disasters are concerned, with a total insured loss valued at around US$12 billion, well below the ten year average of US$19.2 billion. Worldwide, the total loss has also been well below the average of US$26 billion for the first 6 months, which is significantly lower than the ten year average of US$75.6 billion. This is according to a recent publication by Munich Re, a leading global reinsurer.
Deaths due to natural disasters in the first six months of the year are also well below the ten year average of 53000, at 3500.
2011 was marked by massive losses suffered during the disasters in Japan and New Zealand, with the total loss for the first half of 2011 stood at US$300 billion of which US$82 billion was insured.
Almost 85% of worldwide insured losses and 61% of total losses were incurred in the USA, mostly due to an earlier than usual tornado season and out of control wildfires. Since 1980, the USA has had an average of 65% and 40% respectively, but the first half of 2012 has seen near record levels of tornado activity.
The most severe single event was a line of thunderstorms that crossed several states, including Ohio and Tennessee, between the 2nd and 4th of March. More than 170 tornadoes were counted in this period, and the storm left 180,000 homes damaged, with total losses in the region of US$4 billion.
In Europe, natural disasters caused lower losses than usual, with only 10% of insured and 16% of overall global losses incurred on the continent. Winter storm Andrea, which brought heavy snowfall and winds gusting up to 200km/h caused the most damage, incurring US$700 million worth of losses, of which about US$400 million was insured. Earthquakes in the sparsely populated area of Modena in Italy caused damage to many historically important buildings.
Aside from some serious flooding in China in May, causing almost US$2.5 billion in overall losses, the Asia Pacific region has had no significant, major loss events to date.
While the mildness of 2012's weather so far is certainly welcome news, Torsten Jeworrek, a board member at Munich Re, pointed out that, "It is in line with expectations that extreme and more moderate years will balance each other out in the course of time."
Some success in efforts to deal with Somali piracy
There has been some significant progress made in the fight against piracy, especially off the Somali coast, with a decline of more than 50% in incidents involving Somali pirates. In the first half of 2012, there were 69 Somali-related piracy events, compared to 163 for the same period in 2011.
According to a recent report by the International Maritime Bureau (IMB), global incidents of piracy fell to 177 reported attacks in the first half of 2012, down from 266 for the same period last year. This improvement is mostly as a result of increased naval activity, including preemptive action, as well as improved security measures put in place by shipping operators and the hiring of private security contractors. "Naval actions play an essential role in frustrating the pirates. There is no alternative to their continued presence," said IMB director Pottengal Mukundan.
While there is a marked improvement in the situation off the Horn of Africa, there were still 11 vessels and 218 crew being held by Somali pirates, some in unknown locations on the mainland.
The Gulf of Guinea, on the West coast of Africa, has seen an increase in piracy, with 32 incidents reported in the first half of the year, up from 25 in the same period in 2011.
Globally, a total of 20 vessels were hijacked worldwide, with 334 crew members taken hostage. Another 80 vessels were boarded, 25 fired upon and 52 vessels reported attempted attacks. Somali pirates still present the most serious threat and ships should continue to take measures to protect themselves.
Elsewhere in the world, attacks are mainly armed robberies, with almost 20% occurring in Indonesia, however, guns were only reported on one occasion.