Insurtech can achieve 10% ROE
Technology can help property/casualty (P&C) insurers achieve the 10 percent return on equity (ROE) that investors expect, according to the latest Swiss Re sigma study.
Underwriting margins would need to improve by around 5 to 9 percentage points in major western markets and Japan to enable primary insurers to deliver an ROE of 10 percent, according to the sigma study titled “Mind the gap—Profitability in non-life insurance”.
The insurance sector has seen ROE levels of 10 percent in the past and technology will be central to get back to these levels, Swiss Re chief economist Jerome Haegeli, said at press conference in Monte Carlo.
The underwriting profitability gap needed to close to allow insurers to reach the targeted ROE is particularly large in Italy, Canada, the UK and the US among the markets included in the sigma report. At the same time, the gap is particularly small in China and Australia.
Higher investment yields as interest rates rise can help reaching the 10 percent ROE target, but will not be sufficient, according to the sigma study. Even a hypothetical 100 basis points increase in real interest rates would leave a significant gap in most markets, Swiss Re calculated, and concluded that the biggest opportunity lies in technological advancements.
Technology can deliver efficiency gains, lower claims for example through telematics which has already reduced claims in a number of markets, Haegeli explained. Technology will also deliver access to new risk pools and expand insurability of risks, he added.
In addition, technology also has the potential to lower expense ratios. A large share of insurers’ cost is generated by intermediation, he noted.
“I would not be surprised if technology would provide a big breakthrough to lower expense ratios,” he said.
