High expense ratios and pricing pressure may lead insurers to drop intermediaries from the supply chain, Swiss Re’s newly-appointed chief economist has said.

Speaking at a press conference at the Monte Carlo Rendez-Vous, Swiss Re’s group chief economist Jerome Haegeli described the possibility of a major confrontation between insurers and intermediaries as a “reality”.

“In terms of the expense ratio, the picture is complex,” Haegeli said. “It is a high cost sector and always has been.”

“However, there can be no doubt that technology in particular will change the ecosystem of the insurance market; there can be no doubt about it.”

According to the latest sigma study from Swiss Re, non-life underwriting margins in major western markets and Japan need to improve by around 5 to 9 percentage points in order to deliver sustainable returns.

The study found that sector return on equity slipped further to 6 percent last year, from 7 percent in 2016 and 9 percent achieved annually between 2013 and 2015. Premium rate increases are needed to restore profitability to sustainable levels, it said. Despite modest rate hardening experienced by commercial lines carriers following the record natural catastrophe losses of 2017, the report said that more work needs to be done to improve underwriting performance if current shortfalls in profitability are to be addressed.

If the market remains significantly below this 10 percent ROE target then the market faces the prospect of fresh hardening of prices.

“Pricing will be affected and further hardening is certainly one possibility,” Haegeli said. The reinsurance giant’s chief economist added that failure to improve ROE will cause strategic capital management to become much more of a focus for non-life insurers and raise the importance of shareholder dividend as a mechanism to keep investors happy.

A further negative outcome that insurers face should they fail to boost underwriting margins is the impact of their ability to invest in technology to streamline claims processes and cut expense ratios.

Haegeli added: “If you look at how much cost goes into intermediation of insurers then I wouldn’t be surprised if technology did not provide a major breakthrough for the industry over the next five to ten years to cut expense ratios.”

“We’ll also see an effect on price of book value,” he said. “Recently we have seen the book value of non-life insurance companies improve.

“However, you could certainly still argue that there may be a discount applied to these due to the realised ROE not being 10 percent.”