Senior management will be disappointed with the firm's return on capital, and retaining their best accounts will be a challenge for underwriters. Returns on total capital, underwriting risk combined with excess capital invested in the high-quality financial assets, will likely result in lower yields than a portfolio fully invested in underwriting risks. If insurers cannot earn a rate of return within their business that is greater than being invested in financial assets, they should liquidate. Enhancing returns will require developing new products with higher margins. Insurers' and reinsures' stated targeted hurdle rates or returns on capital range from 12 to 20 percent.
Insurers currently remain in an over-capitalized position with operating losses.
Increasing premiums will absorb some of the surplus capital, however, it is unlikely to eliminate the total surplus position. Investment income has reduced the deficit, but operating margins have been affected by account or risk selection and market pricing levels. Pricing has been impacted by over-capitalization and the basic laws of economic supply and demand. Next, insurers and reinsurers need to extend their reach into new products beyond their traditional lines of business without necessarily being able to apply their technical underwriting metrics and their actuarial history. New products refer to products that have not been offered to customers in the past.