Posted on Oct 12, 2011 by Sergio Ulloa
A new special report released this week by worldwide insurance rating and information agency AM Best Co has highlighted the significant threats currently facing the European general insurance sector, as the region's various markets continue to adjust to adverse economic, regulatory and market forces.
AM Best's report, titled 'European Non-Life Sector Approaches Economic, Regulatory Turning Points
,' describes how ongoing macroeconomic recession conditions, volatile financial markets and the Eurozone's sovereign debt crisis have all affected the European insurance industry. This is all occurring while a soft market and stubbornly low interest rates persist, which keep pricing low and put pressure on insurers' profitability. Attempts to increase premiums levels are met with resistance in a weak economic climate, as consumer are unwilling to pay higher rates, if in fact they can afford insurance at all. Stagnant economic growth in Europe's principal markets have both increased the possibility of a double-dip recession and exacerbated the sovereign debt crisis in a number of peripheral Eurozone countries, including Portugal, Italy, Ireland and Greece. AM Best conducted a scenario-based test on major European non-life insurers to see how their balance sheets would fare if in fact the economic and debt position in the Eurozone were to become much worse.
AM Best conducted the stress-tests with its proprietary capital model, Best's Capital Adequacy Ratio (BCAR), and have thus far found that a prolonged Eurozone crisis would lead many insurers to reevaluate their underwriting leverage, as they would not be able to maintain their operations at historical levels without further negatively impacting their long term financial strength. The company released a statement on the findings this week that explained why insurance companies in particular are vulnerable to the effects of potential downgrade. "Companies with the largest exposures to peripheral European debt were hit hardest by the stress test. Many major European (re) insurers have progressively reduced their exposures to Portugal, Ireland and Greece in the past year, leaving sovereign debt of these countries at only about 1 percent of total investments and less than 10 percent of shareholders' funds of the insurers tested. In isolation, these now reduced exposures did not have a significant impact once stressed, but larger exposures to Italy and Spain resulted in greater falls in risk-adjusted capitalization," A.M. Best noted, adding that further economic twists, such as inflation and debt related problems for European banks, could trouble general insurers in the future. "The uncertainty of the situation and its potential resolution lead A.M. Best to underscore the importance of carefully monitoring the exposures of each credit in the coming months," the credit rating agency reported.
At a time of great economic stress, Europe's insurance companies also find themselves being further stretched to meet changing solvency and accounting rules on the continent. AM Best singles out the uncertainly surrounding the introduction of Solvency II's capital requirements as a key impediment to European insurers. Short term concerns persist that Solvency II could lead to insurers increasing their capital position at the expense of tackling new business ventures and damaging their overall competitiveness on the global insurance marketplace. The slow-moving implementation of Solvency II, now perhaps pushed back to 2014
, has been "costly already and promises to further strain insurers with its potentially stricter risk-based capital requirements," according to AM Best. The overall cost of introducing Solvency II across Europe is already thought to have exceeded the EU's estimated EUR 3 billion. There are also significant implementation details that still need to be figured out, including premium provision and risk margins. In addition to the new capital requirements, a new International Financial Reporting Standard (IFRS) for insurance will also cost companies valued staff time and resources when they can least afford it. "The trouble may lie not merely in the overlap of these two challenging projects, but in the effect of IFRS reporting on insurers' ability to raise capital-at precisely the time when Solvency II may create the need for an infusion," AM Best notes
Europe's major general insurance markets have all responded in different ways to the upcoming challenges. AM Best's report found that Germany has continued to perform better economically than many of its neighbours, with GDP growth of 3 percent projected for 2011. The country's non-life insurers saw their premium levels increase by 0.9 percent overall to EUR 55.2 billion in 2010, although underwriting results fell due to fierce competition and a soft pricing market. AM Best noted that property insurance, general accident, and legal protection insurance would continue to be growth drivers in the non-life sector. If the general level of economic activity in Germany remains strong into 2012, the country will continue to be one of the more attractive insurance markets on the continent.
The French non-life sector was also able to demonstrate improvement in 2010. Overall, non-life premiums grew by 1.5 percent annually to EUR 45.7 billion according to the Federation Francaise des Societes des Assurances (FFSA) and they were up another 4 percent during the first half of 2011. French insurers have also been able to slightly improve their underwriting performance for the period, although they remain threatened through their considerable equity holdings in troubled sovereign debt countries. AM Best believes 2011 and 2012 could develop favourably for French non-life insurers as rate increase for both personal and commercial lines and catastrophe-related losses remain minimal
The Italian non-life sector meanwhile is under duress due to sustained legislative, regulatory and judicial action that has directly cut into general insurers' business. Non-life premiums in Italy dropped 2.4 percent last year to EUR 35.9 billion, lead by declines in the motor insurance sector, the country's dominant general insurance line. The motor sector's profitability has been crippled by recent governmental action, in particular the Bersani law, which equalizes premium levels across a household rather than through individuals. This has enabled higher risk clients to be shielded away from more appropriate insurance prices leading to a spike in underwriting losses for insurers. Claims costs have also been further exacerbated by recent judicial rulings and increased insurance fraud, brought on by the troubled economy.
Spain's insurance sector was able to register a slight turnaround, with non-life gross premiums written growing for the first time in two years (by 0.2 percent) despite ongoing economic and pricing pressures. The most significant increase in premium volume was found in the health insurance sector (4.6 percent growth), which recognized the increased importance this type of cover holds during these trying economic times. AM Best noted that the Spanish insurance market will continue to be challenged by declining demand if the overall economy contracts and consumer consumption continues to fall. Insurer prospects for growth across Europe will continue to be challenged by strong competition, downward pressure on pricing, and the new increased capital requirements from Solvency II
AM Best Company was founded in 1899 and is a full-service credit rating organization dedicated to servicing the financial services industries, including the banking and insurance sectors.