Posted on Feb 06, 2012 by Sergio Ulloa
The European insurance industry faces a myriad of problems as we head into 2012. The continent's ongoing macroeconomic and political issues have adversely impacted company balance sheets, altered consumer demand and sapped investor interest across most business lines. A new report released this week from international consulting firm Ernst & Young notes that these challenges will force insurance companies operating in Europe to make smart strategic decisions this year in order to prosper going forward.
In their European Insurance Outlook 2012
, Ernst & Young (E&Y) describes how ongoing recession conditions, volatile financial markets and accompanying European sovereign debt downgrades
have all affected the performance of Europe's insurance sector. E&Y notes that due to the inter-connectivity of the eurozone market, the fiscal imbalances that warranted recent downgrades of sovereign debt in weaker European countries (Greece, Italy, Spain etc.) have gone on to negatively impact the balance sheets of numerous insurers and reinsurers across the continent . While many of the continent's principal insurers remain well capitalized, with their long-term outlook affirmed by raters, possible sovereign defaults could reduce asset portfolios substantially. "With no final resolution of the Eurozone crisis on the horizon, the combination of insurers' innate exposure to sovereign debt and the long term effect of recession and low interest rates on the insurance market may force rating agencies to reconsider the ratings of insurers," E&Y explained.
In addition to persistent economic and political uncertainty
, European insurance companies have also found themselves stretched to meet upcoming capital requirements and industry-wide accounting rules, which will be coming into force relatively soon across the continent. E&Y noted that the uncertainly surrounding the introduction and execution of Solvency II's updated risk-based financial frameworks and enlarged capital requirements has proven to be a particular obstacle for many insurance companies in Europe. Short term concerns persist that Solvency II could drive insurers to raise their capital positions at the expense of tackling new business lines, and thus damaging their competitiveness across the overall international insurance marketplace. The slow-moving implementation of Solvency II, which is now delayed to 2015
, has already proven quite costly in terms of time and expense.
Despite these persistent macroeconomic and regulatory concerns, there are still many things European insurance companies can do for themselves to rebuild their balance sheets, generate profitable growth and increase market share over their peers, according to Ernst & Young. The consulting firm identified five key areas where industry innovation could reap sizeable returns: retooling the organization to quickly respond to challenges; transforming financial operations and systems; integrating risk management to identify emerging and diffused risks; rationalizing product portfolios to reflect a changing consumer market; and adapting consumer channels to remain competitive. Overall, insurance companies operating in Europe must continue evolving their operations to improve margins and generate bottom line growth. They can do this by adopting new technologies and risk management strategies to squeeze out unnecessary costs and use their people and capital more productively.
Given Europe's fast-moving market environment, combined with sluggish growth prospects and the increased regulatory pressures
described before, insurance companies should look to adapt quickly, refine their corporate structures and business mix and reduce expenses where necessary. "Insurers that effectively identify and act on their strategic choices are better positioned to minimize the downside impact of unforgiving market conditions and capitalize on available opportunities on the upside," E&Y noted. One particular structural change that insurers operating in Europe may consider in 2012 to boost their bottom line is intra-region mergers and acquisition (M&A) activity. Other tactics E&Y suggest include the consolidation of back-office operations or outsourcing insurance service and support functions. Insurers may also position themselves to further develop their operations in higher-growth territories, such as Asia or other emerging markets, where economic growth opportunities
will likely surpass the 1 percent growth forecast for Europe in 2012. Many European insurance companies also need to update their internal processes to best international standards in order to both achieve their operational objectives and better prepare for upcoming Solvency II and IFRS regulations. "Insurers' legacy systems, current processes, and concerns over data quality, are barriers to this goal and not all European insurers are starting from the same place in terms of financial and systems technology enhancements," E&Y observed.
In addition to changes in regulation and governance, European insurers also have to contend with evolving consumer preferences. Over the past few years, customers in Europe have increasingly gone back to using banks to purchase pure investment and savings products that have fewer constraints. These same customers have given up on once-popular unit-linked insurance products, which had no guarantees and were very capital intensive due to inherent market risk. European Insurers are in turn altering their portfolio, reducing their pure savings products outlay and in stead focus on products that offer a protection component, offer better margins and are less capital intensive, emphasizing greater convenience, simplicity and value. Insurance markets across Europe are by no means uniform. While highly concentrated and mature market conditions characterize much of northern Europe, the low insurance penetration rates across many eastern and southern states present substantial opportunities for organic premium growth going forward. This diversity in health and insurance markets penetration across these regions underscores the importance of a micro-strategy. E&Y observed that consumers in Southern and Eastern states are moving away from investment-linked products toward those that are easier to understand and offer more guarantees with lower costs.
To reach these customers, insurance companies must adapt their distribution channels to remain competitive. Going forward, E&Y expect the internet to become an ever more important distribution channel, one which will continue to challenging existing life and non-life sales and marketing plans. Direct sales of insurance policies via the internet has been growing rapidly across Europe, which have posed data security and identity theft issues for many firms. At the same time, E&Y notes that regulatory changes will affect bancassurance models in some countries and this will in turn alter the competitive landscape and develop new opportunities for insurers to forge new distributor relationships. As a result, insurance companies and their updated distributor networks will need to share client information and provide necessary training to make this cross-selling strategy a reality. Overall, the report believes that smart insurance companies should be able to persevere under current market conditions and potentially even thrive through sound, strategic plantings that works to secure growth, reduce expenses and encourage innovation.