European non-life market flat or softening but challenges mount—AM Best

At its 2011 Insurance Market Briefing – Europe yesterday the rating agency added that the major European markets are characterised by a flat to softening rating environment, but some markets and certain lines, such as motor, are witnessing upward rate movement.

According to Sam Dobbyn, Senior Financial Analyst at AM Best, the European non-life market has weathered the financial storms of the last few years and is well capitalised, but faces a number of uncertainties going forward.

The top 50 European non-life insurers increased capitalisation in 2010 on the back of increased profitability and a lack of any significant claims events. Since the financial crisis of 2008, which saw a low point in insurers’ balance sheet strength, these insurers have increased surplus and capital by €42bn or 17%.

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Mr Dobbyn expects that capital level to remain broadly flat in the first half of 2011 with some larger multinational insurers groups having taken a hit from the heavy catastrophe losses in the first quarter. This level of capitalisation means that insurers are in a ‘relatively strong position should further turbulence in the Eurozone result in increased claims and large investment losses’, he explained.

However, if extra capital is required it may be challenging to raise the needed capital on affordable terms, particularly for non-life insurers based within peripheral Eurozone countries, he added.

He warned that European non-life insurers are operating in an increasingly challenging investment and economic environment. “Continued economic weakness has been exacerbated by sovereign debt concerns. Volatile investment markets and persistently low interest rates have increased insurers’ emphasis on underwriting profitability.”

Slow growth in European economies has increased the threat of a double dip recession and exacerbated the sovereign debt crisis in a number of Eurozone countries, particularly Portugal, Italy, Ireland, Greece and Spain.

The continued uncertainty around the resolution of the Eurozone crisis has further damaged business confidence and major austerity plans introduced in Italy, Spain and France may potentially further damage growth, said Mr Dobbyn. “This is a difficult environment for insurers to operate in.”

Low interest rates reducing investment income, poor equity returns due to financial market volatility and the possibility of increased inflation is a major concern for the insurance companies rated by AM Best.

“In particular non-life casualty companies with long tail lines may not have adequately priced in future inflation expectations and low investment returns, which will harm future profitability,” said the analyst.

On top of these concerns Solvency II and International Financial Reporting Standard (IFRS) regulatory changes are combining to add pressure on the non-life sector.

Mr Dobbyn explained that the total cost across the European economic area of Solvency II is thought to have exceeded the European Union’s estimate of €3bn.

IFRS 4, the planned new reporting standard for insurers, is planned for implementation by January 2015.

“The trouble may lie in not only the overlap of these two challenging projects but in the effects of IFRS reporting on insurers’ ability to raise capital as a result of potentially increased reporting and profit volatility at precisely the time when Solvency II may create the need for an infusion of capital,” argued Mr Dobbyn.

The general flat to softening European non-life insurance markets is a result of competitive pressures and flat demand, according to AM Best. “The future profitability of the market will be dependent on the European economic outlook and the resolution of the Eurozone sovereign debt crises,” said the analyst.