Supply of risk capital in CEE under threat suggests S&P

"Although we expect insurance growth in CEE to outpace GDP growth, we consider that the riskiness associated with the region will weigh on the sector's growth and profitability prospects in the short to medium term," the rating agency said in its recent High Risks For High Rewards Temper Reinsurers' Enthusiasm For Central And Eastern Europe report. However, it noted that despite a number of recent losses in the region, global and regional reinsurers still see considerable growth opportunities with total capacity increasing at the 1 Jan renewals. According to S&P, recent losses in motor and engineering insurance and natural catastrophe events highlight the unpredictable nature of risks in the CEE region.hideInsurers and reinsurers-especially those in Romania, Russia, and Bulgaria-have suffered significant motor losses in recent years. According to S&P, heightened consumer awareness has led to an increase in the frequency of claims, while severity is also rising because of motor and medical claims inflation, higher policy limits and unexpected losses following unfavourable court rulings. Disproportionate catastrophe losses have also hit reinsurers out of pockets, noted S&P. According to Swiss Re's sigma study, flooding in central and eastern Europe in June 2013 caused over $18bn in economic losses and over $4bn in insured losses, accounting for about 10% of the year's global insured catastrophe losses. The far east region of Russia also experienced its worst flooding in over a century, which caused economic losses estimated at about $1bn from property, infrastructure and crop damage. Insured losses were relatively small, however, because of the low level of insurance penetration in this region. Large, unpredictable loss events in the region have also struck and will be weighing on the minds of potential insurance market capital investors. A large single flood loss at the Zagorskaya power plant in Russia in September 2013 is likely to hit a number of global and regional reinsurers. This event could be the largest single insurance payout in the history of the Russian market. Loss estimates vary considerably, from Russian ruble (RUB) 3bn ($90m) to RUB14bn ($420m). These recent losses have encouraged reinsurers to reduce their exposure to the affected lines of business, said S&P. However, the historical profitability of CEE business, particularly in property and other product lines, means that reinsurers are not, as yet, withdrawing from the region, it added. S&P said its rating on the region's reinsurers reflects the high levels of unmodelled and unforeseen risks inherent in writing local business. "Recent losses demonstrate heightened earnings and capital volatility for regional insurers and reinsurers. We indicate the sector's vulnerability to external risks in our risk position assessment; for most rated reinsurers in this region, we assess the risk position as high. Many ratings are further constrained by country-specific risks associated with doing business in this region," it said.

Supply of risk capital in CEE under threat suggests S&P

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