A.M. Best: Europe Insurance Market Begins Recovery; Life Sector Drives Growth


Europe’s largest insurance markets have continued to show some signs of recovery, with many experiencing top-line growth, driven by the life sector, according to a new report by A.M. Best.

In general, the increases in total gross written premium (GWP) come following a number of years of muted development and even decline, and there is a sense of optimism that this momentum will continue, said the report, titled, “European Insurance Markets Display Early Recovery Signs but Regulatory Issues Brew.”

A.M. Best’s analysis of key European markets reveals that Italy has experienced a second consecutive year of double-digit growth, with a 20.7 percent jump in total GWP in 2014. France recorded a 6.1 percent increase, while Germany had a more modest 2.7 percent rise. During 2014, Spain’s total premium volume fell by 0.4 percent, although this was its smallest decline in three years, and despite its continued contraction, the country’s insurance market remains very resilient and profitable, the report said.
Life Sector Drives Top-Line Growth

The report noted that it is usual to see volatility with regards to the demand for life products, due to a combination of factors, such as changes in tax treatment, marketing initiatives and competition from banks.

“The life sector has been the driver for top-line expansion as the prolonged low interest rate environment has caused investors to move away from traditional products such as bank deposits and investment funds and seek alternative investment solutions,” explained Carlos Wong-Fupuy, senior director, analytics.

“For European life insurers, the biggest challenge remains legacy business with relatively high guaranteed investment returns, given the continued low interest rate environment. While new business is structured toward unit-linked products, portfolios of traditional products remain significant,” he added.

“A.M. Best considers historical guaranteed business to represent a long-term potential issue, although there is a possibility of a secondary market emerging to take over these portfolios. This could include the sale or transfer of historical books to specialist companies, potentially backed by private equity firms,” Wong-Fupuy confirmed.
Non-Life Sector

The report examines how the European non-life sector remains competitive, with motor continuing to be the dominant line of business in Italy, France, Germany and Spain (and is generally the class most under pressure), the report added. A.M. Best expects technical results on non-life business to experience increased volatility owing to catastrophe exposure, although in the year to date there have been few major losses.

There has been an element of repricing as re/insurers heighten their focus on the bottom line, given their inability to rely on investment returns to support unprofitable underwriting, A.M. Best said, noting that Italy’s non-life sector stood out, with GWP contracting for a third consecutive year in 2014. This reflected pricing pressures for third-party motor and marine insurance – Itlay’s largest lines of business.
Centralizing Resources

A.M. Best noted that some of Europe’s biggest insurers are centralizing resources and have increased their levels of retention during the past few years in order to make their reinsurance programs more efficient. This trend has continued in 2015, with the biggest groups centralizing their reinsurance purchasing, even creating reinsurance captives.

Yvette Essen, director, research & communications – EMEA, and report author, said: “The largest European insurers are also attempting to realign their investment policies, and, given the low investment returns as a result of suppressed interest rates, are becoming more involved in ‘real assets.’ In addition to direct and indirect exposure to property and listed stocks, these may include infrastructure projects with government support through equity or debt.”
Solvency II

Turning its attention to Solvency II, the report said that European insurers continue to await approval for internal capital models submitted under Solvency II.

“A.M. Best expects some companies will hold capital in excess of minimum capital requirements (MCRs) to provide a significant buffer in the event of any economic uncertainty and volatility,” the report said.

The report noted that Solvency II has triggered some level of legal restructurings among larger insurers, as they attempt to allocate capital more efficiently. “Surplus funds are being kept at holding company level, while some restructuring initiatives are clearly aimed at minimizing the number of regulators involved in the oversight of these groups. Typically, this has led to the relocation or merging of subsidiaries.”

The report concluded that, despite the challenging environment, European insurers and reinsurers rated by A.M. Best have sound levels of risk-adjusted capitalization and maintain a good operating performance.

Source: A.M. Best

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