Best’s London Briefing Highlights Challenges for Europe’s Insurers


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“2011 will be another challenging year,” said Roger Sellek, the CEO of A.M. Best Europe – Rating Services Limited, at the rating agency’s annual review of the state of Europe’s insurance industry. Speaking to an attentive audience at the Grange St. Paul Hotel in the City of London, Sellek’s introductory remarks covered past, present and future.

He reviewed the natural catastrophes that have occurred so far this year, 720 of them according to Munich Re. Lloyd’s endured the most costly first six months in its history. And yet insurance premiums, or rates, are still soft and insurer’s profits have fallen.

Sellek ticked off some of the reasons: “economic uncertainties; fear of inflation; generally weak economies; decreased rates of investment, and low interest rates.” In short: an “economic downturn.” In addition Europe’s insurers are still coming to terms with the additional regulatory requirements that will come into force under the Solvency II regulations, currently being compiled by the European Commission.

Despite all that, Europe’s insurers are managing to cope. Sellek advised the audience to “focus on cycle management,” and not to “compete for market share,” as well as to “seek growth from emerging markets. He also said there could be an “increase in the need for reinsurance.”

The Non-Life Outlook

“Calm amidst the storm,” was the way Miles Trotter, Best’s general manager-analytics in London, described the state of the industry. He noted, as did several others the “resilience insurers have shown in the face of adversity.”

Trotter described a landscape that has both good and bad features. Insurers “capital has somewhat recovered, but the industry may well be faced with higher capital requirements.” He explained that while 2009 had been a better year than 2008 with fewer natural catastrophes and somewhat better investment returns, “demand is still flat,” and underwriting results are being eroded by “excessive competition.” In addition insurers’ profits are being affected by “declining reserve margins,” with the amounts of prior year reserve releases being reduced.

Of special concern is the current state of motor [auto] insurers, in Europe and particularly in the U.K. Intense competition, increased claims, Higher recoveries, more fraud, the growth of “claims farming” and invasive government regulation have combined to make auto insurance a loss making line for almost all companies in Europe.

As an example the combined ratio for UK auto insurers as a group rose to 120.2 percent in 2009. “Higher rates [premiums] are the most important factor,” Trotter said, in trying to reverse the decline.

Non-Life Reinsurance

The picture for reinsurers is somewhat better than for primary carriers, according to John Andre, Best’s group vice president for property casualty ratings. He cited robust capitalization, competitive pricing, “depending on the class and layer;” management discipline, as well as the fact that primary carriers are “still maintaining healthy retentions,” and the industry has “taken catastrophe losses in stride,” as the most positive factors.

Despite the horrendous beginning, 2010 is on course to be a relatively benign year for natural catastrophes. Andre pointed out that the worst events – the Chile earthquake, windstorm Xynthia and the Gulf oil spill – were still “earnings events;” i.e. they didn’t affect balance sheets. In fact aggregate shareholders equity has already reached $157 billion in the first half of 2010, from a low of $120 billion as recently as 2008.

Andre did have a few caveats. He warned that “casualty prices are eroding” along with a general decline in pricing and low interest rates. In the longer term Andre said “pricing fundamentals continue to disappoint with the concern being that ultimately companies will compete for market share.” This would be exacerbated by both inflationary pressures and “global regulatory issues.”

Those issues, as well as “unknowns in the U.S. and Bermuda” have combined to convince some reinsurers to move to Europe. Amlin, which is headquartered in London, moved from Bermuda to Switzerland. Flagstone Re moved from Bermuda to Luxembourg. XL moved from the Cayman Islands (its official domicile) to Switzerland, and Allied World recently announced that it plans to, move from Bermuda to Switzerland as well. Andre said that in such cases “the ratings [all of Europe’s top 10 are rated ‘A’ or higher by Best] would follow the capital.”

Emerging Markets

Emerging markets do offer “potential growth,” said Vasilis Katsipis, Best’s general manager-analytics in Europe. However, he cautioned, there are big differences in Europe’s emerging markets. For purposes of Best’s conference Katsipis limited his analysis to Russia and the ex- states of the Soviet Union, or CIS, Eastern Europe and the Middle and Near East.

His main concern with all of these regions, and with the CIS and Russia in particular, is the reliability of their “accounting standards.” Many companies in Russia and the CIS are “tax optimization vehicles, rather than actual insurance companies,” he said. In addition it’s difficult to tell how accurate their asset valuations are, as they seem to have ignored the effects of the economic crisis, which has drastically reduced real estate values.

What it comes down to is a warning as to “how much trust can you place in their figures?” Health and liability coverage are especially susceptible to questionable accounting maneuvers.

Nonetheless Katsipis foresees growth in some areas. Eastern European countries, with closer ties to Western Europe and more insurance penetration are doing the best. Poland accounts for 32 percent of the total in the region. However, as in the west, motor insurance dominates most markets, with the same problems. Katsipis described the capital positions of companies in most of Eastern Europe as having somewhat “declined” from prior levels, but as being relatively “good overall.”

He also indicated that growth in the Middle and Near Eastern countries is experiencing “good continuing growth,” with the “main drivers being the United Arab Emirates (UAE) and Saudi Arabia, driven by oil.” The Middle East has also seen a flurry of reinsurance start ups in recent years. These companies, which have prospered locally, are now increasingly expanding towards the east.


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