In a recently published special report from BestWeek, A.M. Best analyzes the relative economic strength Europe’s 10 largest insurance groupsand the top five European reinsurers.
“Ever since American International Group’s troubles sent ripples of panic through the financial markets in September 2008, the insurance industry has also come under the spotlight,” Best said in a press bulletin.
However, Best also indicates that “overall, compared with the European banking sector, the European insurance market has limited direct exposure to U.S. subprime mortgage and other ‘toxic’ assets. But European (re)insurers also face considerable challenges. In contrast to other major insurance markets (the U.S., for instance), the top market participants in Europe are composite insurance groups and thus simultaneously have to manage both their life and non-life business portfolios through the financial crisis.”
Among the most significant financial challenges for Europe’s (re)insurers, Best singled out the following:
— The current turbulence is expected to particularly impact insurance groups with significant life insurance operations, given the reduction in the level of personal disposable income. The deterioration in investment performance, with increased amounts of realized and unrealized losses as a result of market-to-market practices, has significantly eroded capital. The uncertainty surrounding the macro environment and interest rates pose difficulties for planning guarantee payments and (re)designing products. On the non-life side, insurers are likely to continue to report further increases in combined ratios. Increased natural catastrophe activity has impacted operating performance, and strong competition in the market constrains insurers’ ability to maintain earnings through price increases.
— In addition to diminished underwriting performance, the increased magnitude of credit write-downs and the deterioration in companies’ financial flexibility, leverage and liquidity have led A.M. Best to revise the outlook to negative and/or downgrade the ratings of a number of European insurers. A.M. Best expects the pace of these negative rating actions to accelerate (particularly in the case of insurance groups with significant life operations) if dislocation of the financial markets persists and the economic recession deepens. Strong enterprise risk management (ERM) continues to be important in today’s challenging environment and crucial to maintain higher rating levels.
— Owing to poor current liquidity in the credit markets with limited access to debt and equity funding, reinsurance provides an alternative form of capital, boosting reinsurers’ prospects for premium income. However, pricing is yet to universally harden based on 2009 renewal activity to date, and future large catastrophic losses and/or investment losses could place further significant stress on reinsurers’ capital cushions.
To access the special report BestWeek subscribers can download a PDF copy of all special reports as well as the associated spreadsheet data.
Non-subscribers can access an excerpt of each special report and purchase individual reports and spreadsheet data. Go to: www.ambest.com.
Source: A.M. Best
Topics Europe Reinsurance Market AM Best
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