The Eurozone financial crisis continues to be among the most significant challenges facing insurers, although capital is strong for the European primary insurance market, according to A.M. Best Co.
In a new report, “European Non-Life Sector Faces Further Economic Uncertainty,” A.M. Best describes the results of two stress tests it conducted in December 2011 and June 2012 on all insurers and reinsurers domiciled in the Eurozone or with significant business operations in the region.
As for its outlook for European insurers. A.M. Best said it retains its negative view on the European insurance sector, as structural issues of the Eurozone do not appear likely to be resolved anytime soon.
“Despite balance sheet concerns, operating fundamentals for most companies remain strong,” said Stefan Holzberger, managing director, analytics. “In the context of extreme global catastrophe losses in 2011, reported earnings were robust and have remained so in 2012.”
Holzberger said primary European insurers appear able to withstand a significant amount of continued deterioration and volatility, although “if conditions were to worsen to a level beyond stress test assumptions, further negative rating actions may be necessary.”
According to the report, European insurers are attempting, where possible, to increase rates, and underwriting margins are passable based on current pricing. Reserving levels are showing stability, with modest reverse releases benefitting returns.
However, Sam Dobbyn, associate director, analytics, said the greatest concern for European primary insurers is the sudden impact macroeconomic conditions can have on an insurer’s balance sheet. “Scenarios that could place a company under severe pressure include the write-down of a large European country’s sovereign debt, or the exit of a current member of the Eurozone and the expected contagion effects of such an action,” Dobbyn said.
A.M. Best said it currently believes both of these scenarios are unlikely, “but they could have extremely damaging consequences for the sector if they were to occur.”
Yvette Essen, report author and director of industry research, Europe and emerging markets, said that economic conditions have continued to deteriorate in the Eurozone in 2012, and previous projections of economic recovery have proved to be “optimistic.”
There are additional risks regarding the ability of the European Central Bank (ECB) to fully implement its bond-buying program, given that the plan may face political resistance, A.M. Best said. And while short-term relief may be provided, fundamental long-term concerns that have contributed to the Eurozone crisis—such as the lack of competitiveness of southern European countries versus those in the north—have not been addressed.