S&P Assesses Insurance Industry and Country Risk Shaping Insurance Markets

By | May 23, 2013

A report by Standard & Poor’s Ratings Services notes that “for the two main insurance sectors, life and property/casualty (P/C), overall industry and country risks are, on average, much lower in developed than in emerging markets.”

S&P explained that it uses the “assessments as a factor in rating insurance companies, and have designed them to provide us and market participants with a comparative and global view of insurance risk across sectors, regions, and countries.

“We assigned the assessments, covering 97 insurance sectors worldwide, for the first time on May 7, 2013. However, for a long time we factored in industry and country risks into our view of an insurer’s competitive position. Under our revised criteria (‘Insurers: Rating Methodology,’ published on May 7, 2013, on RatingsDirect), and to increase transparency, we now separately assess and publish our views about industry and country risk,” S&P said.

Credit analyst David Laxton added: “What is noticeable is that industry risk is lower in emerging P/C markets than in developed ones. That’s because more favorable competitive dynamics in emerging markets have allowed for continued, strong profit margins, which have declined under competitive pressure in more mature markets.”

The bulletin also noted: “We see good profitability in emerging markets, together with positive premium growth and straightforward products with lower product risk. However, these advantages are partly offset by the generally less developed institutional frameworks.
Life insurance in emerging markets is usually well established only in the more advanced countries that have more stable economic, financial, and legal systems. Consequently, they exhibit lower country risk.

“Our assessments in developed countries show similar levels of risk for both the P/C and life sectors, and reflect highly competitive markets, modest growth, and the risks associated with complex products. However, markets in developed countries benefit from stable economic and legal systems and sophisticated financial sectors.”

Laxton said: “Showing the highest industry risk is the global P/C reinsurance sector. That’s because this sector assumes the high-severity risks, such as catastrophe risks, coming from the P/C insurance sectors. To cope with these risks, global reinsurers tend to be strongly capitalized and exhibit sophisticated enterprise risk management skills.”

In contrast, S&P observed that “life reinsurance is a sector dominated by a few internationally diversified groups with specific market expertise. This represents a significant barrier to entry for others and preserves the sector’s positive operating performance, leading to significantly lower industry risk.

The report is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to research_request@standardandpoors.com.

Source: Standard & Poor’s

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