Best Issues Special Report on European Life and Non-Life Markets

According to a newly issued special report from A.M. Best Co., European life insurers have experienced strong growth over the past few years, due to strong demand for unit-linked products, good investment conditions and the companies’ focus on selling capital efficient products.

However, Best notes: “Previous experience indicates that should investment volatility develop into a more persistent trend, unit-linked sales are likely to suffer first. Pensions throughout the developed European markets are considered the long-term growth opportunity, with the business showing strong growth during 2006. Regulatory changes are likely to increase demand even further for pension products in 2007. As far as composite insurers are concerned, the attractiveness of life business is likely to increase in the future as modest but stable life returns become more appealing against a background of deteriorating rates and margins on non-life portfolios.”

Turning to the P/C sector, Best indicated that “non-life property business remains profitable, though results tend to vary significantly between segments.” 2007 is likely to see profits shrink, however, due to “the impact of softening rates, especially for industrial risks.” Winter storm Kyrill is also a factor. It produced losses of approximately €2 billion ($2.72 billion) for German property insurers.

The motor (auto) sector continues to be affected by intensifying competition in most European markets, leading to softening rates, which has caused “declining or at least flat premiums.” As a result underwriting results are also “deteriorating, “with overall combined ratios near the 100 percent mark.

Best also notes that “accelerating claim inflation, either due to higher bodily injury awards or to higher car repair costs, remains an important issue in most European markets. Most surprisingly, motor insurance still is regarded as attractive by new entrants. Notwithstanding this, there is a stronger tendency to offer motor insurance via new distribution channels, such as retailers with larger customer bases.”

The report also discusses the coming impact of Solvency II, which is due to be implemented in 2010 (See IJ web site Sept. 15, 2006). Best calls the measure “an important step in changing the risk culture of insurers, especially smaller ones.” While still endorsing the need to maintain “minimum capital requirements,” Best said the “holistic approach is likely to have a more enduring impact on the insurance industry. Under Pillar II, European insurers will have to disclose their risk management procedures and strategy. Supervisors will have the power to evaluate whether an insurer has appropriate risk management procedures.”

Best also noted the “market has been characterized by increased levels of acquisition activity during 2006. A.M. Best believes that any merger and acquisition (M&A) activity in Europe is likely to be opportunistic rather than part of a major trend. However, macroeconomic and market conditions may be ripe for significant consolidation in some of the more fragmented markets. Cross border activity is likely to be focused either on the strongly growing markets of France, Italy and Eastern Europe or transatlantic deals.”

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