The European insurance industry continued to enjoy ratings stability and good results in the first half of 2007 despite external influences, Moody’s Investors Service said in a new Industry Outlook. While the operating environment should remain generally supportive to rating stability in the short term, external shocks or financial markets corrections could present a challenge for the industry.
Despite the recent turmoil in credit markets (particularly the US sub-prime credit market), some important weather-related catastrophic events in Europe (Winter Storm Kyrill and July’s UK floods) and continuing pressures from competition and regulations, European insurers generally have reported stable or improved underlying operating results and further strengthened their balance sheets in recent months.
“We have therefore seen European insurers still very actively channelling excess resources into franchise-enhancing acquisitions or capital management initiatives such as share buy-backs or minority buy-outs,” said Jose Morago, a Moody’s Assistant Vice President-Analyst and author of the report.
“They have also been pursuing acquisitions in growth markets such as Central and
With regard to the recent turbulence in credit markets, the report — entitled Industry Outlook: European Insurance — notes that European insurers have recently become relatively conservative in their investment strategies.
“With a few exceptions, the European insurance industry has relatively good asset quality, with limited exposures to complex credit instruments (e.g. CDOs). As a result, we do not expect a major direct impact from the sub-prime crisis for European insurers, particularly for those companies with more advanced risk management practices. However, the full extent of any second-order effects is difficult to ascertain at this stage.” added Morago.
The report also focuses on demographic change as one of the main business challenges, for life insurers in the coming years. “Longevity risk has clearly emerged as one of the main risk drivers for life insurers and potentially as one of the main sources of capital pressure for a number of companies over time,” said Morago.
With regard to P&C insurance, climate change is viewed as one of the main challenges and opportunities for the industry in coming years. The report notes the increasing challenge for European P&C writers — particularly with regard to the pricing, modelling and reinsurance management of insurance lines more exposed to catastrophe losses. Conversely, the report describes the opportunities that climate change could bring to European P&C writers in the long term.
“Those companies that best know how to innovate and identify customers’ needs in the context of appropriate underwriting and risk management could benefit the most,” Morago explained.
Distribution capabilities and operating excellence also remain a major rating differentiator.
“European insurers face an ongoing challenge with respect to their ability to control and extract value from their distribution channels and ultimately their ability to grow revenue and retain customers,” said Morago.
“Increasing cross-sector / cross-channel competition, new regulations, the increasing influence of some distribution channels on margins and the potential cannibalisation of other internal channels are all key issues,” Morago added.
