The fundamental credit outlook for the Italian insurance market is negative, in line with the negative outlook for the overall European insurance market, according to Moody's Investors Service. Unlike other European markets, the negative outlook for Italian insurance is driven primarily by structural changes to the nature of the sector and only partly by the effects of the global financial crisis, the rating agency said in its new Insurance Industry Outlook on Italy.
"We expect the persistently competitive nature of the motor market, exacerbated by the introduction of new legislation in 2007 and 2008, and the changing dynamics of bancassurance distribution to continue to depress the industry's medium-to-long term profitability, which is unlikely to return to the peak of 2005 any time soon. More positively, the Italian insurance system has proven more resilient than others to the financial crisis due to its lower exposure to structured assets and its conservative investment portfolio," said Antonello Aquino, Moody's lead analyst for the Italian insurance market.
PROPERTY & CASUALTY
Moody's noted that the Italian P&C sector has undergone some structural changes in recent years: the introduction of direct motor claim settlement in 2007 and the Bersani Law in 2008 have exacerbated the decline in the motor business's profitability. In addition, the decrease in new car registrations and the higher penetration of foreign competition are pressurising car insurance pricing.
"In H1 2009, market leaders initiated a campaign of price hardening following the sharp deterioration of the industry's motor loss ratio. Nevertheless, the benefits of this initiative will only start to be reflected in insurers' results from 2010 onwards and P&C underwriting results are expected to remain depressed in 2009," added Aquino.
Furthermore, the growing presence of foreign players, while not jeopardising the consolidated leadership position of established players, will mean that motor profitability will remain subdued relative to the peak of 2005.
Moody's expects an increase in distribution costs for Italian insurers in order to retain their current agency distribution services, following the ban on exclusive distribution for agents introduced by the Bersani Law. It also expects the recession, which has started to profoundly affect the real Italian economy only relatively recently, to result in an increase in the number of fraudulent claims.
LIFE
The sharp decline in bancassurance premia, historically the largest distribution channel for life products in Italy, significantly affected the life insurance sector in 2008 and mainly resulted from the banks encouraging the sale of their own deposit-type products rather than the products of their insurance partners as a means to restore their liquidity positions. Furthermore, Moody's notes that the collapse of equity indices and the default of Lehman Brothers Inc. brought the sale of investment-linked products to a halt.
H1 2009 saw a rebound in traditional premiums sold via the bancassurance channel thanks to the launch of a new "dedicated assets" product.
However, Moody's remains cautious as to the sustainability of the sales growth generated by this product, given its very low, potentially negative, profitability on a market consistent embedded value basis.
