Factors Combine for Continued Uncertainty for Insurance Sector

A succession of catastrophes, an ample supply of capital and a range of economic worries are combining to create uncertainty for the insurance sector, Roger Sellek, chief executive officer of A.M. Best Europe-Rating Services Ltd., told A.M. Best's 2010 Insurance Market Briefing ? Europe in London.

"There is no doubt that 2011 is set to be another challenging year for the insurance industry," Sellek said.

However, Miles Trotter, general manager, analytics for A.M. Best, said the nonlife insurance industry in Western Europe has shown "resilience in difficult circumstances, particularly the difficult economic environment."

Trotter said he believes that many of the challenges facing the European insurance sector are related to these wider economic problems.

Investment returns remain poor in the face of low interest rates and capital markets that have become less accessible, Sellek said. "Capital management is becoming increasingly important for insurers and reinsurers alike," he said.

Threats to the U.K. economy include both inflation and deflation and the possibility "that the country is on the brink of a double-dip recession," Sellek said.

While inflation is a serious risk for the insurance sector, a weak economy could spawn an increase in claims frequency and dampen consumer demand for insurance products, he said.

"The insurance industry has coped well so far," Trotter told the audience. "And we will anticipate that it will continue to do so."

Trotter said underwriting exhibited "signs of strain."

Problems on the underwriting side included catastrophes, a recession-related drop in demand for life products and excessive competition, Trotter said.

"Reserve margins are coming under pressure," Trotter said. "In some territories, notably here in the U.K., reserve releases have dried up."

This year's catastrophes, Sellek said, have included Windstorm Xynthia in Western Europe, the New Zealand earthquake and the Deepwater Horizon oil spill in the Gulf of Mexico. He noted Munich Re has estimated there were 725 natural catastrophes worldwide in the first nine months of the year.

However, rates are "generally soft," despite expectations that the losses would cause premiums to rise, Sellek said.

"Prices appear to be marginally stronger in the reinsurance sector than in the direct market, although both are suffering from an abundance of capital, despite the recent financial crisis," he said.

Lloyd's has been a long-standing bright spot, having traded well since the terrorist attacks on Sept. 11, 2001, Trotter said. Reasons cited for this strength include the creation of the Franchise Performance Directorate, the arrival of new entrants, and the resolution of the liabilities involving Equitas, the reinsurer established to handle pre-1993 nonlife liabilities, he said.

"This decade has really been a buoyant one" for such Lloyd's-written international lines as reinsurance, marine and specialty, Trotter said. Pointing to the positive effects of catastrophes, he said, "Each time rates flatten out, there has tended to be a follow-up increase in rates."

By contrast, the more mainstream and companies-oriented U.K. property/casualty business peaked around 2004 before weakening, Trotter said.

In continental Europe, Trotter identifies "excessive competition" as the main feature of property/casualty markets. The economic recession has had negative effects on some lines of business, Trotter added.

Financial institutions, and rating agencies, face the prospect of increased regulation, Sellek said. Since the beginning of the economic downturn, the insurance industry has defended itself against what it has seen as excessive regulation, he said.

"Whilst there was general recognition that insurers had demonstrated clearly that they are more resilient than their banking counterparts, heavy regulation remains a key threat to the insurance community," Sellek said.

Government intervention in the market in Italy is an example of the difficulties the industry is facing in the setting of rates, Trotter said.

Vasilis Katsipis, general manager, analytics for A.M. Best, said emerging markets in the former Soviet Union, Eastern Europe and the Middle and Near East offer potential for growth. While Russia offers good prospects, investors should be aware it also has issues with accounting standards that could affect valuations, Katsipis said. He said a Russian insurer, for instance, is allowed to count structured products as cash. He also suspects Russian insurers of being overly generous in their evaluation of their real estate holdings, despite the negative effects of the recession.