European Insurers Face Ongoing Capital Challenges Amid Struggle to Deliver Top-line Growth in 2012

Kimberly Watson, Editor in Chief
February 07, 2012 /

European life and non-life insurers face significant strategic decisions and difficult choices in 2012 with the recent European sovereign downgrades adding to capital pressures, according to Ernst & Young’s new European Insurance Industry Outlook.

Volatility and deterioration in macroeconomic and political factors are disrupting balance sheets, consumers and investors. Consumer needs and expectations are rapidly changing, and a mature insurance market in the region continues to make growth difficult to achieve. As a result, considerable challenges are hitting insurers who are seeking to improve both top-line and bottom-line performance.

“Economic developments in Europe create significant risks to insurer balance sheets and may result in a prolonged and stagnant organic growth environment,” says Andreas Freiling, Ernst & Young’s Europe, Middle East, India and Africa (EMEIA) Insurance Leader.

“Fiscal imbalances that guided the downgrade of sovereign debt in weaker European countries have adversely affected the balance sheets of numerous European insurers and reinsurers.”

Andreas continues; “To date the rating agencies have been reassured by the relatively strong capital levels and long-term outlook of most insurers. It has long been recognised that it is necessary for insurers to have exposure to sovereign debt, especially in the currencies in which they operate.

“However, with no final resolution of the Eurozone crisis on the horizon, the combination of insurers’ innate exposure to sovereign debt and the long term effect of recession and low interest rates on the insurance market may force rating agencies to reconsider the ratings of insurers.”

Ernst & Young identifies five needs for the European insurance industry to examine in 2012.

Retool the organization to quickly respond to challenges. The European environment continues to evolve rapidly, shrinking the margin for error and pressuring executives to respond. Insurers that effectively identify and act on their strategic choices are better positioned to minimize the downside impact of unforgiving market conditions and capitalize on available opportunities on the upside.

Considerable changes affecting the economic future of Europe, combined with sluggish growth prospects and regulatory pressures, will motivate leading insurers to reconsider their corporate structures, business mix and development programs.

Transform financial operations and systems. Insurers need to consider transforming their internal processes to achieve their strategic and operational objectives, given the critical importance of financial operations and systems. Furthermore, the intensifying pressures of the ever-changing regulatory and accounting regimes require insurers to produce more detailed information in a timelier manner.

Insurers’ legacy systems, current processes, and concerns over data quality, are barriers to this goal and not all European insurers are starting from the same place in terms of financial and systems technology enhancements.

Integrate risk management to identify emerging and diffused risk. European non-life insurers and reinsurers confront challenges from the increased frequency of known severity risks, along with emerging insurance risks in their portfolios. As a result, these issues will require applying more rigorous analytical discipline to existing portfolios.

Furthermore, they compel higher-level enterprise risk management (ERM) techniques to identify and manage potential risk correlations across insurance portfolios. Insurers should elevate the importance of ERM in decision-making and implement measures to streamline and centralize risk management.

Rationalize product portfolios to reflect a changing consumer market. The challenge for European life insurers is to balance the need to charge for higher risks with the consumer’s preference for lower-cost, more transparent and easier to understand products. Many insurers have not fully grasped the competitive value of making their products more accessible, in recognition of the evolutionary changes in consumer motivation, attitudes and behavior.

These changes are largely a consequence of the growing influence of the Internet as a sales and information channel.

Adapt distribution channels to remain competitive. The growing use of the Internet will continue to challenge existing life and non-life distribution models and marketing plans. At the same time, regulatory changes will affect the significant bancassurance model in some countries, changing the competitive landscape and developing opportunities to forge new distributor relationships.

Insurers and their distributor networks will need to share client information and provide necessary training to make cross-selling a reality.

“Proposed regulatory changing transforming solvency and accounting standards will affect insurers from both a capital management and operational standpoint,” says Shaun Crawford, Ernst & Young’s Global Insurance Sector Leader.

“For instance, insurers will be compelled to rethink their business and product mix in light of the anticipated capital requirements. Looming regulatory challenges will call for insurers to support new reporting requirements with improved data quality and possibly with overhauled financial systems.”

 

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