European insurance industry set to grow despite economic uncertainty
Ernst & Young says there’s ‘opportunity in adversity’ ZURICH/LONDON, 17 February 2009 – The European insurance industry is expected to continue to grow this year albeit at a slower pace than previous years, according to Ernst & Young in its 2009 outlook.
Ernst & Young says that adapting to the changing financial landscape could bring a number of opportunities for insurers. And this is despite the backdrop of a recession and the industry marching towards the 2012 implementation target of three major pieces of regulation. Ernst & Young also forecasts simpler and more transparent insurance product structures as one impact on the European insurance industry.
Key points for 2009
According to Marcel Stalder, Head of Insurance Practice at Ernst & Young Switzerland and of the International Insurance Center in Zurich: “Current challenges in the insurance sector look set to continue this year, with no easing of the situation on the financial markets yet on the horizon.
Now is the time for the insurance industry to face these exceptionally adverse conditions and exploit any opportunity that may arise – although such opportunities are also the exception. In this time of crisis the fundamental mechanisms of insurance – an essential part of the financial industry – are manifesting themselves in a rare clarity which we must use in order to act purposefully and decisively. Those companies that choose to make bold and radical changes and succeed in their implementation will find themselves in a stronger position, and if they are to do that, capital adequacy and defenses against falling asset valuations and profits are crucial.
The financial crisis will, without doubt, lead to an expansion of regulatory requirements. Both supervisory authorities and investors will demand greater transparency in relation to compliance. The insurance sector must do everything in its power to meet these challenges in order to reverse the trend and comply with the important implementation deadline of 2012 for Solvency II, IFRS 4 and the Market-Consistent Embedded Value Principles.”
The five key points for insurance companies in 2009 are:
- Restoring public confidence in the financial industry
- Verifying and revising the orientation of corporate and product strategy
- Strengthening balance sheets and capital adequacy
- Renewed focus on operational issues
- Preparing for changes in official supervision
Some of these points are discussed in more detail below:
Life insurers
- The most successful insurance companies will be those that identify real needs in relation to savings and pensions across all consumer segments and that satisfy these needs transparently by providing readily understandable products.
- However, against the generally sobering backdrop of 2008, the increasing need for loss provisions to cover product and interest rate guarantees and, in particular, deep anxiety among end consumers reflected in their savings and investment behavior, we can assume that 2009 will be characterized by profits falling still further.
- Insurance companies are faced with the challenge of developing individual techniques for managing assets and liabilities. Apart from conventional issues such as capital efficiency and modeling of biometric risks, they now have to take observation of current market upheavals into account.
- For the reinsurance industry this is generating opportunities in the form of traditional or alternative transactions which are likely to be attractive. We expect a clearly heightened focus on this area in 2009.
Non-life insurers
- The intensifying competition in non-life insurance looks set to continue in 2009. Our expectation is that companies will focus more strongly on sectors where competitive advantages are identified.
- Sectors and business areas where returns are unlikely to meet expectations over the long term will be increasingly weeded out, and portfolios in core strategic areas will be strengthened, where possible by means of acquisitions.
- We expect that insurers, particularly small and medium-sized companies, will continue to tackle quantitative and qualitative risk management issues, with great importance assigned to in-depth analysis of risk capacity in insurance and investment business.
Balance sheets and capital adequacy
- Few insurance companies have been able to escape the effects of declining asset values and investment income, and further write-downs are likely in 2009. Capital income is predicted to fall as the central banks cut interest rates still further.
- Insurance companies will need to be aware of the consequences of charges, such as rising hedging costs, losses in relation to ineffective hedging, and currency volatility.
- The effectiveness of the various government rescue packages will continue to be crucial. If the effect of the crisis on the real economy were to result in a sharp rise in failing corporate bonds, insurers with exposure in these areas could see their balance sheets affected by essential value adjustments to the point where their own existence would be threatened.
Renewed focus on operational issues
- The new technologies acquired over the past 18 months will be transformed into applications in 2009, reducing administrative costs and improving customer service.
- Additional cost-reduction and operational restructuring initiatives will be crucial in 2009 to provide sustained support for profitability.
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