As life insurers examine how to reduce the capital strains caused by guaranteed products, the prolonged low interest rate environment will depress the yields for new cash flow and maturing bonds.
- Europe in 2011 offers a financially stronger insurance market than in 2010, given strengthening of the credit and equity markets and improvements in the insurance industry's capitalization, solvency and profitability.
- While GDP is expected to decrease slightly in 2011, inflation should remain steady at 1.5% to 1.6% — levels that pose no immediate threat to growth.
- Litigation, fraud and catastrophe-type exposures also are increasing in the region.
- As insurers prepare for the implementation of Solvency II and Basel III, they must develop ways to maintain, if not increase capital.
To seize growth in 2011, insurers will need to quickly address and adapt to the changing regulatory and accounting environments, enhance the flexibility of their distribution systems, develop new markets and products and improve management of capital.
European insurers challenged to prosper amid uncertainty
The European insurance industry entered 2011 financially stronger than it was at the beginning of 2010. As the credit and equity markets recover combined with reductions in claims frequency in 2009 and 2010, the industry's capitalization, solvency and profitability are improving. Efforts to maintain and increase capital will continue in 2011, as insurers prepare for the impending implementation of Solvency II and Basel III.
Macroeconomic conditions indicate that 2011 will likely be another year in Europe of low GDP growth, low interest rates and moderate equity market performance. Even if the economic recovery continues, insurers may find that the assets underpinning their balance sheets have decreased in value.
Questions concerning the impact of the European sovereign debt crisis also remain, albeit the effect may vary for individual countries. Certainly, the macroeconomic conditions will challenge the skills and resources of insurers to generate superior investment returns and maintain balance sheet strength.
Macroeconomic conditions suggest sluggish economy
The sluggish economy and low interest rate environment challenges all segments of the European insurance industry to achieve superior growth. Non-life premiums across the region were poor in 2010, while profitability in both the non-life and reinsurance sectors will continue to be challenged by the soft market, the need for continuing expense reductions, and the end of loss reserve releases supporting profitability.
Business demand for traditional non-life products will remain especially listless in 2011 due to the slow business growth. At the same time, risks relating to continued advancements in technology, catastrophic weather events as well as fraud and litigation exposure are increasing. A key question is how catastrophic losses in 2010 might affect pricing this year.
Aging population creates opportunities
On the life side, premiums improved modestly in 2010. As Europe's population ages and grapples with demographic challenges to their social welfare systems, especially those parts related to retirement benefits, it creates opportunities for insurers to provide products and services in the retirement space. The downside is the low interest rate environment, which reduces profitability of guaranteed products.
Continued high unemployment also makes it difficult financially for many individuals to purchase new products. A key question facing life insurers is whether the emerging capital requirements will hinder their ability to meet consumer needs.
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