A.M. Best Special Report: Economic Slump, Financial Crisis Hit Europe's Insurance Industry.OLDWICK, N.J. -- Ever since American International Group's troubles sent ripples of panic through the financial markets in September 2008, the insurance industry has also come under the spotlight, although most European insurers enjoyed a position of relative financial strength immediately prior to the current crisis. Overall, compared with the European banking sector, the European insurance market has limited direct exposure to U.S. subprime mortgage and other "toxic" assets, but European (re)insurers also face considerable challenges. In contrast to other major insurance markets (the U.S., for instance), the top market participants The term market participant is used in United States constitutional law to describe a U.S. State which is acting as a producer or supplier of a marketable good or service. When a state is acting in such a role, it may permissibly discriminate against non-residents. in Europe are composite insurance groups and thus simultaneously have to manage both their life and non-life business portfolios through the financial crisis. A.M. Best's analysis of the 10 biggest insurance groups in Europe and the top five European reinsurers highlights a number of issues for the European insurance industry arising out of the financial turmoil: * The current turbulence is expected to particularly impact insurance groups with significant life insurance operations, given the reduction in the level of personal disposable income disposable income Portion of an individual's income over which the recipient has complete discretion. To assess disposable income, it is necessary to determine total income, including not only wages and salaries, interest and dividend payments, and business profits, but also . The deterioration in investment performance, with increased amounts of realised and unrealised losses as a result of market-to-market practices, has significantly eroded capital. The uncertainty surrounding the macro environment and interest rates pose difficulties for planning guarantee payments and (re)designing products. On the non-life side, insurers are likely to continue to report further increases in combined ratios. Increased natural catastrophe activity has impacted operating performance, and strong competition in the market constrains insurers' ability to maintain earnings through price increases. * In addition to diminished underwriting performance, the increased magnitude of credit write-downs and the deterioration in companies' financial flexibility, leverage and liquidity have led A.M. Best to revise the outlook to negative and/or downgrade Downgrade A negative change in the rating of a security. Notes: For example, an analyst may downgrade a stock from strong buy to buy, or a bond rating agency may downgrade a bond from AAA to AA. the ratings of a number of European insurers. A.M. Best expects the pace of these negative rating actions to accelerate (particularly in the case of insurance groups with significant life operations) if dislocation dislocation, displacement of a body part, usually a bone. When a bone is dislocated, the ends of opposing bones are usually forced out of connection with one another. In the process, bruising of tissues and tearing of ligaments may occur. of the financial markets persists and the economic recession deepens. Strong enterprise risk management (ERM (Enterprise Relationship Management) An umbrella term with many shades of meaning over the years. It may refer to the management of information from any or all of an organization's customers, suppliers, business partners and employees. ) continues to be important in today's challenging environment and crucial to maintain higher rating levels. * Owing to owing to prep. Because of; on account of: I couldn't attend, owing to illness. owing to prep → debido a, por causa de poor current liquidity in the credit markets with limited access to debt and equity funding Equity funding An investment consisting of a life insurance policy and a mutual fund. The insurance policy is paid by the collateral value of fund shares, giving the investor the advantages of insurance protection with the growth potential of a mutual fund. , reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. provides an alternative form of capital, boosting reinsurers' prospects for premium income. However, pricing is yet to universally harden based on 2009 renewal activity to date, and future large catastrophic losses and/or investment losses could place further significant stress on reinsurers' capital cushions. Access a copy of this special report. BestWeek subscribers can download a PDF (Portable Document Format) The de facto standard for document publishing from Adobe. On the Web, there are countless brochures, data sheets, white papers and technical manuals in the PDF format. copy of all special reports as well as the associated spreadsheet data. Non-subscribers can access an excerpt ex·cerpt n. A passage or segment taken from a longer work, such as a literary or musical composition, a document, or a film. tr.v. ex·cerpt·ed, ex·cerpt·ing, ex·cerpts 1. of each special report and purchase individual reports and spreadsheet data. Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com. |
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