Further write-downs are expected and certain lines will be curtailed, according to Ernst & Young
The European insurance industry is expected to continue to grow this year albeit at a slower pace than previous years, according to Ernst & Young (E&Y).
Adapting to the changing financial landscape could bring a number of opportunities for insurers, said E&Y, despite the recession and three new major pieces of regulation due in 2012.
The forecast also predicted simpler and more transparent insurance product structures.
Considerations for Europe in 2009
Head of insurance for E&Y in Europe, Middle East, India and Africa, Lex Van Overmeire said: ‘The insurance industry faces many challenges this year, not least those posed by the tightening grip of a European-wide recession.’
‘But there are always opportunities in adversity. There could be potential rich-pickings for those insurers brave enough to use the current climate to implement changes, assess capital adequacy and keep a close eye on the impact of falling investment valuations and incomes.’
‘The financial crisis will undoubtedly drive greater regulatory scrutiny. Regulators and investors alike are requesting more disclosure and compliance information. The insurance industry must do all it can to step up to the challenges to survive 2009 and meet the key 2012 implementation date for Solvency II, IFRS 4 and market-consistent embedded value.’
According to E&Y there are a number of issues the industry needs to address:
Certain lines of business are likely to be curtailed as insurers focus on remaining as profitable as possible, with directors’ and officers’ (D&O), errors and omissions (E&O) and credit insurances being likely casualties.
Continuing pressure on profit margins means further asset write-downs and further falls in investment income are anticipated.
Low prices are expected to firm mid-year largely because of the need for capital protection and capital-raising strategies will increase demand for reinsurance, and reinsurers will drive prices up.
Central and Eastern Europe
Central and Eastern European insurance markets are projected to grow at a slower pace than recent years. Insurers should focus on simple, transparent protection products such as savings, endowment and health. Targeting specific market segments, such as takaful, could be used to expand franchises in these countries.
“Certain lines of business are likely to be curtailed as insurers focus on remaining as profitable.
Balance sheets and capital adequacy
Few insurers have escaped the impact of declining asset values and investment returns and continued write-downs should be expected in 2009. Investment income is anticipated to decline, as central banks continue to reduce interest rates.
Insurers will need to consider the impact of pressures such as increased hedging costs, losses associated with ineffective hedges and foreign exchange volatility. There is no doubt that these will further erode companies’ capital.
It will be difficult to raise capital for potential acquisitions but some insurers will have access to funds from government safety nets. Others will take advantage of buying opportunities to make acquisitions in 2009.
Readdress operating issues
Technology acquisitions made in the past 18 months will begin to be deployed in 2009, helping to attract a broader spectrum of policyholders by reducing administration hassle and improving customer service.
Cost reduction initiatives are expected to be key in 2009 as technology is deployed and operational transformation is achieved.
Andy Baldwin, managing partner for industries in E&Y’s EMEIA Financial Services Organisation, said: ‘We will see a continued hardening of rates in the general insurance marketplace, which will lead to increased significant investor interest in insurers as the value creating stock for the next three years.’
‘Unsurprisingly, we will see greater insurer focus on efficiency with many of the key players targeting a sub 10% expense ratio by restructuring, headcount reductions, selected technology investments and significant changes to business and operating models.’
‘Leveraging existing spend on technology assets will be crucial given the inevitable reduction in technology spend. UK insurers have probably spent over £250m on new applications in claims, policy processing and specialist areas in the last 24 months. The challenge will be to ‘sweat’ these assets during the recession to ensure tangible and intangible benefits match the original upfront investments.’
He added: ‘The winners in the market will be those who accomplish this drive for operational efficiency, while maintaining the quality and focus on customer and broker service. All too often the drive towards a ‘factory processing’ mentality on unit cost efficiency has been to the detriment of service; especially to brokers.’
‘Experience suggests that despite the UK marketplace being the toughest for a generation, there are still opportunities for well-capitalised, technically adept and market-orientated insurers in such difficult trading conditions.’
The top five considerations for insurers in 2009 are:
Balancing risks and opportunities
Rethinking strategies in Central and Eastern Europe
Strengthening balance sheets and capital adequacy
Readdressing operating issues
Preparing for changes in global regulatory oversight