European insurers facing ‘slow and painful death’

AM Best has identified the top 10 threats or events that may have devastating effects on the financial strength of insurers or the market within which they operate.

The report, The 'Grey Swans': Top 10 Threats to European Insurers' Financial Strength, examined structural weaknesses in the European financial system, as policymakers search for solutions to solve macroeconomic imbalances in the Eurozone region, among other challenges.

AM Best said that the top 10 threats it has identified can be evenly spread into two categories: those that deliver a "knock-out punch," such as a mega-catastrophe, extreme financial market downturn, or a modelling error that leads to a rapid spiral toward impairment, versus those that lead to a "slow and painful death," such as higher regulatory costs and protectionist practices, or emerging underwriting risks in areas such as cyber terrorism, food security or climate change.

European insurers have enjoyed a recent period of relative economic stability, with many able to rebuild their capital positions following the financial crisis, yet these ongoing risks still remain.

Stefan Holzberger, managing director of analytics, said: "It is important that insurance companies devote sufficient time and resources toward managing the low probability, high severity risks to their businesses. These are the grey swan events, the known unknowns, as compared with the black swan events, the unknown unknowns that are virtually impossible to manage or hedge against.”

The report is a high-level summary of a presentation delivered at the International Insurance Society's 2014 seminar in London. AM Best expects to publish an additional report later this year reflecting on how the grey swan risks outlined are captured in the rating analysis.

The rating agency said it expects securely rated insurers to incorporate the potential for grey swan events into their risk management frameworks, adding that these companies' risk appetites, risk management capabilities and balance sheet strength should be sufficient to withstand the severe stress scenarios discussed in the report.