Operating environment in Europe deteriorates further for insurers in 2017: Dagong

The pressure and risks faced by insurers in Europe are increasing further in 2017, pressuring profitability and return on capital, according to China-based credit rating agency.

"We consider 2017 for the European insurance industry to be more challenging than 2016, underpinned by highly uncertain, volatile and difficult operating environment, with weak economic growth, amplified political risk, and increased regulatory burden." said Linas Grigaliunas, head of insurance at Dagong Europe.

"In addition, increasing competition, persistent low and in some cases negative interest rate environment suppress growth and elevate pressure on profitability and return on capital. These, coupled with risks and opportunities coming from rapid advances in innovation and technological progress, changing consumer needs and lifestyles will challenge insurers’ established business models and sustainability in the medium and long term.

Nevertheless, Dagong notes that the European insurance industry is expected to maintain its robust credit characteristics based on strong capitalisation, high liquidity, and prudent risk management, and also helped by improving governance and close regulatory supervision.

"The European insurance industry is facing a rising number of risks, which could materially weaken its credit characteristics," said Grigaliunas. "However, in the long term, we expect the industry to find a way to transform and adapt to the rapidly changing world and become more relevant, robust, efficient and agile.

"At the same time, the innovation & technology is developing faster than ever and is already challenging the long-standing insurance business and operating models. We believe that technology and innovation can help to reduce insurance protection gap in developing and mature markets and will be the driving force for industry’s growth, improved efficiency and profitability in the long term," Grigaliunas added.

Dagong expects non-life insurance premiums to grow at about 1.5-2 percent in the 2017-18 period in Europe, just below the European Union GDP (gross domestic product) growth, negatively affected by increasing competition.

At the same time, Dagong expects pricing trends to vary significantly between countries, but on average, to soften slightly or remain the same at best. Competition is set to intensify and put pressure on pricing.

Dagong believes that merger and acquisition activity and industry consolidation will continue in Europe and are likely to gain pace, driven by more favourable regulatory solvency calculation terms for large and better-diversified companies, lack of organic growth opportunities in most mature European markets, divestments and need to support profitability and competitiveness.

The agency also expects an increased and enhanced use of reinsurance protection in Europe, driven by tougher regulatory capital requirements, improving risk management practices and attractive pricing.

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