Western European re/insurers stable but clouds loom

The credit quality of Western European insurers and reinsurers has been stable over the past 12 months, despite a difficult period of low investment yields, a competitive environment, particularly for reinsurers with an abundance of capacity, and challenges to meet shareholders’ expectations, according to AM Best.

In a new special report, titled “Western European Insurers Enjoy Stability but Diverse Pressures Persist,” the rating agency argues that only modest alterations were made to Long-Term Issuer Credit Ratings in 2016, compared with a year earlier.

Ratings changes were largely a result of the major merger and acquisition (M&A) activity that took place in the prior 12-24 months, and many of the changes have reflected companies joining larger groups. Nevertheless, insurers and reinsurers involved in M&A activity must continue to focus on post-integration rationalisation in 2017 to achieve cost savings and retain key underwriting talent.

In 2016, upgrades largely resulted from companies benefiting from integration, although other drivers have included broader distribution, enhanced enterprise risk management and improved governance. Some rating changes have also reflected stronger capital positions and improved risk profiles.

Greg Carter, managing director, analytics, said: “In AM Best's opinion, Western European re/insurers will face a number of diverse challenges in 2017. Future pressures are likely to come from the fallout of political events, such as the economic impact on European markets as the UK government unveils details of its plans to exit the European Union. However, this is a medium to longer-term issue and will not affect ratings immediately.”

But AM Best also warned that there are further political clouds on the horizon with some of the major European economies, including France, Germany and the Netherlands, facing general elections and referendums in the coming 12-18 months. This creates challenges for the market with the rise of populist parties and movements creating uncertainty – as demonstrated by the Brexit vote and the election of President Donald Trump in the United States.

Yvette Essen, director, research & communications, and author of the report, added: “Given the soft market conditions and capacity available, AM Best expects industry consolidation to continue in the coming year. Western European markets will see relatively modest economic growth, so expansion of insurance business volumes will be sluggish at best.”

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