European insurance outlook - Insurers face difficult choices
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6 Februarie 2012 |
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ERNST & YOUNG S.R.L. |
Adresa
Strada Dr. Felix Iacob, Nr. 63-69
Cladirea Premium Plaza, Etaj 15
011033 Bucuresti, Sector 1
Telefon
+40-21-402.40.00
Fax
+40-21-310.71.93
Website
www.ey.com
Market summary
European life and non-life insurers face important strategic decisions in 2012. Volatility and deterioration in macroeconomic and political factors are disrupting balance sheets, consumers and investors. Unfolding regulatory initiatives will have a pervasive influence on insurer operations. A mature insurance market across much of the landscape continues to make growth difficult to achieve. And consumer needs and expectations are rapidly changing. These forces are combining to create considerable challenges for insurers seeking to improve both top-and bottom-line performance. Those companies that have a deep understanding of these challenges, and respond with strategic solutions, will outperform their peers.
Economic developments in Europe create significant risks to insurer balance sheets and may result in a prolonged and stagnant organic growth environment. Fiscal imbalances that guided the downgrade of sovereign debt in weaker European countries have adversely affected the balance sheets of numerous European insurers and reinsurers. Possible sovereign defaults, which may spread to other countries and sectors, could further reduce asset portfolios. A sudden spike in interest rates would further destabilize insurer portfolios and loss reserves, challenging the ability of insurers to remain competitive in the marketplace. Finally, wider recessionary conditions could reduce consumer and business demand for insurance products and services, adding to the restrictions in top-line growth potential.
Proposed regulatory changes transforming solvency and accounting standards will affect insurers from both a capital management and operational standpoint. For instance, insurers will be compelled to rethink their business and product mix in light of the anticipated capital requirements. These looming regulatory challenges will require insurers to support new reporting requirements with improved data quality and possibly with overhauled financial systems. Adding another dimension to these regulatory pressures are customer protection concerns from the country level, which may further induce insurers to alter their products and distribution.
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Ernst & Young believes that five broad needs are emerging to command management’s attention in 2012:
- Retool the organization to quickly respond to challenges
- Transform financial operations and systems
- Integrate risk management to identify emerging and diffused risk
- Rationalize product portfolios to refl ect a changing consumer market
- Adapt distribution channels to remain competitive
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Insurance market conditions in Europe are playing out on different fields. The region is increasingly differentiated from an economic performance standpoint, as indicated by the more economically challenged southern region and its impact on polarization. By contrast, more concentrated and mature markets characterize the northern countries. Still, the low market penetration in parts of eastern and southern Europe presents opportunities for organic market growth. The diversity in economic health and insurance penetration across these regions underscores the importance of a differentiated strategy. Consumers in these areas also are moving away from investment-linked products toward those that are easier to understand and offermore guarantees and lower costs.
Insurers operating in Europe in 2012 will need to make smart decisions to prosper amid the aforementioned adverse economic developments, significant imminent regulatory changes and a more demanding and changing consumer base.
Retool the organization to quickly respond to challenges
The severity and rapidity of change in the strategic environment in Europe has shortened the margin for error and increased pressure for quick responses from managers. Insurers that effectively identify and act on their strategic choices are best positioned to minimize the downside impact from adverse conditions and seize available opportunities on the upside.
Rapid changes in the economic picture for Europe, combined with continued sluggish growth prospects and increasing regulatory pressures, will compel leading insurers to reconsider their corporate structures, business mix and business development programs in 2012. A particular structural change that insurers may consider in 2012 to boost the bottom line is intra-region mergers and acquisitions (M&A). Other tactics to improve bottomline performance may include the consolidation of back-offi ce operations and the outsourcing of service and support functions, such as customer call centers. Insurers also may weigh domiciliary decisions regarding their legal structures and operating units, based on a review of rapidly-changing fiscal, regulatory and insurance market considerations. Finally, some insurers may be positioned to further develop operations in higher-growth territories.
Given the challenges impeding robust top-line growth in 2012, insurers operating within Europe need to review their current business mix. Some may reconsider their geographic locations and/or lines of business. Pressures from analysts and stakeholders to improve performance in the difficult European insurance environment will likely guide more consolidation of the industry through enhanced M&A activity. With more than 5,000 insurers, the European insurance market has long been considered ripe for consolidation. Although European M&A activity was restrained in 2011 because of the depressed valuations of companies and a “wait and see” attitude concerning Solvency II, the growth-starved conditions create pressure for M&A activity to revive in 2012.
