22 October 2015 Insurance

European insurers becoming more selective on risk coverage

European insurers are in a strong position, but are becoming more selective when it comes to the risks they are prepared to write, according to rating agency AM Best.

“From a credit ratings point of view, most of the AM Best-rated major players remain in a very strong position,” Carlos Wong-Fupuy, senior director, analytics at AM Best, told Baden-Baden Today.

“Despite paying special dividends and executing share buybacks, they keep high levels of risk-adjusted capital due to accumulated retained earnings. The market leaders continue to benefit from some positive reserve developments and their above-average degree of diversification.

“Having said that, technical margins continue to narrow and companies are becoming more selective on the risks they are prepared to write. This typically means reducing exposures on property cat—particularly in the US—and trying to move into other lines of business such as liability and specialty lines,” he said.

“Large groups are also trying to redeploy their capital where possible, developing further their direct insurance business and financial solutions portfolios, allocating resources to life business, partnering with providers of alternative capital and shifting part of their investment portfolios towards real assets.”

According to Wong-Fupuy, the main issue currently facing insurers in Europe is the soft market. Due to the low interest rates and the relatively higher profitability of the reinsurance sector compared to other industries, alternative capital is still abundant, he added.

“In addition to this, strongly capitalised direct writers have increased their net retention levels and strengthened their negotiating positions,” he said. “Because of the relatively low incidence of large catastrophe losses and positive reserve developments from previous years, most reinsurers remain well capitalised, which allows them to provide ample capacity, adding to the excess of supply.”

AM Best is not optimistic about an end to the soft market. Asked if the upcoming 1-1 renewals are expected to differ from the 2015 renewals, Wong-Fupuy replied: “Unless interest rates start moving upwards—very unlikely between now and year end—or a major natural catastrophe takes place, we don’t see any signs of a recovery in pricing conditions. At the same time, there is limited room for further pricing declines without materially impacting technical profitability.”

Catherine Thomas, senior director–analytics, added: “We would expect further rate decreases but the magnitude of these to be lower this year. Rate decreases likely to spread to non-cat lines.

“In my view, the market leaders will continue to be very selective in the risks they write, being prepared even to reduce their portfolios in traditional lines of business.”

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