European financial crisis still most significant challenge for insurers: A.M. Best

Despite some improved profitability and strong capital among some European countries’ non-life insurance sectors, the Eurozone financial crisis still presents a major barrier to growth for that industry moving forward, suggests a recent report  from A.M. Best.

Based on “stress tests” completed in December 2011 and June 2012, the rating agency maintained its negative outlook for the European insurance sector in its special report, European Non-Life Sector Faces Further Economic Uncertainty, published this month.

The company has downgraded several large European insurers, mainly because of those companies’ “exposures to Italian and Spanish sovereign debt and Eurozone financial institutions,” the report noted.

“Despite balance sheet concerns, operating fundamentals for most companies remain strong,” Stefan Holzberger, managing director of analytics for the company noted in a statement.

“In the context of extreme global catastrophe losses in 2011, reported earnings were robust and have remained so in 2012. Primary European insurers appear able to withstand a significant amount of continued deterioration and volatility, although if conditions were to worsen to a level beyond stress test assumptions, further negative rating actions may be necessary.”

The German and French markets have been particularly resilient, although legislative changes have created a “shifting landscape” in Italy, and the very weak Spanish economy presents a challenge for that country’ market, the report noted.

Best did acknowledge September 2012 efforts by the European Central Bank to curb the debt crisis through a new bond-buying program, but said it won’t be a lasting solution. Fundamentals concerns, such as a lack of competitiveness between southern and northern European countries, have not yet been addressed, the report argued.

“A.M. Best’s greatest concern for European primary insurers is the sudden impact macroeconomic conditions can have on an insurer’s balance sheet,” the report said. That could include the write-down of certain country’s sovereign debt, or contagion effects if a current Eurozone member exited, which the rating agency noted are unlikely scenarios.