European insurers need to grow capital: S&P

While Europe, like most insurance markets, has seen a growth in profitability recently, the challenge remains to sustain this profitability and grow capital, according to Standard & Poor’s “report card” on European insurers.
“The sector remains focused on profitability at the expense of volume, but the mantra has now shifted subtly toward profitable growth,” says Hans Wright, S&P credit analyst.
The problem is that many insurers remain exposed to credit risks because investment leverage remains high, risk retention levels have increased and long-tail risk continue to haunt the industry. Thus adverse reserve development, currency and investment fluctuations, and catastrophes continue to threaten profitability. Insurers who are unable to translate earnings into capital will be challenged to fund growth at stable levels of capitalization.
“Key among the risks associated with achieving profitable growth is the execution risk in insurers’ business models, many of which have been reshaped to respond to the changing market,” add Wright. “The success of this reshaping, which focuses largely on the restructuring of distribution capacity and products, cost reduction programs, and more selective underwriting, will be measured by the degree of sustained profitability over the next few years.”