European insurers will continue to face challenges in delivering genuine profitable growth over the next few years, said Standard & Poor's (S&P).
“The sector remains focused on profitability at the expense of volume, but the mantra has now shifted subtly toward profitable growth,” said S&P credit analyst Hans Wright.
S&P said it remained cautious about the continued optimistic messages coming from many insurers, however, as the definition of profitable often ignored some key risks.
Notably, investment leverage remained high for some insurers, risk retention levels had generally increased, and long-tail risks continue to increase, said S&P.
As a result, insurers remained exposed to negative short-term investment fluctuations, losses from large events, and adverse reserve development, which could offset underlying profits.
It warned that for those insurers unable to translate underlying earnings into capital, funding growth at a stable level of capitalization could be a significant challenge for the market.
”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,” said 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.”
The full report, entitled ‘Industry Report Card: European Insurance', is available at www.ratingsdirect.com.
