Standard & Poor's non-life insurance rating outlook

Standard & Poor's non-life insurance rating outlook
Weaker earnings prospects due to government freeze on motor tariffs leads to negative outlook for Italian non-life insurance market .

Standard & Poor's has established a negative outlook for the Italian non-life insurance market, reflecting the detrimental impact of the government's one-year tariff freeze on motor liability insurance that has opened a gulf between premium levels and rising injury awards.

The negative outlook implies that the non-life market will be subject to more rating downgrades than upgrades.

Italy's non-life insurance market is unlikely to be profitable for a number of years. The one-year tariff freeze, which ended in March 2001, is expected to have an ongoing negative affect on insurers' earnings for the next two to three years.

To compound the deficit in the motor liability result over the past year, the government enacted legislation to increase injury award payments at a rate 40% higher than that advocated by the Italian insurance association, Associazione Nazionale fra le Imprese Assicuratrici (ANIA). The cost of motor insurance is already expensive, suggesting motorists who are good risks are paying excessive premiums. If rates rise further to compensate for higher awards, the market's earnings will increasingly polarise in favour of a few cost efficient companies.

Vittoria Assicurazioni, Compagnia Assicuratrice Unipol and Lloyd Adriatico have already proved themselves adept at segmenting motor risk. Consequently, they are cherry-picking the better risks, offering much lower rates for good risks than their competitors, while pricing the bad risks out of their portfolios.

There is additional concern about the cost of distribution in Italy. Tied agents remain the dominant force in non-life insurance sales and, although internet-based products are proving more successful than expected (currently representing about 1.5% of gross premiums written and set to double over the next two years), other lines of distribution are struggling to grow.

Although banks have demonstrated an ability to push insurance products, their sales are heavily weighted toward life products. This is largely due to the profitable nature of the life market compared with the non-life market. Banks are keen to own a majority in the life products they sell, but non-life products are more likely to be 100% owned by the insurer, giving banks less incentive to push them.

The development of the Italian health market is also slow. There is more scrutiny over claims now but, as the market is tied into generous state provisions, its profitability remains poor. Although insurers have made some advances by developing more sophisticated products aimed at high net worth individuals, the level of care in Italy is high and take-up is generally poor.

The insurance market
As of April 2000, there were 249 active insurance companies, of which 199 were domestic operations and 50 foreign. Of the domestic operations, the vast majority are joint-stock companies with mutuals making up the balance.

The major insurance centres in Italy are Milan, where over 90 companies are based, and Rome, from where over 45 companies operate. Other prominent centres include Turin, Genoa, Bologna, Trieste and Florence.

The Italian insurance market is the fourth largest in Europe in terms of premium volume. However, due to the widespread practice of self-insurance and generous state provisions, both the life and non-life sectors are under-developed (in terms of insurance spending per capita) relative to other European markets with comparable population sizes, such as those in Germany, France and the UK.

The market is dominated by large groups, which tend to comprise significant operating companies writing similar types of predominantly personal lines products. These groups are almost all domestic, with the exception of the RAS Group, the second largest in Italy, which is controlled by Allianz of Germany. Winterthur and Axa are also prominent in the market. The ten largest companies in 2000 accounted for approximately 55% of non-life premium income.

Following deregulation of the motor market in the mid 1990s, the larger companies consistently strengthened their reserves and capital. According to data provided by ANIA, the largest motor insurer during 2000 was SAI, which held a market share of 8.4% of motor liability business, the largest non-life class in Italy. The second largest insurer of motor liability was RAS, with a market share of 8.0%. As a result of deregulation, the balance sheets of many companies appear stronger than ever before.

A one year freeze in tariffs on motor liability insurance ran from April 2000 to March 2001. In addition, substantial fines were imposed on the leading players for alleged anti-competitive practices. Both of these developments have had a negative impact on insurers, though they have not been as damaging as was initially feared. This was mainly due to a reduction in claims frequency. In addition, the industry is vigorously appealing the fines, which were fully reserved for in 2000. Motor liability business remains unprofitable, but rate increases in 2001 and more selective underwriting may avert any significant deterioration in this important class.

Current non-life initiatives are centered on the reform of the motor liability sector. Under an agreement between ANIA, the government and the Italian consumers' association, a number of measures have been agreed. These include anti-fraud measures through the creation of a central claims register and driving license reform to be achieved by the introduction of a points system. A law passed in 2001 instituting base tables for minor injuries will give greater certainty when insurers estimate the claims costs, but there remains considerable scope for courts to vary their awards for more serious injuries.

In common with insurance markets the world over, the Italian market has, in recent years, experienced significant changes in both the primary and reinsurance sectors. Historically, significant acquisitions in the market have tended to be preceded by regulatory intervention due to effective bankruptcy. Prominent examples included SAI's purchase of MAA Assicurazioni (now called Nuova MAA Assicurazioni), Toro's purchase of the Tirrena Group of companies (now called Nuova Tirrena) and INA's purchase of the agricultural insurer, FATA.

Consolidation continued in 2000, in line with the trend of recent years. No companies, small or large, were immune. The most striking example was the acquisition by Italy's leading insurance group, Generali, of the INA Group (formerly Italy's third largest insurance group). The deal has created Italy's largest insurance group by a considerable margin with market shares of 29% and 18 % of the Italian life and non-life sectors respectively. However, many other companies have also been on the acquisition trail, including Unipol, which acquired several medium-sized operations in 2000 and Toro Assicurazioni, which is in the process of acquiring Lloyd Italico Assicurazioni and Lloyd Italico Vita.

In 2001, merger and acquisition activity has been more subdued, with the notable exception being SAI, which has agreed to purchase a 29% stake in La Fondiaria, thereby raising its stake in the company to 32%. The acquisition is subject to regulatory approval. However, several leading insurance groups have been progressively restructuring their balance sheets with issue of debt in various forms.

Natural disaster coverage is an area of potential reform. To date, the state has traditionally provided support to both commercial and personal sections of the community in the event of a natural catastrophe. This has limited the demand for catastrophe insurance cover and, although there is pressure to make natural disaster insurance compulsory for those who have fire policies, no measures have been adopted.

In the field of accident and health insurance, generous state benefits still limit the appetite for private insurance protections. It is likely substantial healthcare reforms will be necessary before there is any significant demand for private protection, which accounted for about 5% of non-life premiums in 2000.

Direct telewriters are only just beginning to make an impact in the market and the influence of brokers is mainly restricted to large and medium-sized commercial risks. Italian brokers have themselves been subject to foreign interest, an example being Willis Corroon's acquisition of a 50% stake in Gruppo Ital Brokers during 1998.

Public insurance operations (such as management of compensation funds for victims of road traffic accidents caused by uninsured/ unidentified drivers or for victims of organised crime) are virtually the only remaining insurance operations that remain under state control.

Insurance regulation and supervision
Under Italian law, the only entities which may provide insurance are public bodies, joint-stock companies (Società per Azioni), limited liability co-operative associations, mutual companies and representatives of foreign insurers.

Insurance in Italy is supervised primarily by the insurance department of the Ministry of Industry, Trade and Crafts in Rome to whom annual returns are made. The supervisory body for private insurance is, Istituto per la Vigilanza sulle Assicurazioni Private e di Interesse Collettivo (ISVAP):

Via V. Colonna 39
00193 Roma

ISVAP was constituted by law 576 of August 12, 1982 (and amended by law 20 of January 9, 1991). It has responsibility for policing the activities of insurers and has special powers of investigation. ISVAP's aim is to ensure the stability of the market and its undertakings, as well as the solvency and efficiency of insurance market participants, with a view to protecting the interests of policyholders.

General legal provisions relating to insurance in Italy are contained in the Civil Code (Articles 1882 to 1932) as amended and/or supplemented by subsequent legislation and, in the case of marine, aviation and transport business, the Navigation Code. In particular, law 295 of June 10, 1978, codified existing legislation in respect of non-marine insurance, including the main supervisory and regulatory measures and also incorporated the EU solvency regulations for non-life insurers into domestic law.

Under Italian bankruptcy law (principally contained in Royal Decree 267 of March 16, 1942), an insurance company facing financial difficulties may be subject to special procedures additional to those which generally apply. These include the company in question being placed under special management, where an ISVAP appointee will assume responsibility for the day-to-day running of the company.

A special process, compulsory administrative liquidation, exists in cases where, as a result of insolvency, it becomes necessary to close down insurance companies or certain other specified categories of enterprise; the procedure is designed to protect the public interest ahead of the interests of private creditors. Both the Ministry of Industry, through its consultative committee on private insurance, and ISVAP (and other interested parties such as trade unions) are involved throughout the various processes applicable to companies experiencing difficulties.

Legislation requires all non-life insurance companies, whether publicly quoted or not, to appoint independent auditors, as well as an internal board of auditors. It should be noted, however, that while there is a legal requirement for shareholders' accounts to be certified by independent auditors, no such duty exists in respect of additional information (such as the class-by-class income statement) contained in the returns made to the Ministry.

In common with the other EU member states, Italy introduced legislation implementing the EC Insurance Accounting Directive 91/674/EC prior to January 1, 1994. The accounting procedures set out in the directive were adopted with effect from the financial year commencing January 1, 1998. The major change introduced by the directive, insofar as Italian companies are concerned, is that they are now required to show unrealised gains and losses in their profit and loss accounts.

Italy has a population of approximately 57.6 million and was a founder member of the European Union (EU). The currency is the lira (ITL) but, with the move to economic and monetary union adopted by 11 EU countries in January 1999 (Austria, Belgium, Finland, France, Germany, Ireland, Luxembourg, Netherlands, Portugal and Spain), the currency will become the Euro in January 2003. The rate was E1 = ITL1,936.27, £1 = ITL3,057.76, as at August 16, 2001.

Standard & Poor's sovereign rating
Publication date: May 24, 2000
Analysts: Luc Marchand, London 020 7826 3812; Konrad Reuss, London 020 7826 3523
Credit Rating AA/Stable/A-1+

The ratings on the Republic of Italy reflect the achievement of successive Italian governments since the mid-1990s in reducing the budget deficit and moving ahead with structural reforms (most notably, privatisation). This, in turn, has put the very high government debt burden on a gradual downward trend. The April 2000 government crisis highlights the continued high degree of fragmentation in Italian politics. This instability constantly threatens effective policymaking and the implementation of essential reforms, including changes to the constitution and electoral system, without which prospects of ending the country's long history of weak coalition governments remains poor.

Italy's ratings are supported by its:

  • Highly diversified and export-oriented economy, with reasonably strong GDP growth prospects expected to increase to 2.7% and 2.6% in 2000 and 2001, respectively – notwithstanding the country's record of only moderate employment creation.
  • Success in fiscal consolidation, as demonstrated by a decrease in the general government's deficit to 1.9% of GDP in 1999, and its participation in European Economic and Monetary Union (EMU). This year's budget aims for a deficit of 1.5% of GDP, with further modest reductions over the next few years. This is a substantial improvement on annual deficits of more than 10% of GDP in the early 1990s.

    Italy's ratings are constrained by:

  • The continued high general government debt and interest burden, which greatly limit policy flexibility. Decreasing very slowly at an estimated 111.7% of GDP this year, Italy's general government debt burden compares unfavorably with almost all other AA-rated countries.
  • Political and institutional constraints stemming from Italy's deeply fragmented political landscape. This may result in a possible delay or dilution of necessary reform of the pension system, public administration, the electoral system, and the main utilities and labour markets.

    The outlook reflects the expectation that any future Italian government will follow a strict path of fiscal adjustment, similar to that outlined in this year's stability program. The program aims to achieve a balanced budget by 2003, and high primary surpluses (at more than 5% of GDP) necessary for further reductions in the public debt burden. This would ultimately enhance fiscal flexibility, improve business and consumer confidence, and strengthen Italy's medium-term investment and economic growth prospects.

    Maintaining fiscal discipline in the face of general government interest payments that are still at a high 14% of revenues, inefficiencies in public administration, local governments' expenditure slippages, and an overly generous pension system will be the key challenge for any future Italian government.

    With greater emphasis on public finances in Standard & Poor's analysis of the sovereigns in the Eurozone, any deviation from the projected decline in the very high governmental debt burden or policy shifts resulting in slippage of long-term structural reforms could quickly result in downward rating pressure.

    Italy insurance analyst contacts:
    Tristan Whittingham London 020 7847 7086
    Laura Santori London 020 7847 7062

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