The insurance markets across Europe vary widely as a consequence of numerous commercial and cultural influences. Political and regulatory control, natural catastrophes and competition have all helped shape them.
As a result, despite the fact that insurers continue to cross borders in terms of ownership, through both acquisition and organic growth, Europe is fragmented with a wide differential between the characteristics of individual insurance markets. Similarly, there is a great divide at an operational level among Europe's composite insurers. The general industry perception is that life business is stable and fairly profitable in most markets. Meanwhile, many insurers perceive non-life business as volatile and frequently unprofitable.
Consequently, a renewed focus on life portfolios has emerged, set against a distinct reduction of many companies' non-life exposures. CGNU's decision to exit its global risks and London Market business over the past year is a notable example.
The UK non-life market, which can be seen as two distinct parts - the domestic market and the international London Market - also looks set for an uncertain future.
The London Market is highly mature and competitive and prospects for long-term premium growth are limited. However, the effects of rate improvements, which, through a lack of retrocession capacity began to trickle down into excess-of-loss reinsurance in 2000, has started to have a significant and positive affect on the industry.
Direct markets have remained more stubborn, but have at least stabilised during 2000, with substantial rate increases expected across the board for 2001. However, lower investment returns in the UK, combined with the fact that rates are still far from healthy, mean that although the non-life market could show a marked improvement in profitability by 2002, it is unlikely to see a significant upturn in the number of rating upgrades.
Lower investment returns have also blighted the UK life market, although the ongoing pressure on earnings is largely caused by greater transparency of charges, coupled with a more consumer-friendly charging structure, spreading "level" charges over the life of a policy, instead of the old system of "up-front" loading.
In the short-term, pressure on solvency also looks set to trouble the market, due to a number of issues arriving at one time: pensions mis-selling, guaranteed annuity options, new reserving regulations, and the possibility of future endowment mis-selling charges.
Germany, with the largest non-life market in Europe, accounting for 25.6% of gross premium income of European Union member countries in 1999, has also been increasingly competitive, although the trend has begun to dissipate this year.
Commercial lines and reinsurance have long been exposed to competition and the deregulation of personal lines caused the competition to intensify. However, although price and product competition increased, the loyalty of policyholders to local agents meant little deterioration in underwriting performance outside of motor lines and has operated as a brake on competitive forces.
Separately, changes to the corporate tax structure will have a significant impact on the larger German insurers. With a 25% reduction in corporation tax and the abolition of capital gains tax on the sale of domestic shareholdings, there is likely to be an increase in the speed that insurers unwind their complex cross shareholdings; an opportunity already utilised by Allianz, which in March announced that it would merge with Dresdner Bank to create one of the world's largest bancassurance groups.
The Italian non-life market, meanwhile, has only recently seen the end of its government's one-year tariff freeze on motor liability insurance, which opened a gulf between premium levels and rising injury awards. The effects are expected to be long-lasting, with insurers likely to experience poor earnings for the next two to three years.
In a more positive strain, the Italian government has benefited its life insurers through ongoing tax and social security benefit reforms that continue to create significant opportunities in the market, ensuring that Italy remains one of the fastest growing and most profitable life sectors in Europe.
The French non-life insurance market has also been troubled, with a marked deterioration in its operating performance in 2000 as a result of under-reserving and the ongoing effect of the windstorms of 1999. French non-life insurers now face the challenge of implementing sufficient rate increases to catch up with the rising cost of reinsurance.
Personal lines reflect a particular threat to the security of the French non-life insurance market. With the country's traditional insurers, mutuals and bancassurers all vying for market share, Standard & Poor's warns that after the initial predicted rate increases, the ease of price comparison will see companies fall back into competition and a subsequent lowering of rates. Meanwhile, a sector-wide strengthening of technical reserves and net written premiums in the French life market provides some stability for insurers.
As a result, over the long term, Standard & Poor's expects to see low-cost providers, such as MSI's (mutuals without intermediaries) and bancassurers, increase their business position in the market.
Elsewhere across Europe, the story looks much the same. The Austrian insurance market is saturated with four dominant companies, owning about 65% of market share. Meanwhile, a lack of consolidation has left the lower end of the market very fragmented and competition has driven rates down. Although Austria's life insurance sector lends a positive feature to the market, it is unlikely to stabilise it.
Tax reform is driving premium growth in the Dutch insurance market's pensions business, despite negative developments in its life savings business and uncertainty in its healthcare sector. However, claims inflation, particularly for bodily injury, has accelerated and the Dutch non-life market, one of the more stable in Europe, could suffer if healthcare and motor insurers do not manage to raise their rates sufficiently.
The Spanish non-life market, dominated by motor business, is another market prone to consolidation due to intense competition, while its life market conversely displays great potential. Changes in fiscal legislation has resulted in the growth of saving products and has required corporates to "externalise" their pension funds with insurance companies or mutual funds.
Evidently, the great driver throughout European insurance is, it seems, that of fiscal reform as governments attempt to off-load the burden of an ageing population. With such uncertain prospects it is perhaps understandable that some insurers are reducing their non-life exposures. However, the boom in life business can only have a limited lifespan before competition cuts in and then, perhaps, a renewed non-life market will appeal again.