Insurance companies operating in Europe during the later years of the 1990s benefited from relatively benign economic conditions. The insurance market has not suffered particularly badly from its traditional sources of problems - there have been fewer catastrophe losses to rival those of previous years. External factors, such as the Asian financial crisis, have hit other markets harder than Europe. The introduction of the Single European Market has been the one major upheaval.
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Insurance companies operating in Europe during the later years of the 1990s benefited from relatively benign economic conditions. The insurance market has not suffered particularly badly from its traditional sources of problems - there have been fewer catastrophe losses to rival those of previous years. External factors, such as the Asian financial crisis, have hit other markets harder than Europe. The introduction of the Single European Market has been the one major upheaval.
Gross premiums have grown steadily throughout the market during the decade. Some of the growth in non-life premiums can be linked to growth in GDP for the more mature insurance markets in Northern Europe. Market deregulation in individual European states and the movement away from tariffs (in some instances the removal of tariffs will have reduced premium volumes) and other such schemes that aimed to control commercial activities in the market also have contributed to this growth. A further factor has been the transfer by governments of state-controlled insurance organisations and responsibilities to the private sector.
Competitive pressures have balanced factors that influenced the growth of premiums. Insurance organisations seem to have become more cost conscious in attempting to improve performance. Technology has played a large part here, and the effects of the introduction of the internet as a distribution channel will be interesting to observe. The recent announcement by Zurich Insurance of a US$1bn internet investment programme gives a clear indication of the importance placed on the internet by insurers in their worldwide operations.
It also could be argued that the European Commission has fostered competitive pressures for the benefit of consumers by carefully examining any merger to identify possible anti-competitive market dominance. It has also exercised some controls over state subsidies for insurance organisations undergoing privatisation.
There are three main routes for an insurer to become active in the European Economic Area (EEA) internal market (the single market): business can be written directly across borders; branch operations can be established in other member states; and business can be written via subsidiaries (either newly established or purchased as going concerns).
The first two routes are not yet particularly active, although increasing. The barriers of language and market practices (for instance, taxation rules particular to each member state) still remain in place. There are also barriers created by legal procedures that need to be accommodated by policy wordings.
Strikingly, however, cross-border mergers and acquisitions increased as the decade closed. In this, the insurance sector has mirrored other sectors as mergers have involved some of the largest and well-established companies. The level of merger and acquisition activity has been heavily influenced by the positive effect of stronger investment markets on balance sheets, which have improved solvency levels to above those required by current books of business.
This has pushed insurers into mergers and acquisitions in order to meet shareholder expectations, given limited opportunities to meet these expectations from organic growth. Other "traditional" reasons for merger (economies of scale, enhanced distribution networks, product synergies etc.) have also had a bearing. Ultimately, the long-term effect of cross border mergers within the EEA will be to establish companies in the new Single Market.
The proportion of worldwide gross premiums written by companies in the EEA increased during the 1990s. While the United States remained the largest market, it was all but equalled at the end of the decade by that written by EEA and Swiss companies.
The number of active insurance organisations within the EEA has fallen during the 1990s, while the numbers operating in other major markets has increased. Though this may be as a result of reclassification within figures reported by some European states, and indeed some states recorded increases in the number of active insurers, the overall reduction can in part be explained by the competitive effects of the Single Market. The need for a competitive edge within the Single Market has become apparent to many larger more generalised operators. Also, certain niche operators, who can easily identify their potential customers (and consequently control distribution and operating costs) have expanded their geographical penetration.
The EU has reported average per capita premiums increasing during the 1990s, for member states, at the same time highlighting reductions in average per capita non-life premiums for the USA market. It is clear that there is room for growth in the EU as average per capita non-life gross premiums were only 46% of that achieved in the USA (74% for life business). Dominant markets in the EEA have remained the same; Germany, the UK and France, which between them accounted for around 70% of gross written premiums in 1997. Markets where there is apparently some room for development (for instance, Italy and Spain) may increase in importance as they become more established.
A good demonstration of a more "mature" market can be seen in the relative movements of gross premiums written by life offices as opposed to non-life insurers. Life offices have witnessed a gradual increase in premiums, while non-life insurers have seen a reduction. The non-life market is significantly more mature than the life market. The longer term need to shift pension funding from state funded to privately funded schemes offers significant growth opportunities, particularly outside the UK. There are limited opportunities for new non-life insurance products unless technological change and the "new economy" throw up such opportunities. The life market has had to cope with the bulk of deregulation that has been put into place and as a result has introduced many new products. An example would be the personal pension in the UK, which the UK government has positively encouraged as an alternative to the State Earnings Related Pension Scheme. The basic difference between life and non-life premiums (the savings element) can also be highlighted to explain the position.
At the end of 1997 EU statistics show insurers holding £2.3 trillion of assets, just under half of which were held as equity shares, other variable yield securities, debt securities and fixed income securities. The proportionate mix of investments varied quite considerably between member states. Total gross technical provisions were reported as £1.3 trillion, with capital and reserves standing at £135.6bn.
Non-linked products dominated the European life market, although the product showing the largest growth potential was linked life. Non-life products were dominated by motor and accident and health business, with fire and other property coverage showing some growth.
As the insurance industry moved into a new decade, further mergers and acquisitions were announced, as were strategic entries to and withdrawals from certain classes of business. Given the scope for further internal development of the Single European Market, and the likely effects of enhanced technological change on consumers buying (and insuring) habits, the European Market is likely to undergo a period of gradual but persistent change.
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