With the European economy being rocked by fears that the Greek debt crisis will spread to other countries, the euro falling in value and the strength of the U.S. recovery uncertain, the European insurance industry recognizes it is navigating stormy seas. However, key players across "the pond" are confident that insurers have weathered the economic perils far better than their banking counterparts, and while it won't be "smooth sailing" ahead, at least their companies are financially sound enough to make the journey relatively unscathed.

"It was quite impressive, actually," said Adam Garrard, CEO of Willis Europe, speaking about how the insurance industry conducted its business during the recession. He noted that:

o There were no major insolvencies for insurers and reinsurers.

o Rates did not spike because of balance sheet issues.

o The theme for the industry through the crisis seemed to be "business as usual."

He said it is heartening to see that during troubled financial times, when capital was difficult to come by for most, insurance companies remained a cheap source of contingent capital, and he praised the industry's "maturity and robustness."

Of note, he said, was that "nothing dramatic happened. That's the interesting thing."

Indeed, the biggest problem facing European carriers at this point is not a shortage of capital, but an overabundance of capacity, as fewer buyers in a shrinking economy means falling commercial insurance prices.

Daniel Hofmann, group chief economist at Zurich Insurance Company Ltd., pointed out that the industry did not escape the recession completely unscathed.

"Clearly a recession [this] deep and long has an impact on demand for [insurance] products," he said.

He pointed to a decline in premium volume across Europe, noting that the growth rate among insurers–which was slightly positive in 2007–became negative in 2008, a trend that worsened in 2009.

"That is true also for the profitability of insurers," he said, noting that while median return on equity was around 12-to-15 percent in 2006 and 2007, ROE dropped to 5 percent in 2008 and was possibly weakly positive or slightly negative in 2009.

Experts said the commercial insurance market in Europe remains soft as well, just as it remains in the United States.

Marguerite Reijnen, Aon's chief broking officer for Europe, the Middle East and Africa, said it is unknown whether insurers will raise prices any time soon as there is still plenty of capacity in the commercial marketplace.

"But," Zurich's Mr. Hofmann added, "all in all, European insurers weathered the crisis well–unlike banks." For example, he noted that insurers did not have to be bailed out by their governments, as many banks were.

He said the insurance industry had positive cash flow through the entire crisis, adding that, as a whole, the European insurance industry had a stabilizing effect on the financial market.

According to Mr. Garrard of Willis Europe, the lesson to take from the financial crisis is for insurers not to overreact to such events, no matter how wide-ranging.

There are lingering economic problems for Europe, however, and how those challenges will impact the overall economy in general, and the insurance industry in particular, are not yet fully known.

While the United States last year took proactive steps to cope with its peaking financial crisis, leading to the current recovery, according to Mr. Hofmann, "now Europe is going through financial policy turbulence."

Speaking to the situation in Greece, with the country facing a huge deficit and suffocating level of debt, Thomas Hess, chief economist for Swiss Re, said those problems by themselves are containable as long as there is a belief that Greece will stay in the euro zone and that Europe will bail them out if the country needs help to pay its soverign debts.

A potential problem that could cause a second banking crisis, he explained, if people believe that Greece will abandon the euro, and as a result there is a bank run as people rush to withdraw funds before their deposits are converted to a weaker currency.

Furthermore, Mr. Hess warned, there is a fear that the financial challenges crippling Greece could spill over to other European countries experiencing similar debt problems–such as Spain, Portugal, and, to some extent, Italy.

In terms of actual amounts, Mr. Hess said the government debt faced by Greece would be around 300 billion euros ($367 billion, at current exchange rates).

However, from the insurance industry's perspective, Mr. Hess explained, any concerns, if there are any, reside on the asset side of the ledger, rather than on the business operation side.

Insurers hold government bonds, he said, including Greek government bonds, so they could face losses on those investments. However, any losses the industry sees, according to Mr. Hess, will not approach anywhere near crisis levels.

Including Spanish, Portuguese and Italian bonds, the losses are bigger, Mr. Hess conceded, but they are also offset by, for example, much stronger German and French bonds held by insurers, he noted.

Barring a second banking crisis or a significant cascading effect of the problems in Greece, Mr. Hess said the asset side issues for insurers will be "nothing like a crisis."

Politically, some in the European insurance industry–similar to their American counterparts–are concerned they will be unnecessarily swept up in regulatory reforms enacted in response to the broader financial crisis.

Mr. Hofmann said one potential negative consequence from the financial crisis could be that insurance regulation gets ratcheted up and insurers get regulated more like banks.

"Banks and insurers should be regulated quite differently," he said.

He explained that the industry is making its case to politicians and regulators, but he added that politicians do not always trust what the financial sector says.

Mr. Hess said the message insurers are trying to get through to regulators is that there is a difference between banks and the insurance industry. He noted that in the United States and in Europe, few insurers received government support.

"So the crisis was a banking crisis and not an insurance crisis," he pointed out.

He added there is concern that insurers could come under pressure alongside banks to "pay for the crisis," via additional taxes or assessments, but he said the industry wants to convey the message that it did not receive government support and should not be taxed for a crisis it did not cause.

Mr. Garrard struck an optimistic tone regarding potential regulatory fallout.

"I think that regulators understand," he said, regarding the differences between insurers and banks, adding that he does not see a huge desire to lump insurers in with banks when assigning blame for the broader economic crisis.

Through the financial crisis, he said, the insurance industry has proven that it is well-regulated and mature.

Special Reports /

European Insurers Hope For Smooth Sailing, But Prepared To Navigate Economic Storms

Related Stories

Recommended For You