Insurers relish Europe’s growing risk

The insurance industry has weathered the storms of recent years fairly successfully. Having been faced since the beginning of the decade with the twin challenges of rising claims set against a backdrop of difficult financial markets, the sector was finally able to announce a full recovery in 2005. According to that year’s figures, total premium income grew by 4.5% to reach €978 billion. Growth in the life market, at 6.2% was particularly strong.

Compared to the US, however, there is still ample room for improvement, according to Gérard de la Martinière, president of the European Insurance and Reinsurance Federation (CEA). He compares the EU’s insurance penetration rate, or premium income as a percentage of gross domestic product (GDP), to that of the US. While the EU rate has grown from 6.8% to a commendable 8.8% over the past decade, the US still maintains a significant lead at 10.8%.

"This is to say there is still significant room for further services that insurers provide, especially in the fields of life insurance, retirement, health insurance, but also professional liability, which is an expanding business," says de la Martinière.

With Europe’s public pension schemes creaking under the weight of ageing populations and no rise in birth rates projected for the foreseeable future, private pension plans are an important growth area for the sector. "There is more awareness among European citizens that traditional public schemes will have a limited impact," says de la Martinière. According to CEA’s annual report for 2005, public pensions spending in the EU25 is expected to increase by 21%, from 10.6% to 12.8% of GDP between 2004 and 2050.

Increased longevity throughout the EU is also placing significant pressure on health systems. Understaffed, cash-strapped public services are finding it increasingly difficult to provide a decent level of care for EU citizens. Here, insurers plan to step up the range of private plans available, offering new categories such as specialised assistance schemes for the elderly. "This is something that is not yet covered, either by traditional pension schemes or public health systems," says de la Martinière.

Compensation culture, already a reality in the US for some time, will bring far-reaching changes to the EU insurance market. In the US, the cost of the liability system is growing at 10% per year with judgements constantly testing the limits of insurance providers. CEA predicts significant growth in this area in the EU, with professionals such as doctors and architects likely to come under increasing consumer pressure.

Finally, CEA makes some grim predictions about natural disasters. Over the last 35 years, the number of natural disasters has risen substantially. Last year, global insured losses due to natural catastrophes hit a record high of $83bn (€65.6bn). As climate change continues to generate freak weather conditions, CEA predicts a range of new schemes covering extreme risk, particularly for floods. To give an example of the scale of the problem, insured losses resulting from the summer 2002 floods in Germany, Austria and the Czech Republic were in the region of €2.5bn.

The question of how the market will evolve at EU level is largely to be settled by the Solvency II framework, which aims to set an EU-wide system for the measurement of assets and liabilities, introducing some measure of harmonisation in EU legislation.

The European Commission sees Solvency II as a contribution to the emergence of a worldwide standard. It is likely to adopt the proposal for a directive in the middle of next year, with final implementation expected in 2010.

The insurance industry has weathered the storms of recent years fairly successfully. Having been faced since the beginning of the decade with the twin challenges of rising claims set against a backdrop of difficult financial markets, the sector was finally able to announce a full recovery in 2005. According to that year’s figures, total premium income grew by 4.5% to reach €978 billion. Growth in the life market, at 6.2% was particularly strong.