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Strong Resurgence

According to new data released by Insurance Europe, gross premiums for the European insurance sector increased by 1.6% in 2012. This is a significant improvement, considering that premiums fell by more than 2% in 2011.

Non-life insurance figures grew the most, increasing by 3% to 459 billion euros. However, life insurance, which accounts for nearly 60% of premium increased by a shade below 1% to 656 billion euros.

The resurgence in European markets in 2012 has also led to a substantial increase in the investment portfolio of European insurers. The total investment portfolio of European insurers has increased from 7,700 billion euros in 2011 to 8,500 billion euros in 2012. Compared to an increase of 1.4% in 2011, 2012 witnessed an increase of 9% of the total investment portfolio.

Possible Roadblocks

But there are some specific concerns which the sector will have to deal with. Europe’s leading insurers include AXA Group (AXAHY), Allianz SE , AEGON N.V. (AEG - Snapshot Report) and Prudential plc (PUK - Snapshot Report). Last month, the European Insurance and Occupational Pensions Authority (EIOPA) released the results of a study carried out on insurers this year. The European Commission will utilise the results of this report to frame new regulations for the insurance sector.

Known as Solvency II, these regulations are expected to come into effect by 2016. Many insurance companies are uncomfortable with these proposals which primarily deal with long term savings guarantees. Schemes with such a flavour find particular favour in Germany and the Netherlands.

The major concern for insurers is how future obligations will be calculated under such a regime. Additionally, these rules will also determine how much capital insurance companies must allocate to fulfil obligations when long term guarantees are involved.

Insurers feel this could lead to their balance sheets suffering from artificial volatility due to short term changes in the values of assets held. This would mean they would have to reduce investments in assets which would provide higher growth.

EIOPA has come up with various proposals to deal with such concerns. These include a “classical matching adjustment” mechanism in the method utilised to determine the value of future liabilities. This move in particular has been welcomed by the industry.

Additionally, after their thorough examination of banks, regulators are beginning to carefully examine the ability of insurers to respond to crisis situations. The International Association of Insurance Supervisors (IAIS) which is monitored by the Financial Stability Board (FSB) and ultimately the G20 is examining 48 insurers for systemic risk.

Risk will be assessed after taking into account five key factors. These include size, global activity, connectedness with financial markets, substitutability of cover and activity in domains which are not traditional or related to the insurance business.

New Opportunities

At the same time, new avenues of growth are opening up for insurers. Demand for “Cyber-crime” policies, which are still to find favour with most companies, may soon pick up.

The European Commission is slated to change data protection rules in a major way from 2014. This would result in higher fines for companies without cover in such an event. These penalties could be as high as 2% of a company’s annual global turnover.

The U.S. market for cyber cover is exceeds $1 billion in terms of annual premiums. However, growth in this area occurred only after strong legislation. And now European authorities are preparing to levy large fines on companies which suffer data losses due to hacking.

Another major avenue for growth is usage based policies for the auto insurance segment. New technology installed in cars will be utilized to collect data on driving behavior or mileage efficiency. Telematics could soon become the new watchword for auto insurance, leading to a decrease in traditional policies.

The idea is to offer discounts on insurance cover based on such data. This would lead to increased synergies between auto companies and insurers. Many reports estimate that by 2020, the number of usage based policy holders could hit the 24 million mark.

The Way Ahead

The future of insurance companies will depend on their ability to adapt to a rapidly changing environment. On the one hand, they will have to cope with increasingly stringent regulatory changes. In addition, they will have to constantly keep pace with rapid technological changes.  Ultimately, whether they view such events as threats or embrace them as opportunities may determine their success of failure.

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