Ongoing soft market conditions are putting pressure on results and ratings, and regulatory and rating agency changes could further impact measured capital adequacy and profitability metrics. However, uncertainty surrounding the changes, particularly with regard to Solvency II, is making it difficult for companies to predict future capital needs, even in the near term.
The report also reveals that:
• Enterprise Risk Management (ERM) continues to be a hot topic. Companies are investing significantly in developing their overall risk management frameworks and internal capital models.
• The trend towards Solvency II and similar frameworks globally, coupled with proposed fair valuing accounting provisions, has the potential to drastically change how analysts and investors view and understand the industry. The additional volatility being introduced by fair value accounting could further dampen valuations below current, historically low, price to book ratios.
• Reinsurance will continue to play an important role in managing volatility as companies look for ways to manage underwriting volatility in the face of increased risk in other areas of the balance sheet and a lower cushion from operating earnings. Solvency II’s QIS5 (Quantitative Impact Study) provides more capital credit for reinsurance than in the previous QIS exercises, but companies will need an internal capital model to fully realize the benefit of reinsurance.
• The rating agencies are split in terms of industry outlooks, between negative and stable, with rating upgrades and downgrades neutral.
Kelly Superczynski, global head of Aon Benfield Analytics’ Rating Agency Advisory, said: “The global insurance industry is at an inflection point. Continued negative pricing pressure is adversely impacting profitability and many companies have revised their risk tolerances in light of lower earnings. Rating agencies see lower earnings putting capital under greater pressure, driving their negative outlooks. At the same time refined rating agency and regulator criteria and capital requirements are placing additional pressure on an already struggling industry.
“Many of the proposed changes aim to improve the overall analysis of the industry. Companies will have to invest significant resources to understand and develop ERM, internal capital models and accounting frameworks. Uncertainty surrounding many of the proposed changes is making some companies question whether or not it is worth making such an investment.”