European credit insurance has to adapt to a new era

Moody’s ratings for European credit insurers is a continuously challenging economic environment as well as common trends in the sector of progressive relaxing in underwriting discipline.
It said that it believes that profitability patterns may differentiate industry players in 2011. In particular, reserves development and costs management will be important drivers of future profitability.

In 2011, some credit insurers may also initiate strategic moves, as a result of the crisis, or in anticipation of Solvency II, which may have various ratings impacts.

Moody’s added that results disclosed by credit insurers in 2010 saw a recovery in loss ratios to levels reported before the credit crisis. This reflected improvements in the global economy, as well as strong measures taken by all industry players to adapt their pricing and risks selection to a challenging claims environment.

It said it expects continuity to prevail in the macroeconomic environment over the next two years, with a high level of business insolvencies and a sluggish economic growth; therefore, spikes in loss ratios are also less likely, marking the entry of the industry into a new cycle.

It said that both sluggish economic growth and the potential for increased levels of self-insurance in reaction to the tightening of underwriting implemented during the crisis will serve to constrain credit insurers’ revenue going forward.

In addition, it believes loss ratios reported in 2010 are unsustainable, as insurers have started to relax their underwriting discipline in order to stimulate demand and mitigate pressures on revenue.

The fragile and uneven economic outlook also exposes credit insurers to large claims and local crises. Finally, in the short term, low financial and reinsurance results will also constrain credit insurers’ profitability.Reserves development and costs management will also be important drivers of future profitability, and these factors may vary by players.

It added that the industry’s new cycle will also be influenced by the preparation for Solvency II. It said that although this legislation is not yet finalised, QIS 5 specifications suggest that regulatory capital requirements for credit insurers are likely to rise. This is a challenge for the industry, which itself has just recovered from the crisis, and is expected to drive an increased focus on capital management in the coming years. In particular, the industry may choose to increasingly rely on reinsurance.

Although reinsurers are currently able to offer ample capacity, from which credit insurers can benefit in the short term, it said it believes this capacity may be volatile or costly in the long term, such that too high a dependence on reinsurers would be a credit negative for the industry.