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European Insurance In Transition: Plotting A Course In A Chaotic World

(Editor's Note: "European Insurance In Transition: Plotting a Course in a Chaotic World," a virtual conference on Nov. 19, 2020, was organized jointly by S&P Global Ratings and S&P Global Market Intelligence, separate and independent divisions of S&P Global. See the Related Research section at the end of this report for a link to the conference's Content Hub.)

The COVID-19 pandemic is pressing insurance companies to urgently respond to megatrends--most importantly climate change and digitalization--that were already on the agenda, according to European insurance executives, experts, and analysts at S&P Global's conference. While they acknowledged that 2020 could dent their businesses, and the recovery in 2021 may be sluggish until widespread immunization brings economies back to normal, the discussion turned to quickly embracing technology and confronting environmental, social, and governance risks to remain competitive in the years to come. Participants at the conference indicated via live polls that the outlook for the European insurance sector would be "part doom," with the main risk for financial strength being COVID-19 economic costs and impact on capital markets (see the Appendix for poll results).

Summarizing S&P Global Ratings' views of the sector, credit analyst Volker Kudszus said although the ratings outlook is stable for most rated insurers in Europe, the Middle East, and Africa, the primary and secondary impacts of COVID-19 will remain a threat in 2021. While not the main factor weighing on ratings, Mr. Kudszus said S&P Global Ratings expects global reinsurers and global multiline insurers' insurance lines will see the most COVID-19-related claims, likely totaling €30 billion-€43 billion in 2020. In 2021, pandemic-related risks to economies and capital markets, including potential downward migration of ratings on corporate bonds, could weaken insurers' capital and likely lead to negative rating actions (see "SLIDES: EMEA Insurance Outlook 2021: Choppy Waters Ahead," published on Nov. 27, 2020).

"Despite the turmoil, less than 10% of insurance ratings and outlooks in EMEA have changed in 2020," Mr. Kudszus said. He noted the industry has taken advantage of low interest rates and abundant liquidity to refinance or add debt in the first half of 2021--but hasn't seen a big jump in leverage: "Thus, if there is a further need to refinance going forward there is still room for that."


Surveying wider credit conditions in Europe, S&P Global Ratings credit analyst Paul Watters sees a bumpy recovery ahead in 2021, with a widening gap in credit risk.   Downgrades are slow for now, but negative outlooks are at historical highs. However, the pandemic hasn't weakened credit metrics for some industries like technology, consumer staples, and homebuilders. We project that defaults across the board will double within a year, to 8.0% in Europe from 4.9% in October, though hitting companies rated speculative grade ('BB+' or lower) much harder. S&P Global Ratings notes that most of the invested assets of European insurance companies are investment grade ('BBB-' or higher), with 1.4% in the 'BB' rating category and 4.4% not rated.

Chart 1


"The potential dichotomy between asset prices and fundamentals is a hot topic," Mr. Watters said. Not all companies or sectors have been winners: airlines and banks have underperformed in the equity market, for example. It's more of an analysis of time to recovery, near-term vulnerability, funding support measures, and the risk appetite of investors. "The credit question of balance sheet sustainability given debt taken on to survive is one that will need to be resolved over coming quarters and years," he said.

Highlights From The Conference

Amanda Blanc, Group CEO, Aviva PLC

"I think the biggest risk for insurers is actually reputation, clearly the second risk is around the economy," said Aviva Group CEO Amanda Blanc, overarching the others like credit, regulation, and Brexit. The biggest risk to the planet is climate change, which points up the importance of risk management. It's important "to take these things head on and turn the risks into opportunities." The danger would come "if we don't adapt to those risks, put our heads in the sands and become irrelevant."

Ms. Blanc, who became CEO earlier this year, referred to negative publicity involving court cases in the U.K. over business interruption claims arising from COVID-19 lockdowns in March. "We already had a problem with trust in our sector [referring to the general insurance pricing review] where everybody knew that there was an issue for a very long time, and I am not sure that we've really helped ourselves this year." Ms. Blanc said that, in her view, it will take a while to be rebuild reputation.

The importance of climate change and impact of the climate risk on the insurance business model was more than a billion-dollar question at the conference.   Ms. Blanc said that 2010-2019 was the costliest decade for climate change with the costs around £3 trillion. We've seen more events of flooding, wildfires, an increase in frequency and severity, and the fact that it is going to become more difficult to offer cover if something does not happen. "I think in a 4-degree world, which is where we are heading if nothing changes, the insurance model does not operate at all, so we have to actually do something about it."

More positively, there's huge momentum around ESG, with shareholders and customers pushing insurance companies to act. "We [financial services and insurers] really have an important role to play here in educating and in responding to this growing momentum that we are seeing from the population to deliver sustainable investments. With COP26 taking place next year, there's no better time to do something. … Our strategy will be more about engagement than exclusion."

While there are a number of ways to digitalize insurance companies, Ms. Blanc said that Aviva until recently put technology into a separate place.   "I think it needs to be integrated into your core business. You need an omnichannel approach." Digital has a key role in everything from the customer connection to automating back office processes. Not just for increasing efficiency, but also for generating more business. The CEO noted that the digital MyAviva customer was five times more likely to hold multiple products and 15 times more likely if they were engaged users of the platform. More deeply, insurance companies need to change their culture to become more like nimble and agile insurtechs.

However, Ms. Blanc still believes in the composite insurance model. Noting that she was slightly biased, "if I were an investor, I would focus on U.K. composite insurers, specifically those with winning positions in their markets, those with strong brands and strong capital--with the customer at heart." The CEO said brand is still an important differentiator, but prices must be right, and insurers can't afford to pass on inefficiencies to customers. "One thing I learned this year is the value in the flexibility of organization, apart from the value of a strong, well-capitalized company."

Panel 1: Understanding How Climate Change Impacts The Insurance Model

  • Dr. Bronwyn Claire, Senior Program Manager, ClimateWise, a climate change initiative between the insurance industry and Cambridge University's Institute for Sustainability Leadership
  • Linda Freiner, Group Head of Sustainability, Zurich Insurance Group
  • Nigel Brook, Partner, Clyde & Co.

The first panel of the day focused on how the insurance industry is responding to the challenges and opportunities posed by climate change. Climate-related risks are commonly broken down into three categories: physical, transition, and liability risks (see box).

Regarding the physical risks of climate change for the insurance industry, Dr. Claire noted that while previously the sector primarily conceived of them as extreme weather events, there has been "scope creep";   in other words, the focus has widened to include the broad impact of climate change on water, biodiversity, and humans. The next step is translating these physical risks into discrete financial or underwriting risks that insurers can consider in their strategic decision-making, including pricing and capital allocation. For example, ClimateWise's Physical Risk Framework took the standard natural catastrophe model of the insurance sector, and modified it to be forward-looking, so that it could offer flood, cyclone, and storm projections and indicators about what portfolios might be affected--helping lenders and asset owners to account for this risk in their planning and pricing, as well as potentially underwriting. The framework projects that average annual insurance losses from property damage from U.K. flood risk, for example, would rise 61% by the 2050s under a 2-degree warming scenario and 130% under a 4-degree warming scenario (see chart 3).

Table 1

ClimateWise Physical Risk Framework
Modeling shows increased losses are expected across all perils, but they are lower if global efforts to reduce emissions are successful
Peril Asset type Risk metric 2-degree warming by end-century 4-degree warming by end-century
U.K. flood risk Residential mortgages % increase in AAL by 2050s 61 130
% increase in number of properties at significant risk of flooding (annual probability of 1.3% or above) 25 40
U.K. flood risk Investment portfolios % increase in AAL by 2050s 40 70
North America and Pacific Rim tropical cyclones Investment portfolios % increase in AAL by 2050s 43 80
European winter wind storms Investment portfolios % increase in AAL by 2050s 6.3 3.6
AAL--Average annual loss: The average losses from property damage experienced by a portfolio per year. Source: "Physical risk framework Understanding the impacts of climate change on real estate lending and investment portfolios," University of Cambridge Institute for Sustainability Leadership, 2019.

While modeling is important and getting better, Dr. Claire says, there are a lot of questions not only about the data and scenarios, but also about the outputs.   Should they be more quantitative or qualitative? Who is the counterparty, the audience? What is the impact going to be for businesses? "There is a lot of room for improvement. How can we move to a quality of reporting that your board and legal team can sign off on?" Such reporting, the researcher noted, will not only guide how you do business but also share prices.

As for transition risk, Linda Freiner, Group Head of Sustainability at the Zurich Insurance Group, said "transition risks present tremendous opportunities for underwriting and asset management," and that as insurers and investors in the real economy, the insurance industry needs to be a force for change. For insurers as asset owners and asset managers, the industry is further ahead in understanding transition risk from a pricing perspective today than on the underwriting side, but the gap is narrowing. In addition, there are more established tools for considering climate-related risks in investment portfolios, including ESG integration into investment decisions, impact investing, and active ownership or engagement.

For underwriting, it's fair to say that transition risk is not yet fully understood throughout the insurance industry as a whole.  "When we look at our own models, physical risk is still more likely, but transition risk can happen at any time." Meanwhile, it is important to understand transition risk for each line of business; for example, travel carries a high risk, while the motor industry is already going through a rapid transition. "We want to be there for customers in their transition and offering the right insurance decisions." To improve the understanding of transition risk, Zurich is actively advocating for collaboration, not only with government, but with industry peers, third-party data providers, and the public.

In the area of climate liability risk, Nigel Brook, Partner, Clyde & Co., believes that as knowledge of climate-related physical and transition risk is increasing, the standards of care are shifting.   As a result, the risk of litigation and liability for failure to manage climate change is mounting. Mr. Brook counts about 1,600 climate change cases files in the world so far, mostly in the U.S. Most of these cases are being filed against corporations and governments, but a growing number are seeking compensation for losses from corporations, and some are also increasingly strategic in that they are pushing for changes in behavior by the defendants. The claims vary, with plaintiffs accusing companies of contributing to climate change or failing to adapt the business to physical risks or transition risks; failing to account for climate risks in the advice they provide; or of making misstatements on climate risks, either overstating activities (for example, greenwashing) or understating exposures. The plaintiffs in the highest-profile cases are in the U.S., for example, municipalities but also a few states, where the plaintiffs are seeking billions in product liability compensation for future losses from, for example, sea level rise. Mr. Brook expects that those cases that survive challenges might see trial in about four to five years. For insurers, the rise in litigation can ultimately lead to insurance claims on certain lines of business, including general liability for corporations, directors & officers' liability, or professional indemnity lines.

Mr. Brook noted that standards are shifting. "What was an unimpeachable decision yesterday might not be today," he said. One key warning: directors cannot assume that anything which does not immediately affect the bottom line is secondary. He noted that the U.K. regulator in July indicated it expects insurers to take account of climate risk in a detailed way. Next year, the largest insurers will be subject to a full-blown stress test for the first time, in what looks set to become a global trend. "You would be unwise to not take climate risk into account and integrate it into your decision making," he said.

Panel 2: Role Of Technology In The Post-COVID-19 Age

  • Mark Bloom, Global Chief Technology Officer, Aegon
  • Silvi Wompa Sinclair, Head of Portfolio Underwriting, Swiss Re
  • Andrew Yeoman, CEO, Concirrus
  • Nigel Walsh, Partner & Co-Host InsurTech Insiders, Deloitte

The second panel, in discussing all things digital, found no disagreement that insurance companies need to move much more quickly to adopt technology and deploy data throughout their organizations, from improving the customer experience to projecting future risks to inform business strategy. Panelists agreed that companies that succeed will gain a competitive advantage in a crowded marketplace.

"Clearly companies that have a digital experience are going to do better. We saw it in the initial part of the pandemic," said Mark Bloom, global CTO at Aegon. Although a large part of insurance is delivered through third parties, he believes insurers that deploy technology to improve operations end to end will move to the forefront. What's more, those companies that move to the cloud, which comes at a cost, will be able to innovate more quickly.

Silvi Wompa Sinclair, head of portfolio underwriting at Swiss Re, emphasized the need to digitize underwriting, the core business of insurance companies and where true profitability has to come from.   "It's about tech turning underwriting, which is seen as a mystical art, into a data-driven profession."

Andrew Yeoman, CEO of InsureTech Concirrus said: "In a digital marketplace we will be rewarded for sharing data and not hoarding. We will also be rewarded for having curated a well thought through investment or underwriting strategy based on solid and well researched information. This information will have been gathered by our algorithmic friends. Not only will it enable better decisions, it will provide the insurance market with the opportunity to not simply cover risk but prevent risk in the future."

Mr. Walsh noted that insurtechs like Concirrus are good at seeing how technology can quickly innovate small parts of the market. However, with these small companies, it's a race between the profit-and-loss and balance sheets. That's where the incumbents come into play. He says that actually all insurers are insurtech, it's just that they have either too much (legacy technical debt) or the wrong technology for today's needs.

Beyond technology, Mr. Walsh worries "that we focus on evolution. Why are we digitizing the old world? We need to seek revolution, not evolution, through technology."   He foresees an insurance marketplace where insurance is embedded in the product, for example, where "motor manufactures take the burden of insurance and bundle it into what you want to buy in the first place."

We're not seeing a revolution in insurance, said Ms. Sinclair, "because the sector doesn't have access to the best data and analytics talent out there today." Or the top talent. She said Swiss Re has made big data and analytics investments, outside of IT. Yet, the challenge is about culture and behavior.

A company can have the best data, but people must use it. "What comes into play is what mindset you have, how you perceive your profession," Ms. Sinclair said. "There's so much more that the industry can do rather than be a money-making machine alone. What do we as an industry contribute to the world? We hear very few statements like this, and yet they could help the industry attract top talent."

Appendix: Poll Results

The conference featured live audience polling about the outlook for the European insurance sector, which most believe would be "part doom," with the main risk for financial strength being COVID-19 economic costs and impact on capital markets.

Chart 2


Chart 3


Writer: Rose Marie Burke

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Secondary Credit Analysts:Simon Ashworth, London + 44 20 7176 7243;
Volker Kudszus, Frankfurt + 49 693 399 9192;
Dennis P Sugrue, London + 44 20 7176 7056;

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